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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBER 1-13495
-------
MAC-GRAY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3361982
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
22 WATER STREET,
CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 492-4040
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant
held by non-affiliates of the registrant as of March 30, 2001 was $46,773,217
based on the last sales price of $3.70 per share as of March 30, 2001 on the
NYSE.
As of March 30, 2001, 12,641,410 shares of Common Stock, par value
$.01 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants' Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2001 are incorporated by reference into Part
III of this report.
PART I
FORWARD-LOOKING STATEMENTS
Some of the statements incorporated by reference or made in this report
under the captions "Risk Factors", "Business," and "Management Discussion and
Analysis" and elsewhere in this report or in documents incorporated by
reference are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. When the Company uses the words "anticipate," "assume," "believe,"
"estimate," "expect," "intend," and other similar expressions in this report,
it is generally intended to identify forward-looking statements. Investors
should not rely on forward-looking statements since they involve known and
unknown risks, uncertainties and other factors which are, in some cases,
beyond the Company's control and which could materially affect actual
results, performance or achievements. Factors that could cause actual
results, performance or achievements to differ materially from those
expressed or implied by these forward-looking statements include, without
limitations, the factors described under "Risk Factors" in Item 7 of this
report, the discussion set forth below, and the matters set forth in this
Form 10-K generally. Investors should carefully review all of the factors
described herein which may not be an exhaustive list of the factors.
ITEM 1. BUSINESS
Mac-Gray was founded in 1927. Unless the context requires otherwise, all
references in this Report to Mac-Gray or the Company shall mean Mac-Gray
Corporation and its subsidiaries and predecessors, including (i) Mac-Gray
Services, Inc., a Delaware corporation, formerly known as Mac-Gray Co., Inc.
("Mac-Gray Co."), and Mac-Gray, L.P., a Delaware limited partnership (the
"Limited Partnership"), and (ii) businesses that Mac-Gray has acquired through
December 31, 2000 from their respective dates of acquisition. Significant
laundry route acquisitions have included Sun Services of America, Inc. ("SSA")
and R. Bodden Coin-Op Laundry, Inc. ("RBCO" and, together with SSA, "Sun
Services") acquired on April 17, 1997 and Amerivend Corporation and Amerivend
Southeast Corporation (collectively "Amerivend") acquired on April 24, 1998.
Other significant acquisitions include Intirion Corporation ("Intirion"), which
was acquired on March 12, 1998 and accounted for as a pooling of interests and
Copico, Inc. ("Copico") which was purchased on April 23, 1998. On October 22,
1997, Mac-Gray completed its initial public offering of 4,600,000 shares of
Mac-Gray Common Stock at an offering price of $11 per share (the "IPO"). Upon
consummation of the IPO, Mac-Gray's status as a S corporation automatically
terminated and Mac-Gray became subject to taxation as a C corporation for
federal and state income tax purposes.
The Company's revenues are derived from the operation of three business
segments: Laundry services, MicroFridge(R) services and Reprographics services.
LAUNDRY SERVICES
Mac-Gray believes that it is among North America's largest suppliers of
card and coin-operated laundry services in multiple housing facilities such as
apartment buildings, colleges and universities and public housing complexes.
Based upon Mac-Gray's ongoing survey of colleges and universities, the Company
believes it is North America's largest supplier of such services to the college
and university market. Mac-Gray owns, manages, or leases to operators
approximately 170,000 card and coin-operated washers and dryers in approximately
30,000 multiple housing laundry rooms located in 33 states. Mac-Gray also
believes that it is the largest user and purchaser of commercial laundry
products manufactured by The Maytag Corporation ("Maytag").
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. Amerivend provided card and coin-operated laundry rooms in multiple
housing facilities, primarily in the state of Florida.
A substantial portion of Mac-Gray's revenue is derived from the operation
of washers and dryers in laundry rooms under long-term leases with property
owners. Under Mac-Gray's long-term leases, the Company typically receives the
exclusive right to operate laundry rooms within a multiple housing property in
exchange for a percentage of the revenue collected. Mac-Gray has been able to
retain in excess of 98% of its existing machine base, while also adding an
average of 4.2% to its machine base through internally generated growth, during
each of the past five years. Mac-Gray believes that its ability to retain its
existing machine base in the past, while growing its machine base through
internally generated installations, is indicative of its service of, and
attention to, property
1
owners and managers. The property owner or manager is usually responsible for
maintaining and cleaning the premises and for payment of the utilities. Mac-Gray
leases space within a property, in some instances improves the leased space with
flooring, ceilings and other improvements, and then installs and services the
laundry equipment and collects the revenue. Mac-Gray sets and adjusts the
pricing for its machines based upon local market conditions.
Mac-Gray is also a significant distributor for several major laundry
equipment manufacturers, primarily Maytag. As an equipment distributor, Mac-Gray
sells commercial laundry equipment to public laundromats, as well as to the
multi-unit housing industry. Mac-Gray is certