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):
November 16, 1998
MAC-GRAY CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 011-13495 04-3361982
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
22 Water Street, Cambridge, MA 02141
(Address of principal executive offices and zip code)
(617) 492-4040
(Registrant's telephone number, including area code)
Item 5. Other Events
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The Registrant is voluntarily filing the attached consolidated financial
statements as of December 31, 1997 and 1996 and for each of the three years
ended December 31, 1997 and Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") for the same period in order to
provide for incorporation by reference of the same in future filings with the
Securities and Exchange Commission. The attached financial statements and MD&A
have been restated as a result of the pooling-of-interests with Intirion
Corporation which occurred on March 12, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. Mac-Gray's actual
results could differ significantly from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include: implementation of acquisition strategy; integration of acquired
businesses; ability to meet future capital requirements; dependence upon certain
suppliers, lease renewals; retention of senior executives; market acceptance of
new products and services; and those factors discussed in Mac-Gray's filings
with the Commission. The historical financial information presented herein
represents (i) consolidated results of Mac-Gray, including the consolidated
results of Intirion, (ii) the combined results of Mac-Gray Co. and the Limited
Partnership and (iii) the results of Sun Services for the period subsequent to
the purchase acquisition. The following discussion and analysis should be read
in conjunction with the combined financial statements and related notes thereto
presented elsewhere in this Prospectus.
OVERVIEW
Mac-Gray derives its revenue principally through the operation and
maintenance of card and coin-operated laundry rooms in multiple housing
facilities, such as apartment buildings, colleges and universities,
condominiums and public housing complexes. Mac-Gray operates its laundry rooms
under long-term leases with property owners, colleges and universities and
governmental agencies. The leases typically grant Mac-Gray the exclusive right
to operate laundry rooms on the lessor's premises for a fixed term, which is
generally seven to ten years, in exchange for a percentage of the revenue
collected. Mac-Gray's laundry route business consists of more than 155,000
laundry machines, operated in over 25,000 multiple housing laundry rooms
located in 27 states east of the Rocky Mountains.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag. Mac-Gray has Maytag distributor
agreements for Alabama, Connecticut, Florida, Georgia, Illinois, Maine,
Massachusetts, New Hampshire, New York (except metropolitan New York City),
western Pennsylvania, Rhode Island, South Carolina, Vermont and portions of
Arkansas, Indiana, Iowa, Mississippi and Missouri. Mac-Gray also sells or
rents laundry equipment manufactured by American Dryer, Dexter and Whirlpool
to provide several alternatives in machine type, cost and capacity.
Additionally, Mac-Gray sells or rents laundry equipment to restaurants,
hotels, health clubs and similar institutional users that operate their own
on-premise laundry facilities.
On October 22, 1997, Mac-Gray completed its initial public offering (the
"IPO"). Upon consummation of the IPO, Mac-Gray's status as an S corporation
automatically terminated and Mac-Gray became subject to taxation as a C
corporation for federal and state income tax purposes.
RECENT DEVELOPMENTS
New Credit Facility. On April 23, 1998, the outstanding debt under Mac-
Gray's $50 million revolving credit facility with State Street Bank and Trust
Company and CoreStates Bank was refinanced under a new senior secured
revolving and term loan credit facility with State Street Bank and Trust
Company, CoreStates Bank and BankBoston, N.A. The Credit Facility provides for
borrowings under a revolving line of credit of up to $90 million and converts
to a term loan after three years. Outstanding indebtedness under the Credit
Facility bears interest at Mac-Gray's option, at a rate equal to the prime
rate minus .5% or LIBOR plus the applicable margin (either (i) 1.5% for loans
outstanding which aggregate less than $50 million or (ii) 1.75% for loans
outstanding which exceed $50 million), or cost of funds plus the applicable
margin. The Credit Facility restricts payments of dividends and other
distributions, restricts Mac-Gray from making certain acquisitions and
incurring indebtedness, and requires it to maintain certain financial ratios.
The Credit Facility is secured by pledges of the capital stock of Mac-Gray's
subsidiaries and a lien on Mac-Gray's assets.
Acquisitions. On April 24, 1998, Mac-Gray acquired through Mac-Gray
Services, one hundred percent of the outstanding capital stock of Amerivend
Corporation and the assets of Amerivend Southeast Corporation. The acquisition
was completed pursuant to the Amerivend Agreement. The purchase price was
approximately $33.5 million in cash, including the payment of approximately
$6.8 million of debt. A portion of the purchase price, $1.5 million, is being
held in escrow to satisfy any potential claims in accordance with the
Amerivend Agreement. The funds used to pay the purchase price were comprised
primarily of borrowings under the Credit Facility. Amerivend is a provider of
card and coin-operated laundry equipment in Florida and Georgia. Amerivend
also is the principal distributor of Maytag commercial laundry products in
Alabama, Florida and Georgia.
On April 23, 1998, Mac-Gray acquired Copico through the purchase by Mac-Gray
Services, of one hundred percent of the outstanding capital stock of Copico.
The acquisition was completed pursuant to the Copico Agreement. In
consideration and pursuant to the Copico Agreement, Mac-Gray issued 250,000
shares of Mac-Gray Common Stock valued at approximately $4.2 million based
upon the closing price of the Mac-Gray Common Stock on April 23, 1998. The
cash portion of the purchase price was approximately $11.1 million, including
the payment of approximately $6.1 million of debt. The funds used to pay the
cash portion of the consideration were comprised primarily of borrowings under
the Credit Facility. Copico is a major provider of card and coin-operated
reprographics equipment and services to the academic and public library
markets in New England, New York and Florida. Copico provides and services
copiers, laser printers and microform reader-printers for libraries of
colleges, universities and graduate schools. Copico also is the sole provider
of reprographics services to the New York public library system, as well as
other public libraries. The Amerivend and Copico acquisitions have been
accounted for using the purchase method of accounting.
On March 12, 1998, Mac-Gray acquired Intirion. The consideration paid
consisted of 1,592,992 shares of Mac-Gray Common Stock and approximately $1
million in cash, which cash was paid to the holder of the Intirion Senior
Preferred Stock. 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. The transaction has been accounted for as a
pooling of interests. Mac-Gray and Intirion incurred aggregate transaction
costs of $884,000 associated with the Merger, primarily in the first quarter
of 1998.
Resignation of Chief Financial Officer. On August 28, 1998, Mac-Gray's Chief
Financial Officer, John S. Olbrych, resigned. Neil F. MacLellan, III,
Executive Vice President of Mac-Gray, was named as interim Chief Financial
Officer and Treasurer.
RESULTS OF OPERATIONS
Fiscal year ended December 31, 1997 compared to fiscal year ended December
31, 1996
Revenue. Revenue increased by $22,587,000, or 27%, to $104,847,000 in 1997
from $82,260,000 in 1996. This increase was primarily attributable to growth
in existing laundry route revenue, the Sun Services Acquisition and the impact
of a full year's operation of businesses acquired in 1996. Laundry route
revenue increased $12,826,000, due to the expansion of existing operations and
to an increase in the number of machines operated as a result of the nine
acquisitions of laundry route businesses subsequent to March 31, 1996. Product
sales increased by $9,115,000, due to growth of revenue from existing
distributorships and the distributorships acquired during 1996 and 1997 and
due to increased sales of Microfridge(R) products to all market segments.
Mac-Gray Corporation ("Mac-Gray") believes that its increased focus on sales and
marketing efforts since mid-1996 has had a significant impact on the growth of
revenue from existing laundry routes and distributorships. Rental revenue also
increased $646,000 due to Intirion's academic living rental program.
Commissions. Commissions increased by $5,957,000, or 23%, to $31,717,000 in
1997 from $25,760,000 in 1996. This increase was primarily attributable to an
increase in laundry route revenue, since commissions are generally paid based
upon a percentage of laundry route revenue.
Route Expenditures. Route expenditures, which are primarily variable
expenses which change with the increases and decreases in revenue and include
costs associated with installing and servicing machines, as well as the costs
of collecting, counting and depositing the revenue, increased by $1,478,000,
or 13%, to $12,449,000 in 1997 from $10,971,000 in 1996. This increase was due
to the general increase in revenue, which resulted in increased servicing,
collecting, counting and depositing activity, increased levels of expenses
associated with improving service in some of the acquired businesses, and
other associated costs.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization included as a component of cost of revenue, as
well as depreciation which is included as an operating expense. Aggregate
depreciation and amortization increased by $2,635,000, or 34%, to $10,478,000
in 1997 from $7,843,000 in 1996. This increase was primarily attributable to
the acquisition of nine laundry route businesses in 1996 and 1997, which
resulted in additional machines to depreciate, as well as an increase in
intangible assets to amortize, and the placement of additional machines at
existing locations.
Cost of Product Sales. Cost of product sales increased by $6,613,000, or
43%, to $22,021,000 in 1997 from $15,408,000 in 1996. This increase was a
direct result of increased product sales.
General and Administration. General and administration expenses increased by
$984,000, or 17%, to $6,923,000 in 1997 from $5,939,000 in 1996. This increase
was attributable to an increase in professional fees and to the hiring of
additional clerical and administrative staff to support the growth in Mac-
Gray's business.
Sales and Marketing. Sales and marketing expense increased by $2,463,000, or
32%, to $10,181,000 in 1997 from $7,718,000 in 1996. This increase was
attributable to the expansion of the marketing department, led by the hiring
of an experienced national marketing executive in the third quarter of 1996,
and an increase in the number of field sales representatives.
Interest Expense. Interest expense, net of interest income, increased by
$621,000, or 26%, to $2,975,000 in 1997 from $2,354,000 in 1996. This increase
was primarily attributable to the increased borrowings incurred to finance the
acquisitions made during 1996 and 1997 and to the increase in product
purchases. Interest expense was minimal subsequent to the IPO because a
portion of the net proceeds from that offering was used to repay the existing
indebtedness under the Old Credit Facility, as further described below.
Income Tax Expense. Income tax expense increased by $4,714,000 to $5,228,000
in 1997 from $514,000 in 1996 due to the termination of Mac-Gray's S
corporation status concurrent with the IPO. Upon termination of the S
corporation status, Mac-Gray became subject to federal and state income taxes,
with a statutory rate of approximately 40%. As a result, Mac-Gray recognized a
non-recurring charge to income tax expense of approximately $4,037,000 in
October 1997, representing additional net deferred tax liabilities as of the
date the S corporation election was terminated. As the historical income tax
provision for Mac-Gray prior to the termination of the S corporation status
was established only to provide for income taxes in states that do not
recognize Subchapter S corporations, the income tax provision recorded in 1997
was significantly higher than the amount recorded in 1996.
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Fiscal year ended December 31, 1996 compared to fiscal year ended December
31, 1995
Revenue. Revenue increased by $15,908,000, or 24%, to $82,260,000 in 1996
from $66,352,000 in 1995. This increase was primarily attributable to the
acquisition of six laundry route businesses, two of which also maintained
Maytag distributorships, as well as internal growth of both card and coin
laundry route revenue and revenue from product sales. Laundry route revenue
increased $9,506,000, of which $3,596,000 was attributable to the expansion of
existing operations and $5,910,000 was attributable to an increase in the
number of machines operated as a result of the six acquisitions of laundry
route businesses. Product sales increased by $5,674,000 due to acquisitions
and growth of existing businesses. Mac-Gray believes that a substantial
portion of the growth of revenue from existing laundry routes and from
existing distributorships was attributable to Mac-Gray's increased
expenditures on sales and marketing efforts, which are described below. Rental
revenue also increased $728,000 due to Intirion's academic living rental
program.
Commissions. Commissions increased by $5,289,000, or 26%, to $25,760,000 in
1996 from $20,471,000 in 1995. This increase was primarily attributable to an
increase in laundry route revenue, which resulted in an increase in variable
expenses, including commissions, related thereto, as well as slightly higher
commission rates applicable to the new leases that Mac-Gray acquired or
entered into during 1995 and 1996.
Route Expenditures. Route expenditures, which include costs associated with
installing and servicing machines and cost of equipment sales, as well as the
cost of collecting, counting and depositing the revenue, increased by
$2,720,000, or 33%, to $10,971,000 in 1996 from $8,251,000 in 1995. This
increase was primarily attributable to the increase in laundry route business,
which resulted in increased servicing and collecting activity.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization which is included as a component of cost of
revenue, as well as depreciation which is included as an operating expense.
Aggregate depreciation and amortization increased by $1,749,000, or 29%, to
$7,843,000 in 1996 from $6,094,000 in 1995. The increase was primarily
attributable to the acquisition of six laundry route businesses, which
resulted in additional machines to depreciate, as well as an increase in
intangible assets to amortize, and the placement of additional machines at
existing locations.
Cost of Product Sales. Cost of product sales increased by $3,174,000, or
26%, to $15,408,000 in 1996 from $12,234,000 in 1995. This increase was
attributable to increased product sales.
General and Administration. General and administration expenses increased by
$135,000, or 2%, to $5,939,000 in 1996 from $5,804,000 in 1995. This increase
was attributable to the hiring of additional clerical and administrative staff
to help support the increase in Mac-Gray's business. General and
administration expenses for 1995 were unusually high as a result of certain
expenses related to the hiring, relocation and subsequent termination of a
senior executive.
Sales and Marketing. Sales and marketing expenses increased by $1,263,000,
or 20%, to $7,718,000 in 1996 from $6,455,000 in 1995. This increase was
attributable to the hiring of a significant number of additional field sales
representatives, the expansion of the marketing department and the hiring of
an experienced national marketing executive in the third quarter of 1996.
Interest Expense. Interest expense increased by $1,026,000, or 77%, to
$2,354,000 in 1996 from $1,328,000 in 1995. This increase was primarily
attributable to increased borrowings incurred to finance the six acquisitions
completed during 1996 and the increase in product purchases to support the
increase in revenues.
Income Tax Expense. Income tax expenses increased by $114,000, or 29%, to
$514,000 in 1996 from $400,000 in 1995. As the historical income tax provision
for Mac-Gray was established only to provide for income taxes in states that
do not recognize Subchapter S corporations, the statutory income tax rate for
1995 and 1996 was 6%. The effective income tax rate differed from the
statutory rate in 1995 and 1996 due to expenses recorded for book purposes
that are not deductible for income tax purposes.
The statutory income tax rate utilized by Mac-Gray during 1995 and 1996 is
not indicative of the statutory income tax rate of approximately 40% that has
been utilized since the termination of Mac-Gray's S corporation status on
October 16, 1997.
SEASONALITY
Mac-Gray experiences moderate seasonality as a result of its significant
operations in the college and university market. Revenues derived from the
college and university market represent approximately thirty-five percent
(35%) of Mac-Gray's total revenue. Route and rental revenues are derived
substantially during the school year which includes the first, second and
fourth calendar quarters. Conversely, Mac-Gray increases its operating
expenditures during the third calendar quarter when colleges and universities
are not in session as a result of Mac-Gray's increased product installation
activities. Product sales, principally MicroFridge(R), to this market are also
high during the third calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES
Mac-Gray's primary sources of cash have been operating activities, bank
borrowings, and the proceeds of the IPO. Mac-Gray's primary uses of cash have
been business acquisitions, capital expenses including the purchase of new
laundry machines, Microfridge(R) equipment and smart card based payment
systems, the payment of a dividend of $9,000,000 to Mac-Gray's shareholders
prior to the IPO and the repayment of the Old Credit Facility. Mac-Gray
anticipates that it will continue to use cash flow from its operating activities
to finance working capital needs, including interest payments on any outstanding
indebtedness, as well as capital expenditures. Funds available under the Credit
Facility were used as needed to finance the acquisitions of Amerivend and
Copico. Mac-Gray also anticipates that it will use additional funds available to
it under the Credit Facility to finance additional possible acquisitions, larger
capital expenditures and, as needed, working capital.
Cash flows (used in) provided by operations were $10,473,000, $15,768,000 and
$10,364,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Cash flow from operations consists primarily of laundry route revenue, product
sales, laundry equipment service revenue, and rental revenue, commissions, route
expenditures, cost of product sales, cost of rental revenue, general and
administration expenses and sales and marketing expenses. Mac-Gray also incurred
costs as a result of the Mac-Gray and Intirion pooling transaction.
Cash used in investing activities was $22,791,000, $24,338,000 and $8,952,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Mac-Gray
invested $12,196,000, $14,487,000 and $1,178,000 in certain laundry route
acquisitions during the fiscal years ended December 31, 1997, 1996 and 1995,
respectively. Capital expenditures were $11,584,000, $10,010,000 and $8,121,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash flows provided by (used in) financing activities were $13,248,000,
$7,516,000 and ($589,000) for the years ended December 31, 1997, 1996 and 1995,
respectively. Financing activities for those periods consist primarily of
proceeds from the IPO, proceeds from and repayments of bank borrowings, capital
stock transactions, and payments of dividends. Mac-Gray also utilized $125,000
as a portion of the consideration paid in connection with the redemption of
2,275 shares of Mac-Gray Common Stock as of January 1, 1996.
Until April 23, 1998, Mac-Gray maintained a $50 million revolving line of
credit with State Street Bank and Trust Company and CoreStates Bank. Mac-Gray
was in material compliance with all covenants of that facility, or received a
written waiver with respect to any non-compliance therewith, for the three
months ended March 31, 1998. On April 23, 1998, Mac-Gray refinanced the
amounts outstanding under the Old Credit Facility with the proceeds of a new
revolving line of credit and term loan facility with State Street Bank and
Trust Company, CoreStates Bank and BankBoston, N.A. The Credit Facility
provides for borrowings under a revolving line of credit of up to $90 million,
and converts to a term loan after three years. The term loan has a weighted
five year amortization schedule with a balloon payment due after the second
year of the term loan. Outstanding indebtedness under the Credit Facility
bears interest at Mac-Gray's option at a rate equal to the prime rate minus
.5% or LIBOR plus the applicable margin (either (i) 1.5% for loans outstanding
which aggregate less than $50 million or (ii) 1.75% for loans outstanding
which exceed $50 million) or the cost of funds rate plus the applicable
margin. The Credit Facility imposes certain financial and operational
covenants on Mac-Gray, including restrictions on indebtedness, certain capital
expenditures, investments and acquisitions, and on Mac-Gray's ability to pay
dividends and to make distributions. The Credit Facility is secured by a
blanket lien on the assets of Mac-Gray and each of its subsidiaries, as well
as a pledge by Mac-Gray of all of the capital stock of its subsidiaries.
In connection with the Sun Services Acquisition in April 1997, Mac-Gray
issued 612,026 shares of Mac-Gray Common Stock to the owner of Sun Services.
As a privately owned company issuing shares of its common stock, which, at
that point, were substantially illiquid, Mac-Gray provided the Sun Services
owner with the right to require Mac-Gray to repurchase the shares of Mac-Gray
Common Stock issued by Mac-Gray as consideration in the acquisition. Mac-Gray
also received certain rights ( the "Call Rights") to repurchase such shares of
Mac-Gray Common Stock. Upon consummation of the IPO, the Call Rights
terminated. Mac-Gray remains obligated to repurchase the 612,026 shares of Mac-
Gray Common Stock at a price of $12.74 per share in the event the holder or
holders of such shares elect to exercise the Put Rights, representing an
aggregate purchase price of approximately $7.8 million. Such remaining Put
Rights expire on October 22, 2000. In the event such Put Rights are exercised,
Mac-Gray would likely fund the purchase price for such shares of Mac-Gray Common
Stock by incurring additional indebtedness under its Credit Facility. See
"Management--Certain Relationships and Related Transactions."
Mac-Gray has used all of the net proceeds from the IPO to repay existing
outstanding indebtedness under the Old Credit Facility, to fund a $9,000,000
dividend paid to shareholders in October 1997 and to provide partial funding
for two laundry route acquisitions. The cash paid in connection with the
acquisitions of Intirion, Amerivend and Copico, including expenses related
thereto, has been paid from amounts available under the Old Credit Facility,
the Credit Facility and cash flow generated from operating activities. Mac-
Gray believes that amounts available under the Credit Facility and cash flow
generated by operations will be sufficient to fund Mac-Gray's normal working
capital needs and capital expenditures for the foreseeable future, including
Mac-Gray's current purchase commitment with Schlumberger to purchase smart-
card based equipment. Based upon the purchase commitment with Schlumberger,
such purchases, in the aggregate, could represent a material portion of Mac-
Gray's capital expenditures for fiscal year 1998. In addition, if Mac-Gray
were to borrow all amounts then available to it under the Credit Facility in
connection with one or more acquisitions, or in connection with significant
capital expenditures, either in the short-term or in the long-term, management
believes that cash generated from operating activities would be sufficient to
fund Mac-Gray's operating expenses and debt service needs for the foreseeable
future. Additional financing under the Credit Facility or otherwise may,
however, be required in connection with an acquisition or acquisitions which
Mac-Gray may consummate in the future. If any such additional financing were
needed, and could not be obtained on terms favorable to Mac-Gray, if at all,
Mac-Gray's ongoing capital improvement efforts and acquisition activity would
likely be reduced or delayed as cash generated from operating activities was
used for operating expenses and debt service. See "Risk Factors--Risks
Associated with Acquisitions; Integration of Acquired Businesses."
YEAR 2000
The Company is aggressively researching and testing potential year 2000 problems
in its software and systems. Toward that end the Company has enlisted the aid
of an outside consulting firm to assist in the identification of any year 2000
issues. The consultants are expected to present their findings to the Company
on or before November 30, 1998. The cost for this service has been estimated at
$35,000, all of which will be incurred and expensed in the fourth quarter of
1998. The Company will be unable to estimate costs or establish timelines for
any items of noncompliance that may be identified by the consultants until
receipt of the consultant's report.
The Company has previously identified some software that is not presently year
2000 compliant. This software is in various stages of being updated to be in
compliance with year 2000 requirements. Based on current schedules it is
anticipated that this updating will be completed, tested, and operational before
the end of the second quarter of 1999. The software is primarily being re-
written by in-house programming staff and the necessary resources have been
allocated from operating budgets to complete the system in a timely manner. No
material additional expenditures are anticipated to complete these projects and
the allocation of these resources is not expected to prohibit the completion of
other less significant projects. The Company cannot presently determine the
impact on its business, results of operations, or financial condition should the
re-writes meet unexpected delays and not be completed by December 31, 1999.
The Company has made preliminary evaluations of its customer's year 2000
compliance. The Company believes that most of its customer's will not be
materially impacted by year 2000 issues. Those customers who may be impacted
consist primarily of finance companies and other commercial lending institutions
through which the Company often receives payment on significant equipment sales.
The Company does not foresee any significant problems with these companies and
is working with them to resolve any potential problems. The Company believes
that in the event any or all finance companies suffer problems due to non-
compliance with year 2000 issues, the Company may experience a delay in payment
on sales for which products have already been delivered. While these sales may
be individually significant they are not material to the overall results of
operations of the Company. The Company expects to complete its assessment of
customer's year 2000 compliance issues by the end of 1998.
The Company is working with its primary vendors to identify and resolve any year
2000 compliance issues. At this time no issues have been identified and the
Company does not foresee any significant issues developing. Should any year
2000 issues arise with any primary vendors that result in extended delays of
shipments of equipment to the Company, the Company could be forced to delay the
installation or sale of equipment. The Company could also be forced to delay
required maintenance where parts are required. The Company expects to confirm
the year 2000 readiness of all primary vendors before the end of the first
quarter of 1999.
The Company has invested heavily in smart card technology where the year 2000
compatibility is not yet confirmed. Smart card technology includes software and
hardware systems which the Company uses to provide cashless interaction with
laundry, reprographic, vending, and door access equipment. The software and
hardware systems include credit card sized devices with imbedded CPU's and
related equipment which can add value or authorize use through various
electronic reading devices installed in or near the related amenities. The
Company is working with its suppliers to ensure that the current technology is
year 2000 compliant and at this time does not foresee any problems. The
Company does not expect to incur significant costs to resolve any issues in this
area and expects to confirm the year 2000 readiness of its smart card technology
by the end of 1998.
The Company does not presently have any contingency plans in place for
unresolved year 2000 issues. At this time all identified year 2000 issues are
being resolved under timelines which the Company believes will more than
adequately provide for unknowns and delays. Should any issues be identified in
the coming months which the Company believes could remain unresolved into the
latter stages of 1999 the Company will begin to develop contingency plans.
INFLATION
Mac-Gray does not believe that its financial performance has been materially
affected by inflation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130) in June 1997. Mac-Gray adopted SFAS 130 for fiscal 1998. SFAS 130
requires presentation of certain information related to comprehensive income.
During the three years ended December 31, 1997, Mac-Gray had comprehensive
income/(expense) of $28,000, $(32,000) and $0, respectively. This
comprehensive income/(expense), as defined in SFAS 130, related to unrealized
gains/(losses) on available for sale securities. FASB issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131) which is required to be adopted
by Mac-Gray in its fiscal 1998 financial statements. SFAS 131 establishes
standards for reporting information on operating segments in financial
statements. Mac-Gray is currently reviewing the impact of SFAS 131 on its
financial statements.
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INDEX TO FINANCIAL STATEMENTS
MAC-GRAY CORPORATION
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheet as of December 31, 1996 and 1997 ............ F-3
Consolidated Statement of Income for the Years Ended December 31, 1995,
1996 and 1997.......................................................... F-4
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997....................................... F-5
Consolidated Statement of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
SUN SERVICES OF AMERICA, INC. AND R. BODDEN COIN-OP-LAUNDRY, INC.
Report of Independent Accountants....................................... F-23
Combined Balance Sheet as of December 31, 1996 and March 31, 1997 (unau-
dited)................................................................. F-24
Combined Statement of Income for the Year Ended December 31, 1996 and
for the Three Months Ended March 31, 1996 and 1997 (unaudited)......... F-25
Combined Statement of Stockholder's Equity for the Year Ended December
31, 1996 and the Three Months Ended March 31, 1997 (unaudited)......... F-26
Combined Statement of Cash Flows for the Year Ended December 31, 1996
and for the Three Months Ended March 31, 1996 and 1997 (unaudited)..... F-27
Notes to Combined Financial Statements.................................. F-28
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Mac-Gray Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Mac-Gray Corporation (the "Company"), at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 30, 1998,
except as to the pooling
of interests with Intirion
which is as of March 12, 1998
F-2
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------
1996 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 2,844 $ 3,774
Trade receivables, net of allowance for doubt-
ful accounts.................................. 4,621 6,570
Available-for-sale security.................... 343 --
Inventory...................................... 4,749 7,208
Deferred income taxes.......................... 23 571
Prepaid commissions and other current assets... 1,819 2,377
------- -------
Total current assets......................... 14,399 20,500
Property, plant and equipment, net............. 36,891 43,615
Intangible assets, net......................... 12,207 28,648
Prepaid commissions and other assets........... 2,720 5,080
------- -------
Total assets................................. $66,217 $97,843
======= =======
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCK-
HOLDER'S EQUITY
Current liabilities:
Current portion of long term debt.............. $ 7,550 $ 7,922
Current portion of capital lease obligations... 251 476
Accounts payable............................... 8,399 7,825
Accrued commissions............................ 4,940 5,585
Accrued expenses............................... 1,653 2,631
Deferred revenues and deposits................. 95 102
------- -------
Total current liabilities.................... 22,888 24,541
Long-term debt................................... 23,473 5,395
Long-term capital lease obligations.............. 193 491
Deferred income taxes............................ 546 5,329
Deferred retirement obligation................... 1,156 1,052
Other liabilities................................ -- 429
Commitments and contingencies (Note 12).......... -- --
Redeemable common stock, 612,026 shares.......... -- 7,797
Senior redeemable preferred stock................ 4,187 4,507
Stockholder's equity:
Preferred stock of Mac-Gray Corporation ($.01
par value, 5,000,000 shares authorized, no
shares issued and outstanding)................ -- --
Common stock of Mac-Gray Co., Inc. ($1 par
value; 200,000 shares authorized, 154,275
shares issued and outstanding at December 31,
1996)......................................... 154 --
Common stock of Mac-Gray Corporation ($.01 par
value; 30,000,000 shares authorized,
1,317,768 and 12,285,568
shares issued and outstanding at
December 31, 1996 and December 31, 1997
respectively)................................. 13 123
Additional capital............................. 3,902 52,524
Retained earnings (deficit).................... 18,377 (4,345)
Net unrealized gain on available-for-sale secu-
rity, net of tax.............................. 258 --
Less: 54,275 shares held in treasury at cost... (8,930) --
------- -------
Total stockholders' equity..................... 13,774 48,302
------- -------
Total liabilities, redeemable common stock
and stockholders' equity.................... $66,217 $97,843
======= =======
The accompanying notes are an integral part of these financial statements
F-3
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
Revenue........................ $66,352 $82,260 $104,847
Cost of revenue:
Commissions................... 20,471 25,760 31,717
Route expenditures............ 8,251 10,971 12,449
Depreciation and amortiza-
tion......................... 5,455 7,060 9,725
Cost of product sales......... 12,234 15,408 22,021
------- ------- --------
Total Cost of Revenue ....... 46,411 59,199 75,912
------- ------- --------
Gross profit................... 19,941 23,061 28,935
Operating expenses:
General and administration.... 5,804 5,939 6,923
Sales and Marketing........... 6,455 7,718 10,181
Depreciation.................. 639 783 753
Merger-related costs.......... -- -- --
------- ------- --------
Total operating expenses..... 12,898 14,440 17,857
------- ------- --------
Income from operations......... 7,043 8,621 11,078
Interest expense, net.......... (1,328) (2,354) (2,975)
Other income (expense), net.... 55 (87) 181
------- ------- --------
Income before provision for in-
come taxes.................... 5,770 6,180 8,284
Provision for income taxes..... (400) (514) (5,228)
------- ------- --------
Net income..................... $ 5,370 $ 5,666 $ 3,056
------- ------- --------
Accretion and dividends on re-
deemable preferred stock...... 240 240 320
------- ------- --------
Income available to common
stockholders.................. $ 5,130 $ 5,426 $ 2,736
======= ======= ========
Net income per common share.... $ 0.68 $ 0.72 $ 0.32
======= ======= ========
Weighted average common shares
outstanding................... 7,554 7,554 8,449
======= ======= ========
Net income per common share--
assuming dilution............. $ 0.67 $ 0.71 $ 0.31
======= ======= ========
Weighted average common shares
outstanding--assuming
dilution...................... 7,686 7,686 8,709
======= ======= ========
UNAUDITED PRO FORMA TAX AD-
JUSTED DATA (NOTE 15):
Income before provision for
income taxes................ $ 5,770 $ 6,180 $ 8,284
Provision for income taxes... 2,484 2,446 3,179
------- ------- --------
Pro forma tax adjusted net
income...................... $ 3,286 $ 3,734 $ 5,105
======= ======= ========
Pro forma tax adjusted net
income available to common
stockholders per common
share....................... $ 0.40 $ 0.46 $ 0.57
======= ======= ========
Pro forma tax adjusted net
income available to common
stockholders per common
share-assuming dilution..... $ 0.40 $ 0.45 $ 0.55
======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-4
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TREASURY STOCK
----------------- NET UNREALIZED ------------------
RETAINED GAINS (LOSSES)
NUMBER OF ADDITIONAL EARNINGS ON SECURITY, NUMBER OF
SHARES VALUE CAPITAL (DEFICIT) NET OF TAX SHARES VALUE TOTAL
---------- ----- ---------- --------- -------------- --------- ------- --------
Balance, December 31,
1994................... 1,472,043 $ 167 $ 1,489 $ 15,736 $ 262 52,000 $(8,384) $ 9,270
Net income............. -- -- -- 5,130 -- -- -- 5,130
Net change in
unrealized gains
(losses) on available-
for-sale security, net
of tax................ -- -- -- -- 28 -- -- 28
Dividends.............. -- -- -- (3,395) -- -- -- (3,395)
Contribution of capi-
tal................... -- -- 1,009 -- -- -- -- 1,009
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1995................... 1,472,043 167 2,498 17,471 290 52,000 (8,384) 12,042
Net income............. -- -- -- 5,426 -- -- -- 5,426
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (32) -- -- (32)
Dividends.............. -- -- -- (4,520) -- -- -- (4,520)
Common stock redemp-
tion.................. -- -- -- -- -- 2,275 (546) (546)
Contribution of capi-
tal................... -- -- 1,404 -- -- -- -- 1,404
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1996................... 1,472,043 167 3,902 18,377 258 54,275 (8,930) 13,774
Net income............. -- -- -- 2,736 -- -- -- 2,736
Elimination of capital
structure (Note 1).... (154,275) (154) (2,413) (6,363) -- (54,275) 8,930 --
Reorganization of the
Company (Note 1)...... 6,367,800 64 -- (64) -- -- -- --
Sale of common stock... 4,600,000 46 45,128 -- -- -- -- 45,174
Contribution of capital
(Note 3).............. -- -- 5,907 (5,907) -- -- -- --
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (258) -- -- (258)
Dividends.............. -- -- -- (13,124) -- -- -- (13,124)
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1997................... 12,285,568 $ 123 $52,524 $ (4,345) $ -- -- $ -- $ 48,302
---------- ----- ------- -------- ----- -------- ------- --------
The accompanying notes are an integral part of these financial statements.
F-5
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income...................... $ 5,370 $ 5,666 $ 3,056
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortiza-
tion......................... 6,094 7,812 10,481
(Gain) loss on sale of as-
sets......................... (72) 11 (178)
Deferred income taxes......... 71 60 4,235
Decrease (increase) in accounts
receivable..................... 1,112 (2,207) (1,905)
(Increase) decrease in
inventory...................... (2,737) 827 (2,149)
(Increase) in prepaid expenses
and other assets............... (1,480) (1,331) (3,009)
Increase (decrease) in accounts
payable, accrued commissions
and accrued expenses........... 1,969 4,889 (65)
Increase (decrease) in deferred
rental revenue and customer
deposits....................... 37 41 7
------- ------- -------
Net cash flows provided by op-
erating activities........... 10,364 15,768 10,473
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Capital expenditures............ (8,121) (10,010) (11,584)
Acquisition of businesses (Note
2)............................. (1,178) (14,487) (12,196)
Proceeds from sale of property
and equipment.................. 347 159 656
Proceeds from sale of
securities..................... -- -- 333
------- ------- -------
Net cash flows used in
investing activities......... (8,952) (24,338) (22,791)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Payments on long-term debt and
capital lease obligations...... (2,610) (2,293) (3,658)
Retirement of line of credit and
term loan...................... -- (5,378) (19,512)
Advances on line-of-credit,
net............................ 4,407 18,541 4,668
Contribution of capital and
proceeds from sale of common
stock.......................... 1,009 1,366 45,174
Cash dividends paid............. (3,395) (4,520) (13,124)
Cash paid to repurchase shares
of common stock................ -- (125) --
Cash paid for refinancing of
long term debt................. -- (75) (300)
------- ------- -------
Net cash flows (used in)
provided by financing
activities................... (589) 7,516 13,248
------- ------- -------
Increase (decrease) in cash and
cash equivalents................. 823 (1,054) 930
Cash and cash equivalents,
beginning of period.............. 3,075 3,898 2,844
------- ------- -------
Cash and cash equivalents, end of
period........................... $ 3,898 $ 2,844 $ 3,774
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMA-
TION:
Interest paid................... $ 1,321 $ 2,331 $ 3,272
Income taxes paid............... 242 437 1,116
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
During the year ended December 31, 1997, common stock with an approximate
value of $7,797 was issued in connection with the Sun Services Acquisition.
Such common stock is redeemable at a negotiated price pursuant to a
contractual arrangement.
The accompanying notes are an integral part of these financial statements.
F-6
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
Basis of Presentation--The financial statements include the accounts of Mac-
Gray Corporation and its wholly owned subsidiaries. On April 17, 1997, Mac-
Gray Co., Inc. and Mac-Gray, L.P. were reorganized to create Mac-Gray
Corporation (the "Parent"). The Parent acquired all of the outstanding common
stock of Mac-Gray Co., Inc. and all of the outstanding limited partnership
interest of Mac-Gray, L.P. in exchange for 6,367,800 shares of the Parent's
common stock. On March 12, 1998, the Company completed the acquisition of
Intirion Corporation ("Intirion"). This transaction was accounted for as a
pooling-of-interests and, therefore, the accompanying financial statements
have been retroactively restated to reflect the financial position and results
of operations and cash flows of Intirion with the Company for all periods
presented (see Note 2). All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to the
financial statements to conform to the current year presentation.
Description of the Business--The Company generates the majority of its
revenue from card and coin route laundry rooms located in the Northeastern,
Midwestern and Southeastern United States. The Company's principal customer
base is the multi-housing market, which consists of apartments, condominium
units, colleges and universities. The Company sells, services and leases
commercial laundry equipment to commercial laundromats and institutions.
Through Intirion, the Company is now engaged in the development, distribution,
rental and sale of multi-purpose appliances to commercial and residential
markets. The Company sells its multi-purpose products primarily to academic
institutions and the U.S. government, and also rents its products to academic
institutions and the students at academic institutions. The majority of the
Company's purchases of coin route laundry equipment and multi-purpose
appliances are from two suppliers.
2. ACQUISITIONS
On April 23, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Copico, Inc. ("Copico"). Copico is a provider of card and
coin-operated reprographics equipment and services to the academic and public
library markets in New England, New York and Florida. The purchase price was
250,000 shares of Mac-Gray common stock and $10,950 in cash, less the
assumption of certain debt. The acquisition was accounted for as a purchase
transaction. The pro forma results of operations assuming this acquisition had
occurred at January 1, 1997 would not have differed materially from the
results of operations reported.
On April 24, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Amerivend Corporation and the assets of Amerivend Southeast
Corporation for approximately $33,500 in cash, including the payment of
certain debt. Amerivend is a provider of card and coin-operating laundry rooms
in multiple housing facilities. The acquisition was accounted for as a
purchase transaction. A portion of the purchase price, $1.5 million, is being
held in escrow to satisfy any potential claims in accordance with the
Amerivend agreement.
F-7
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
The following unaudited supplemental pro forma financial information
reflects the Amerivend acquisition as if it occurred on January 1, 1997.
YEAR ENDED
DECEMBER 31,
1997
------------
Revenue........................................ $124,506
Net Income..................................... $ 2,762
Pro Forma tax adjusted net income available to
common
stockholders.................................. $ 4,609
Pro Forma tax adjusted net income Per Share.... $ 0.55
Pro Forma tax adjusted net income Per Share--
assuming dilution............................. $ 0.53
On March 12, 1998, the Company acquired Intirion Corporation pursuant to an
Agreement and Plan of Merger dated December 22, 1997. Pursuant to the
agreement, Intirion equity securities were exchanged for approximately 1.6
million shares of Mac-Gray common stock and approximately $1 million in cash.
Intirion Corporation had a June 30 year end and the results of operations for
the three years ended June 30, 1997, were combined with the results of
operations for Mac-Gray's three years ended December 31, 1997, respectively.
Additionally, the financial position of Intirion as of June 30, 1996 and 1997
has been combined with the Company's financial position as of December 31,
1996 and 1997, respectively. As such, results of operations for Intirion for
the six months ended December 31, 1997 (including revenue and net income of
$13,355 and $289, respectively) were not included in the consolidated
statement of operations for the year ended December 31, 1997. In order to
conform Intirion's year end to Mac-Gray's year end, an adjustment has been
made to retained earnings in fiscal 1998 to include the net income of Intirion
for this six month period.
Costs directly associated with the pooling transaction of $884 were incurred
in the three months ended March 31, 1998. These costs include legal,
accounting and severance costs directly associated with the pooling
transaction and are classified as merger-related costs on the income
statement. Additionally, $123 of sales and marketing expenses and $66 of
general and administrative expenses incurred by Intirion in the three months
ended March 31, 1998 are considered to be non-recurring as they were directly
attributable to the individuals whose employment was terminated subsequent to
the transaction.
Revenues and net income (loss) for each of the two previously separate
companies for the period prior to the Intirion Acquisition were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- --------
NET REVENUES:
Mac-Gray........................ $50,710 $64,427 $ 81,370
Intirion........................ 15,642 17,833 23,477
------- ------- --------
$66,352 $82,260 $104,847
======= ======= ========
NET INCOME (LOSS):
Mac-Gray........................ $ 5,770 $ 5,527 $ 2,686
Intirion........................ (400) 139 370
------- ------- --------
$ 5,370 $ 5,666 $ 3,056
======= ======= ========
F-8
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
In October and November, 1997, the Company acquired certain assets of two
coin-operated laundry businesses for approximately $7,150. These acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
purchase price assigned to the assets acquired was the fair market value on
the respective acquisition dates. Purchase price in excess of the fair value
of assets acquired was allocated to goodwill and amounted to approximately
$6,228. Pro forma financial information for the October and November 1997
acquisitions has not been presented due to their insignificance in relation to
the Company as a whole.
On April 17, 1997, the Company acquired in exchange for 612,026 shares of
its common stock, (approximate value of $7,797), approximately $2,170 in cash,
$850 of a deferred payment obligation, and assumption of approximately $2,787
in debt, each of Sun Services of America, Inc. and R.
Bodden Coin-Op Laundry, Inc. (collectively, "Sun Services"). The shares of the
Company's common stock are redeemable at the election of the shareholder. The
redeemable common stock has been valued at a contractual put price of $12.74
per common share (which was in excess of market as of that date). The
redemption feature of these shares expires on October 22, 2000. Sun Services
of America, Inc. and R. Bodden Coin-Op Laundry were 100% owned by the same
shareholder. The Parent acquired all of the outstanding capital stock of Sun
Services, which was accounted for pursuant to the purchase method of
accounting, and resulted in goodwill of approximately $11,600.
The following supplemental pro forma financial information reflects the Sun
Services Acquisition as if it occurred on January 1, 1996. 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 the Company.
UNAUDITED SUPPLEMENTAL
PRO FORMA RESULTS FOR THE
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
------------ -------------
Revenue......................................... $ 88,924 $ 106,879
Net Income...................................... 5,819 3,209
Pro Forma tax adjusted net income (Note 15)..... 3,826 5,197
Pro Forma tax adjusted net income available to
common stockholders............................ 3,586 4,877
Pro Forma tax adjusted net income Per Share..... $ 0.47 $ 0.58
Pro Forma tax adjusted net income Per Share--as-
suming dilution................................ $ 0.47 $ 0.56
In 1995, the Company acquired certain assets of Commercial Appliance, Inc.
for $821 and recorded goodwill of approximately $564. During 1996, the Company
acquired certain assets of six coin-operated laundry businesses or divisions
for an aggregate purchase price of $15,561 and recorded goodwill of $10,184.
Non-compete agreements valued at $1,250 were also recorded in 1996 in
connection with these acquisitions. These acquisitions were accounted for
using the purchase method of accounting. Pro forma financial information has
not been provided for these acquisitions due to lack of historical financial
data of the acquired entities.
The Company's consolidated financial statements include the results of the
1995, 1996, and 1997 acquisitions from their respective acquisition dates.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
Mac-Gray Corporation completed its initial public offering of 4,600,000
shares of common stock at $11 per share on October 22, 1997. The net proceeds
from the sale of the common stock of $45,174 were used primarily to repay
existing indebtedness outstanding under the Credit Facility (Note 9) and to
fund a distribution of $9,000
F-9
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
of previously taxed but undistributed earnings to the Company's shareholders
of record as of October 16, 1997. As a result of the initial public offering,
the Company's S corporation status was terminated. Retained earnings of $5,907
as of that date were reclassified to additional paid-in capital to reflect
additional contributions of capital by the S-corporation shareholders.
4. SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Available-For-Sale Security--The Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company invests excess cash in repurchase agreements and other highly
liquid short term investments. Accordingly, the investments are subject to
minimal credit and market risk. All of the Company's investments are
classified as available-for-sale. As such, unrealized gains and losses are
excluded from earnings and reported as a separate component of stockholders'
equity, net of tax.
Revenue Recognition--The Company recognizes coin route laundry revenue on
the accrual basis. Rental revenue is recognized ratably over the related
contractual period, which is less than one year. The Company recognizes
revenue from product sales upon shipment of the products. The Company offers
limited duration warranties on multi-purpose appliance products and, at the
time of sale, provides reserves for all estimated warranty costs.
Allowance for Doubtful Accounts--The Company maintains an allowance for
doubtful accounts of $372 at December 31, 1996 and $508 at December 31, 1997.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk include trade receivables,
generated by the Company as a result of its selling and leasing activities. To
minimize this risk, ongoing credit evaluations of customers' financial
condition are performed and reserves are maintained. The Company typically
does not require collateral.
Fair Value of Financial Instruments--For purposes of financial reporting,
the Company has determined that the fair value of financial instruments
approximates book value at December 31, 1996 and 1997, based upon terms
currently available to the Company in financial markets.
Inventories--Inventories are stated at the lower of cost (as determined
using the first-in, first-out method) or market and consist primarily of
finished goods.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost and depreciated using the straight-line method over the estimated useful
lives of the respective assets. Tooling costs are depreciated using the units-
of-production method. Expenditures for maintenance and repairs are charged to
operations as incurred; acquisitions, major renewals, and betterments are
capitalized.
Coin route equipment-not yet placed in service--These assets represent
laundry machines that management estimates will be installed in coin route
laundry rooms and have not been purchased for commercial sale.
Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the acquisitions
(Note 2). The non-compete agreements are amortized using the straight-line
method over the life of the agreements, which ranges from two to five years.
Goodwill is amortized
F-10
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
using the straight-line method over fifteen or twenty years from the acquired
companies respective dates of acquisitions. Intangible assets also include
customer lists which are being amortized on a straight-line basis ranging from
five to ten years.
Impairment of Long-Lived Assets--Impairment losses are recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.
Income Taxes--Mac-Gray Co., Inc. which elected S corporation status, and
Mac-Gray, L.P. were "pass through" entities for income tax purposes prior to
the reorganization on April 17, 1997. From April 17, 1997 through October 16,
1997, Mac-Gray Corporation also elected S corporation status. Accordingly,
earnings and losses were included on the income tax returns of the respective
equity owners through October 16, 1997. On October 16, 1997, the Company's S
corporation status was terminated as a result of the initial public offering.
The Company accounts for income taxes utilizing the asset and liability
method as prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the provisions of SFAS 109,
the current or deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determined the amount of taxes
payable currently or in future years. The classification of net current and
non-current deferred tax assets or liabilities depend upon the nature of the
related asset or liability. Deferred income taxes, net of any valuation
allowance, are provided for temporary differences and operating loss
carryforwards.
Stock Compensation--The Company's stock option plans are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". In fiscal 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation".
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.
Earnings Per Share--The Company accounts for earnings per share in
accordance with Statement of Financial Accounting Standard No. 128, "Earnings
Per Share" (SFAS 128). SFAS 128 replaces APB Opinion No. 15 "Earnings Per
Share" and requires the presentation of basic earnings per share and diluted
earnings per share (EPS). Basic EPS includes no dilution and is computed by
dividing net income available to common stockholders 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, similar to fully diluted EPS under APB 15. Diluted earnings per share
has been calculated using the treasury stock method and prior period earnings
per share have been restated in accordance with SFAS 128. Net income per share
gives effect to the exchange of shares between the Parent and the Company
(Note 1).
New Accounting Pronouncements--The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in June 1997. Mac-Gray adopted
SFAS 130 for fiscal 1998. SFAS 130 requires presentation of certain
information related to
F-11
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
comprehensive income. During the three years ended December 31, 1997, Mac-Gray
had comprehensive income/(expense) of $28, $(32) and $0, respectively. This
comprehensive income/(expense), as defined in SFAS 130, related to unrealized
gains/(losses) on available for sale securities. FASB issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). In accordance with this
statement, the Company will implement SFAS 131 which requires that certain
additional information related to operating segments be reported during fiscal
year 1998. The Company is currently reviewing the impact of this statement on
its financial statements.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
ESTIMATED ---------------
USEFUL LIFE 1996 1997
------------- ------- -------
Coin route equipment......................... 10 years $58,610 $68,179
Rental equipment............................. 7 years 5,984 7,439
Buildings and improvements................... 15-32 years 6,531 7,388
Furniture, fixtures and computer equipment... 2-7 years 4,712 5,967
Trucks and autos............................. 3-5 years 1,786 2,610
Tooling costs................................ 250,000 units 212 271
Land and improvements........................ -- 309 309
------- -------
78,144 92,163
Less: accumulated depreciation............... 42,305 49,548
------- -------
35,839 42,615
Coin route equipment, not yet placed in serv-
ice......................................... 1,052 1,000
------- -------
Property, plant and equipment, net........... $36,891 $43,615
======= =======
Depreciation and amortization of property, plant and equipment totaled $697,
$932 and $1,912 for the years ended December 31, 1995, 1996 and 1997,
respectively.
At December 31, 1996 and 1997, trucks and autos includes $1,449 and $2,284,
respectively, of capital leased equipment with an accumulated amortization
balance of $1,052 and $1,307, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
---------------
1996 1997
------- -------
Goodwill.................................................... $10,348 $28,208
Covenants-not-to-compete.................................... 2,549 2,869
Customer lists.............................................. 901 1,008
Other....................................................... 153 451
------- -------
13,951 32,536
Less: accumulated amortization.............................. 1,744 3,888
------- -------
Intangible assets, net...................................... $12,207 $28,648
======= =======
Amortization expense associated with the above intangible assets amounted to
$697, $932 and $1,912 for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-12
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------
1996 1997
------ ------
Accrued interest.............................................. $134 $ 101
Accrued salaries.............................................. 332 596
Warranty...................................................... 131 128
Current portion of deferred retirement obligation............. 104 104
Current portion of deferred payment obligation................ -- 392
Other......................................................... 952 1,310
------ ------
$1,653 $2,631
====== ======
8. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at December 31, 1996 and 1997 relates to
payments due to a shareholder of the Company in connection with a retirement
agreement which provides for annual payments of $104 until the death of the
shareholder. The liability at December 31, 1996 and 1997 has been estimated
based upon the life expectancy of the shareholder utilizing actuarial tables.
9. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
--------------
1996 1997
------- ------
Credit agreement and revolving credit facility.............. $21,042 $2,525
Unsecured notes payable to former shareholders:
Variable rate note, lesser of prime rate plus 2% or 9%,
quarterly principal payments beginning January 1, 1996
(9% at December 31, 1997)................................ 3,360 2,560
Fixed rate notes, 8.4% interest rate, due September 1, 1997
and June 1, 2000........................................... 2,046 746
Discount note, 6% imputed interest rate (estimated fair
market rate), quarterly installments, due December 31,
2003....................................................... 2,613 2,239
Fixed note, 8.75% interest rate, due January 1, 2001........ 421 317
Note payable, 11.5% fixed interest rate, monthly principal
payments,
due September 1, 1999...................................... 249 172
Acquisition note payable, 8% imputed interest rate
(estimated fair
market rate), monthly payments, due May 31, 2006........... 1,010 911
Acquisition note payable, 10% imputed interest rate, annual
installments, due March, 1999.............................. 282 153
Demand line of credit with primary supplier, 9.5% variable
interest rate, at December 31, 1997........................ -- 3,694
------- ------
Total long-term debt.................................... 31,023 13,317
Less: current portion....................................... 7,550 7,922
------- ------
$23,473 $5,395
======= ======
F-13
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
Credit Agreement and Revolving Credit Facility
On April 23, 1998, the outstanding debt under Mac-Gray's $50 million
revolving credit facility with State Street Bank and Trust Company and
CoreStates Bank was refinanced under a new senior secured revolving and term
loan credit facility with State Street Bank and Trust Company, CoreStates Bank
and BankBoston, N.A. The Credit Facility provides for borrowings under a
revolving line of credit of up to $90 million and converts to a term loan
after three years. Outstanding indebtedness under the Credit Facility bears
interest at Mac-Gray's option, at a rate equal to the prime rate minus .5% or
LIBOR plus the applicable margin (either (i) 1.5% for loans outstanding which
aggregate less than $50 million or (ii) 1.75% for loans outstanding which
exceed $50 million), or cost of funds plus the applicable margin. The Credit
Facility restricts payments of dividends and other distributions, restricts
Mac-Gray from making certain acquisitions and incurring indebtedness, and
requires it to maintain certain financial ratios. The Credit Facility is
secured by pledges of the capital stock of Mac-Gray's subsidiaries and a lien
on Mac-Gray's assets.
On April 17, 1997, the outstanding debt under the 1996 Credit Agreement and
Revolving Credit Facility was refinanced under terms of an amended and
restated agreement (the Senior Secured Credit Facility). The Senior Secured
Credit Facility provides for borrowings under (i) a revolving line of credit
and term loan facility and (ii) a revolving working capital line of credit
facility of up to $45,000 and $5,000, respectively. Outstanding indebtedness
under the Senior Secured Credit Facility bears interest at the Company's
option, at a rate equal to the prime rate plus .5% or LIBOR plus 2.5% with the
margin over the prime rate and LIBOR decreasing after October 22, 1997 due to
the initial public offering of the Company's common stock (Note 3) to the
prime rate less .5% or LIBOR plus 2.0%. The Senior Secured Credit Facility
restricts payments of dividends and other distributions, restricts the Company
from making certain acquisitions and incurring indebtedness, and requires it
to maintain certain financial ratios. The Senior Secured Credit Facility is
secured by pledges of assets of the Parent and its subsidiaries. The Senior
Secured Credit Facility provides for the issuance of standby letters of credit
of up to $15,000 in the aggregate. At December 31, 1997, outstanding letters
of credit amounted to $1,302. There is no outstanding balance on the Senior
Secured Credit Facility at December 31, 1997. The interest rate for the Senior
Secured Credit Facility at December 31, 1997 was 8.0%. Subsequent to year end,
the Company refinanced its credit facility (see Note 16).
Through Intirion the Company also had outstanding borrowings pursuant to a
secured demand line of credit agreement with a bank that allows for maximum
borrowings of $7,500 at December 31, 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 Intirion's 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%, and 9.5% for fiscal 1996 and
1997, respectively). Under the rental asset component of the agreement,
borrowings are restricted to the lesser of (i) $1,500 or (ii) 70% of
Intirion's 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%, and 10.0% for fiscal 1996 and 1997, respectively).
Borrowings under the line of credit agreement are secured by substantially all
assets of Intirion Corporation. 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. All outstanding borrowings of Intirion were repaid by Mac-Gray
subsequent to the merger and the line of credit was terminated.
F-14
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
In connection with the financing of the 1996 Acquisitions (Note 2), the
Company entered into a Credit Agreement with a bank which provided for
borrowings under a Revolving Line of Credit, Working Capital Line of Credit
and Acquisition Line of Credit of up to $14,000, $1,500 and $4,000,
respectively. Borrowings under the Credit Agreement were restricted to
providing working capital requirements of the Company and funding future
acquisitions.
During June 1996, the Company entered into an agreement with a bank which
provided a Revolving Credit Facility with aggregate borrowings of up to
$4,500. As of December 31, 1996, $2,893 was available to be borrowed under the
Revolving Credit Facility. A portion of the proceeds from the Credit Agreement
and the Revolving Credit Facility were used to pay the balance of the Bank
Note and Line of Credit outstanding prior to the refinancing of the Company.
The Credit Agreement and the Revolving Credit Facility provided for the
issuance of standby letters of credit up to $2,200 in the aggregate. At
December 31, 1996, outstanding letters of credit amounted to $1,526.
Borrowings under the 1996 Credit Agreement and the Revolving Credit Facility
bore interest, at the Company's option, at either (1) the banks' prime
interest rate (the "Prime Rate") or (2) 2.5% plus the rate at which certain
Eurodollar deposits were offered in the interbank Eurodollar market (the
"LIBOR Rate") or (3) 2.5% plus the rate at which funds were offered in the
secondary markets (the "Cost of Funds Rate").
Future Payments
As of December 31, 1997, the scheduled future principal payments of long-
term debt are as follows:
1998................................................................. $ 7,922
1999................................................................. 1,401
2000................................................................. 2,088
2001................................................................. 887
2002................................................................. 602
Thereafter........................................................... 417
-------
$13,317
=======
10. INCOME TAXES
On October 16, 1997, the Mac-Gray Corporation's S corporation status was
automatically terminated due to the initial public offering (Note 3). As a
result, the current year provision includes a charge of $4,037 to provide for
net deferred tax liabilities resulting from the change in income tax status
from an S corporation to a C corporation, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
following information relates to temporary differences at October 16, 1997,
for which a deferred tax provision was not provided for until the Company's
termination of its S corporation status.
Accounts receivable................................................ (627)
Fixed assets....................................................... 16,051
Deferred compensation.............................................. (3,415)
Other.............................................................. (147)
--------
Total............................................................ $ 11,862
========
F-15
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
Prior to October 16, 1997, the historical income tax provision for Mac-Gray
Corporation was established only to provide for income taxes in states that do
not recognize Subchapter S corporations, using a statutory income tax rate of
6%. The effective rate differed from the statutory rate in 1996 and 1997
(prior to October 16, 1997) due to meals and entertainment expenses and
goodwill amortization recorded for book purposes that are not deductible for
income tax purposes. In addition to the aforementioned items, the Company's
1996 effective tax rate differs from the statutory tax rate due to taxable
losses generated by Mac-Gray, L.P. for which only a 10% tax benefit
(equivalent to Mac-Gray Co., Inc.'s general partnership interest in Mac-Gray,
L.P.) was recognized by the Company.
The provision for state and federal income taxes of the Company consists of
the following:
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
Current state income tax................................... $315 $416 $ 460
Deferred state income tax.................................. 69 60 505
Current federal income tax................................. 16 38 533
Deferred federal income tax................................ -- -- 3,730
---- ---- ------
Total income taxes....................................... $400 $514 $5,228
==== ==== ======
The net deferred tax liability in the accompanying balance sheets includes
the following amounts of deferred tax assets and liabilities at December 31:
1996 1997
------ ------
Deferred tax assets:
Net operating loss carryforwards............................ $1,037 $1,080
Alternative minimum tax credit carryforwards................ 106 50
Accounts receivable......................................... 57 376
Deferred compensation....................................... 202 1,366
Amortization................................................ 53 53
Other....................................................... 50 86
------ ------
1,505 3,011
------ ------
Deferred tax liabilities:
Fixed assets................................................ 1,512 7,341
Other....................................................... 13 58
------ ------
1,525 7,399
------ ------
Excess of deferred tax liabilities over deferred tax assets... 20 4,388
Deferred tax asset valuation allowance........................ 503 370
------ ------
Net deferred tax liability.................................... $ 523 $4,758
====== ======
F-16
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
As Mac-Gray Corporation maintained its S corporation election through
October 16, 1997, the provision for income taxes recorded for the year ended
December 31, 1997 differs significantly from the amount of income taxes
determined by applying the applicable U.S. statutory federal income tax rate
to consolidated pretax income. For the period subsequent to the termination of
the S corporation, the statutory income tax rate differed from the effective
rate primarily as a result of the following differences:
%
----
Taxes computed at federal statutory rate............................... 34.0%
State income taxes, net of federal benefit............................. 2.3
Other.................................................................. (1.0)
----
Income tax provision................................................. 35.3%
====
The current provision for income taxes recorded for fiscal 1997 includes
$314 in tax while Mac-Gray Corporation was an S corporation and $657 in tax
for the period subsequent to the termination of the S corporation election.
The current provision for income taxes recorded for fiscal 1997 also includes
$22 in tax related to Intirion Corporation (Note 1), a C Corporation.
At December 31, 1997, the Company has the following net operating loss
carryforwards available to reduce certain future federal taxable income:
Net operating loss carryforwards relating to certain losses incurred
prior to November 30, 1990.......................................... $ 386
Net operating loss carryforwards relating to certain losses incurred
in the year ending December 31, 1994 and June 30, 1997.............. 330
Net operating loss carryforwards relating to certain losses incurred
in the year ended December 31, 1995................................. 1,826
------
$2,542
======
Subsequent ownership changes could further affect the limitations in future
years.
11. STOCKHOLDERS EQUITY
On January 1, 1996, the Company redeemed 2,275 shares of its common stock at
$240 per share from minority shareholders. The aggregate redemption price was
$546, consisting of cash in the amount of $125 and the issuance of five-year
promissory notes in the amount of $421, bearing interest at 8.75% per year.
In April 1994, Intirion Corporation issued 100,000 shares of Senior
Redeemable Preferred Stock. Such securities are recorded at issuance cost plus
accumulated accretion and accrued dividends of $480 and $800 at December 31,
1996 and 1997, respectively. The Company was 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. This redemption obligation was being accreted through April
2001 by charges to retained earnings (deficit). Cumulative dividends of 6.0%
to 8.0% per annum were payable when and if declared by the Board of Directors,
upon mandatory redemption or upon liquidation. No dividends were paid in 1996
and 1997. Subsequent to year-end and in conjunction with the merger between
the Company and Intirion Corporation, on March 12, 1998, the Senior Redeemable
Preferred Stock was exchanged for approximately $1 million in cash and 275,224
shares of Mac-Gray common stock (Note 2).
F-17
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
12. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases certain equipment and facilities under non-
cancelable operating leases. The Company also leases certain vehicles under
capital leases.
Future minimum lease payments under non-cancelable operating and capital
leases consist of the following:
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
1998................................................... $ 538 $ 608
1999................................................... 389 535
2000................................................... 133 456
2001................................................... -- 243
Thereafter............................................. -- 89
------ ------
Future lease payments.................................. 1,060 $1,931
======
Less: amount representing interest (8.5% at December
31, 1997)............................................. 93
------
967
Present value future minimum lease payments less
amounts due within one year........................... 476
------
Amounts due after one year............................. $ 491
======
Rent expense incurred by the Company under non-cancelable operating leases
totaled $280, $369 and $675 for the years ended December 31, 1995, 1996 and
1997, respectively.
Guaranteed Commission Payments--The Company operates coin laundry routes
under various lease agreements in which the Company is required to make
minimum guaranteed commission payments to the respective property owners. The
following is a schedule by years of future minimum guaranteed commission
payments required under these lease agreements that have initial or remaining
non-cancelable contract terms in excess of one year as of December 31, 1997:
1998.................................................................. $1,633
1999.................................................................. 1,395
2000.................................................................. 1,375
2001.................................................................. 826
2002.................................................................. 735
Thereafter............................................................ 1,876
------
$7,840
======
Guarantee of Indebtedness--At December 31, 1997, Mac-Gray Co., Inc. was a
guarantor on a line-of-credit for a customer in the amount of $706. The
customer incurred substantial losses. While the guarantee was secured by a
pledge of the borrowing company's assets, it was uncertain if those assets and
profits from continuing operations would be adequate to retire the line-of-
credit. The Company recorded a reserve of $250 at December 31, 1997 for
estimated losses on this guarantee. During the three months ended March 31,
1998, the customer defaulted on the line of credit and the Company succeeded
to the assets and assumed the liabilities of the customer in accordance with
the guarantee and related agreements. At March 31, 1998, the fair market value
F-18
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
of the customer's assets and a liability of $677 were recorded on the
Company's financial statements and a loss was recorded against the reserve. In
April 1998, the customer's liability to its creditor was paid in full by the
Company.
Litigation--The Company is involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Company's ultimate liability, if any, under pending litigation would not
materially affect its financial condition or the results of its operations.
13. EMPLOYEE BENEFIT AND STOCK PLANS
Retirement Plans--The Company maintains a qualified profit-sharing/401(k)
plan (the Plan) covering substantially all employees. The Company's
contributions to the Plan are at the discretion of the Board of Directors.
Costs under the Plan amounted to $535, $532 and $285 for the years ended
December 31, 1995, 1996 and 1997, respectively.
1997 Stock Option and Incentive Plans--In December, 1996, the Board of
Directors of Mac-Gray Co. adopted, and the stockholders approved, the Mac-Gray
Co., Inc. 1996 Stock Option and Incentive Plan (the Predecessor Plan). On
April 7, 1997, the Board of Directors adopted and the Company's stockholders
approved the 1997 Stock Option and Incentive Plan for the Company (the 1997
Stock Plan). The 1997 Stock Plan is designed and intended as a performance
incentive for officers, employees, consultants and directors to promote the
financial success and progress of the Company. All officers, employees and
independent directors are eligible to participate in the 1997 Stock Plan.
Awards, when made, may be in the form of stock options, restricted stock,
unrestricted stock options, and dividend equivalent rights.
On December 30, 1996, Mac-Gray Co. granted 556,350 options to purchase
shares of common stock with an exercise price of $9.99 per share pursuant to
the Predecessor Plan. Concurrent with the reorganization of the Company, the
options issued pursuant to the Predecessory Plan were assumed by the Company
under the 1997 Stock Plan, and the Predecessory Plan was terminated. The
options assumed by the Company under the 1997 Plan were reflective of the
exchange of common stock between the Parent and Mac-Gray Co., Inc. The
exercise price of the options was adjusted to $8.80 in August 1997, in order
to restore the economic position of the option holders as a result of the
$9,000 distribution (Note 3). The change in the exercise price of these
options has been reflected as a cancellation of the $9.99 options and a grant
of the $8.80 options on the following option rollforward. Employee options
vest so that twenty percent (20%) of the options will become exercisable on
each of the first through fifth anniversaries of the date of grant of the
options. In the event of termination of the optionees' relationship with the
Company, options not yet exercised terminate within 90 days. The 1997 Stock
Plan also provided for the automatic grant to each of the four independent
directors to purchase 1,000 shares of common stock. The non-qualified options
granted to independent directors were exercisable immediately and will
terminate on the tenth anniversary of the grant. The exercise prices were
determined by the Board of Directors to be the fair market value of the shares
underlying the options on the respective dates of the grants. Other than the
stock option grants, there were no other grants of equity-based compensation
awards during 1996 and 1997.
The 1997 Stock Plan provides for the issuance of up to the greater of
750,000 shares of common stock or ten percent of the then outstanding shares
of common stock. Subsequent to the initial public offering (Note 3), a total
of 1,157,982 shares of common stock are reserved for issuance under the 1997
Stock Plan, of which 638,590 shares are subject to outstanding options and
519,392 remain available for issuance.
F-19
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
The following is a summary of stock option plan activity.
1996 1997
---------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- -------- --------
Outstanding, beginning of year........... -- $ -- 556,350 $ 9.99
Granted.................................. 556,350 $ 9.99 649,840 $ 8.88
Exercised................................ -- $ -- -- $ --
Canceled................................. -- $ -- (556,350) $ 9.99
Forfeited................................ -- $ -- (11,250) $ 8.89
------- ------ -------- ------
Outstanding, end of year................. 556,350 $ 9.99 638,590 $ 8.88
======= ====== ======== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
-------- ----------- ---------------- -------- ----------- --------
$8.80-$9.25...... 634,590 9 $ 8.86 109,470 $ 8.80
$11.00-$16.06.... 4,000 10 $12.27 4,000 $12.27
------- --- ------ ------- ------
638,590 9 $ 8.88 113,470 $ 8.92
======= === ====== ======= ======
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." The Company continues to measure compensation cost using the
intrinsic value based method of accounting prescribed by APB Opinion 25. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net income
and net income per share would have been reduced to $2,684 in 1997, or $0.28
per share compared to reported net income of $3,056, or $0.32 per share and
$0.31 per share-assuming dilution.
DECEMBER 31,
----------------
1996 1997
------- -------
Fair value of options granted at grant date................ $ 3.10 $ 3.61
Risk free interest rate.................................... 6% 6%
Expected option term--Employees............................ 7 years 7 years
Expected option term--independent directors................ -- 3 years
Expected volatility........................................ -- 50%
Option valuation method.................................... Black-Scholes
option-pricing
model
In accordance with the provisions of SFAS 123, a volatility assumption was
not used to calculate the fair value of options granted prior to the Company's
initial public offering.
Because the determination of the fair value of all options granted includes
vesting periods over several years and additional option grants are expected
to be made each year, the above pro forma disclosures are not representative
of pro forma effects of reported net income for future periods.
F-20
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
14. EARNINGS PER SHARE
FOR THE YEAR ENDED 1997
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
Net Income................................... $3,056
Less: Accretion and dividends on redeemable
preferred stock............................. (320)
------
Net income available to common stockhold-
ers....................................... $2,736 8,449 $0.32
====== ===== =====
Effect of dilutive securities:
Stock options.............................. 128
Contingent shares.......................... 132
-----
Net income available to common stockholders--
assuming dilution........................... $2,736 8,709 $0.31
====== ===== =====
FOR THE YEAR ENDED 1996
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
Net Income................................... $5,666
Less: Accretion and dividends on redeemable
preferred stock............................. (240)
------
Net income available to common
stockholders.............................. $5,426 7,554 $0.72
====== ===== =====
Effect of dilutive securities:
Stock options.............................. --
Contingent shares.......................... 132
-----
Net income available to common stockholders--
assuming dilution........................... $5,426 7,686 $0.71
====== ===== =====
FOR THE YEAR ENDED 1995
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
Net Income................................... $5,370
Less: Accretion and dividends on redeemable
preferred stock............................. (240)
------
Net income available to common
stockholders.............................. $5,130 7,554 $0.68
====== ===== =====
Effect of dilutive securities:
Stock options.............................. --
Contingent shares.......................... 132
-----
Net income available to common stockholders--
assuming dilution........................... $5,130 7,686 $0.67
====== ===== =====
F-21
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
15. UNAUDITED PRO FORMA TAX ADJUSTED DATA
Statement of Income--Unaudited pro forma tax adjusted data reflects
adjustments to the consolidated statement of income for year ended December
31, 1997. Such adjustments consider the effect of the Company's operations as
if the Company was subject to federal and state income taxes on a corporate
level. Accordingly, the pro forma income tax provision and pro forma net
income have been calculated, as if the Company was subject to income taxation
as a C corporation during the entire year.
F-22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
Sun Services of America, Inc. and
R. Bodden Coin-Op-Laundry, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statement of income, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of Sun
Services of America, Inc. and R. Bodden Coin-Op-Laundry, Inc. (the
"Companies") at December 31, 1996, and the results of the Companies'
operations and cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Companies' management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit 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 audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 2, 1997
F-23
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful ac-
counts of $16...................................... $ 33 $ 22
Due from shareholder................................ 173 173
Inventory........................................... 164 151
Prepaid expenses and other current assets........... 230 242
------ ------
Total current assets.............................. 600 588
Property and equipment, net........................... 1,693 1,687
Intangible assets, net................................ 1,540 1,651
Prepaid commissions and other assets.................. 787 734
------ ------
Total assets...................................... $4,620 $4,660
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................... $ 765 $ 765
Accounts payable.................................... 329 169
Accrued expenses.................................... 383 462
------ ------
Total current liabilities......................... 1,477 1,396
------ ------
Long-term debt........................................ 2,209 2,268
------ ------
Commitments and contingencies (Note 10)............... -- --
Stockholder's equity:
Common stock--Sun Services of America, Inc., $1 par
value; 1,000 shares authorized; 30 shares issued
and outstanding.................................... -- --
Common stock--R. Bodden Coin-Op-Laundry Inc. $1 par
value; 7,000 shares authorized; 1,000 shares issued
and outstanding.................................... 1 1
Additional paid-in capital.......................... 90 90
Retained earnings................................... 843 905
------ ------
Total stockholder's equity........................ 934 996
------ ------
Total liabilities and stockholder's equity........ $4,620 $4,660
====== ======
The accompanying notes are an integral part of these financial statements.
F-24
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1996 1996 1997
------------ ------ ------
(UNAUDITED)
Revenue............................................ $6,664 $1,628 $2,032
Cost of revenue:
Commissions...................................... 2,718 723 797
Laundry route expenditures....................... 820 193 183
Depreciation and amortization.................... 655 129 209
Cost of equipment sales.......................... 277 19 164
------ ------ ------
Total cost of revenue.......................... 4,470 1,064 1,353
------ ------ ------
Operating expenses:
General and administration....................... 1,220 292 307
Sales and marketing.............................. 160 30 47
Depreciation..................................... 25 5 6
------ ------ ------
Total operating expenses....................... 1,405 327 360
------ ------ ------
Income from operations............................. 789 237 319
Interest expense................................. (267) (42) (89)
Other expense, net............................... (60) (3) --
------ ------ ------
Net income......................................... $ 462 $ 192 $ 230
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-25
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK--SHARES COMMON STOCK--VALUE
---------------------- ----------------------
SUN SERVICES R. BODDEN SUN SERVICES R. BODDEN
OF COIN-OP OF COIN-OP- ADDITIONAL
AMERICA, LAUNDRY, AMERICA, LAUNDRY, PAID-IN RETAINED
INC. INC. INC. INC. CAPITAL EARNINGS TOTAL
------------ --------- ------------ --------- ---------- -------- -----
Balance, December 31,
1995................... 30 1,000 $-- $ 1 $ 90 $ 772 $ 863
Net income............. -- -- -- -- -- 462 462
Dividends.............. -- -- -- -- -- (391) (391)
--- ----- ---- --- ---- ----- -----
Balance, December 31,
1996................... 30 1,000 -- 1 90 843 934
Net income (unau-
dited)................ -- -- -- -- -- 230 230
Dividends (unaudited).. -- -- -- -- -- (168) (168)
--- ----- ---- --- ---- ----- -----
Balance, March 31, 1997
(unaudited)............ 30 1,000 $-- $ 1 $ 90 $ 905 $ 996
=== ===== ==== === ==== ===== =====
The accompanying notes are an integral part of these financial statements.
F-26
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1996 1996 1997
------------ ------ ------
(UNAUDITED)
Net income....................................... $ 462 $ 192 $ 230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 680 134 215
Changes in assets and liabilities:
(Increase) decrease in trade receivables,
net......................................... (26) (2) 11
(Increase) in shareholder receivable......... (10) -- --
(Increase) decrease in inventory............. (46) (1) 13
(Increase) decrease in prepaid expenses and
other current assets........................ (329) (185) 1
Increase (decrease) in accounts payable and
accrued expenses............................ 172 (197) (81)
------- ------ ------
Net cash provided by (used in) operating
activities.................................. 903 (59) 389
------- ------ ------
Cash flows from investing activities:
Capital expenditures........................... (444) (105) (15)
Acquisition of businesses (Note 3)............. (1,720) (300) (265)
------- ------ ------
Net cash used in investing activities........ (2,164) (405) (280)
------- ------ ------
Cash flows from financing activities:
Advances under line of credit agreement, net... 116 163 143
Principal payments on long-term debt........... (953) (627) (194)
Proceeds from issuance of long-term debt....... 2,507 984 110
Dividends paid................................. (391) (56) (168)
Cash paid for refinancing of debt.............. (18)
------- ------ ------
Net cash provided by (used in) financing
activities.................................. 1,261 464 (109)
------- ------ ------
Net change in cash and cash equivalents.......... $ -- $ -- $ --
======= ====== ======
Supplemental cash flow information:
Cash paid for interest......................... $ 241 $ 25 $ 64
The accompanying notes are an integral part of these financial statements.
F-27
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION AND THE BUSINESS
Basis of Presentation--The accompanying combined financial statements
include the accounts of Sun Services of America, Inc. (Sun Services) and R.
Bodden Coin-Op-Laundry, Inc. (Bodden) (collectively, the Companies). The
Companies are 100% owned by the same shareholder and are under common
management.
Nature of Business--The Companies are engaged in the coin operated laundry
business throughout Florida. The majority of the Companies' customers are
apartment complexes and laundromats. The Companies lease coin operated laundry
equipment to their customers for percentages of the monies collected. The
majority of the Companies purchases of coin route laundry equipment are from
one supplier.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Combined Interim Financial Statements--The accompanying combined
financial information as of March 31, 1997 and for the three month periods
ended March 31, 1996 and 1997 is unaudited. The interim financial statements
have been prepared on the same basis as the accompanying annual financial
statements. In the opinion of management, such interim financial information
reflects adjustments consisting of normal and recurring adjustments necessary
for a fair presentation of such financial information. The unaudited results
of operations for the interim periods ended March 31, 1996 and 1997 are not
necessarily indicative of the results of operations to be expected for any
other interim period or for the full year.
Principles of Combined Financial Statements--The combined financial
statements include the accounts of Sun Services and Bodden, including the 1996
Acquisitions (Note 3) from their respective acquisition dates. All significant
intercompany transactions and balances have been eliminated in combination.
Cash and Cash Equivalents--The Companies consider all highly liquid
investments with original maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk--Financial instruments which potentially expose
the Companies to concentrations of credit risk consist principally of trade
receivables generated by the Companies as a result of the selling and leasing
of laundry machines. To minimize this risk, ongoing credit evaluations of
customer's financial condition are performed and reserves are maintained. The
Companies typically do not require collateral.
Inventory--Inventory is stated at the lower of cost or market with cost
determined using the first-in, first-out method.
Property and Equipment--Property and equipment are recorded at cost.
Expenditures for repairs and maintenance are charged to expense as incurred;
expenditures for renewals and betterments are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the 1996
Acquisitions (Note 3). The non-compete agreements are amortized using the
straight-line method over the life of the agreements, which range from five to
seven years. Goodwill is amortized over fifteen years from the acquired
companies respective dates of acquisition.
Income Taxes--Sun Services and Bodden have elected to be taxed as "S
corporations" as defined in the Internal Revenue Code. This results in the
pass-through of any taxable income directly to the shareholder. Accordingly,
no taxes are provided on the earnings attributable to the Companies.
F-28
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Earnings Per Share--Given the capital structure of the Companies, historical
earnings per share information is not considered meaningful or relevant and
has not been presented in the accompanying financial statements.
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.
3. ACQUISITIONS
During 1996, the Companies acquired certain assets of a number of coin-
operated laundry businesses (the 1996 Acquisitions). The 1996 Acquisitions
were paid in cash, with the exception of the Coin Laundry Leasing acquisition,
which also included a deferred note payable of $350. The 1996 Acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
purchase price assigned to the assets and liabilities assumed was their fair
market values on the respective acquisition dates. Purchase price in excess of
the fair value of net assets acquired was allocated to goodwill. The
Companies' combined financial statements includes the results of the 1996
Acquisitions from their respective acquisition dates. The 1996 Acquisitions
purchase price allocation is summarized as follows:
1996
ACQUISITIONS
------------
Acquisition price, including non-compete payments and other
direct acquisition costs........................................ $2,070
======
Fair market value of assets acquired:
Inventory...................................................... 110
Coin-route equipment........................................... 485
Other fixed assets............................................. 28
Intangible assets:
Non-compete.................................................. 15
Goodwill..................................................... 1,432
------
Total...................................................... $2,070
======
In connection with financing the 1996 Acquisitions, the Companies entered
into a Credit Agreement on January 26, 1996 (Note 8).
The pro forma effect of the 1996 Acquisitions was not material to the
results of the Companies' historical operations or the Companies' historical
financial position.
4. PREPAID COMMISSIONS OTHER CURRENT ASSETS
Prepaid commissions other assets consist of the following:
DECEMBER 31,
1996
------------
Prepaid commissions............................................. $140
Other receivables............................................... 40
Prepaid insurance............................................... 29
Other........................................................... 21
----
$230
====
F-29
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
LIFE DECEMBER 31,
(YEARS) 1996
--------- ------------
Coin-route equipment.................................. 8 $2,708
Furniture and fixtures................................ 7 140
Vehicles.............................................. 5 189
Computer equipment.................................... 4 49
Leasehold improvements................................ 2-3 15
------
3,101
Less: accumulated depreciation........................ 1,408
------
Property and equipment, net........................... $1,693
======
Depreciation expense for the year ended December 31, 1996 was approximately
$360.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
1996
------------
Goodwill........................................................ $1,746
Non-compete agreements.......................................... 290
Other........................................................... 18
------
2,054
Less: accumulated amortization.................................. 514
------
Intangible assets, net.......................................... $1,540
======
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
1996
------------
Accrued commissions............................................. $218
Accrued payroll................................................. 28
Accrued interest and loan fees.................................. 63
Other........................................................... 74
----
$383
====
F-30
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT
DECEMBER 31,
1996
------------
Note payable, 8% fixed interest, semi-annual principal pay-
ments, due
September 1, 1999............................................. $ 300
Credit Agreement
Line of credit............................................... 432
Acquisition note............................................. 773
Term loan A facility......................................... 917
Term loan B facility......................................... 523
Other........................................................ 29
------
Total long-term debt....................................... 2,974
Less: current portion........................................ 765
------
Total...................................................... $2,209
======
CREDIT AGREEMENT
In connection with the Companies 1996 Acquisitions (Note 3), the Companies
entered into a new Credit Agreement in January of 1996. The Credit Agreement
consists of a $700 Line of Credit; a $850 Acquisition Note; a $1,100 Term A
Facility, payable in thirty-five equal monthly installments beginning March
1996; and a $584 Term Loan B Facility, payable in thirty-seven monthly
installments of $6 beginning March 1996, with a balloon payment due April
1999. Borrowings under the Credit Agreement are restricted to only provide for
working capital requirements of the Companies and fund future permitted
acquisitions and capital expenditures. As of December 31, 1996, $346 was
available to be borrowed under the Credit Agreement. The Credit Agreement
expires in April of 1999.
A portion of the proceeds from the Credit Agreement were used to pay down
the Companies' outstanding debt under the previous credit facilities.
Interest--Borrowings under the Credit Agreement bear interest at 1% above
the banks prime interest rate (the "Prime Rate") (9.25% rate as of December
31, 1996). In addition, the Companies shall pay 3% of annual gross revenues
generated by all permitted acquisitions financed by proceeds from the
Acquisition Note.
Termination--The Credit Agreement may be terminated at any time after the
first two years without a penalty or premium. If borrowings under the Credit
Agreement are pre-paid within the first two years, the Companies must pay a
prepayment penalty of up to 2% of the total amounts available under the Credit
Agreement. In addition, the Companies are required to pay the bank 3% of the
average monthly gross revenues of the permitted acquisition multiplied by the
number of months remaining in the term of the Credit Agreement.
Amendment--In January of 1997, the Credit Agreement was amended to increase
the borrowings available under the line of credit to $850.
As of December 31, 1996, the scheduled future principal payments of long-
term debt are as follows:
1997................................................................ $ 765
1998................................................................ 747
1999................................................................ 1,462
------
$2,974
======
F-31
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. EMPLOYEE BENEFIT PLAN
The Companies maintain a qualified profit sharing/401(k) plan (the "Plan")
covering substantially all employees. The Companies' contributions to the Plan
are at the discretion of the Board of Directors. Costs under the Plan amounted
to $4 for the year ended December 31, 1996.
10. COMMITMENT AND CONTINGENCIES
Operating Leases--The Companies lease facilities under three non-cancelable
operating leases. Total lease expense incurred for the year ended December 31,
1996 was approximately $74. These leases expire during fiscal 1998. The future
minimum payments under these leases are $77 and $55 in 1997 and 1998,
respectively.
Guaranteed Commissions--The Companies operate coin laundry routes under
various lease agreements in which the Companies are required to make minimum
guaranteed commission payments to the respective property owners. During 1996,
the Companies made guaranteed commission payments of approximately $150 as
required under certain lease agreements.
Litigation--The Companies are involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Companies ultimate liability, if any, under pending litigation would not
materially affect their financial condition or the results of their
operations.
11. RELATED PARTY
Periodically, the Companies make loans to their sole shareholder. The
balance of these shareholder loans is included on the accompanying balance
sheet as due from shareholder. The due from shareholder balance at December
31, 1996 included approximately $36 of interest imputed at 6%.
12. SUBSEQUENT EVENT (UNAUDITED)
On April 17, 1997, Mac-Gray Corporation acquired all of the outstanding
common stock of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry,
Inc., in exchange for 612,026 shares of its common stock ($7,797 approximate
value), approximately $2,170 in cash, $850 of a deferred obligation and the
assumption of outstanding indebtedness of the Companies of approximately
$2,787.
F-32
Item 7 Exhibits
- -----------------
(c) Exhibits
Exhibit No. Description
- ----------- -----------
23.1 Consent of Independent Accountants
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.
Dated: November 16, 1998 MAC-GRAY CORPORATION
By: /s/ Stewart G. MacDonald, Jr.
--------------------------------------
Stewart G. MacDonald, Jr.
Chairman and Chief Executive Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23.1 Consent of Independent Accountants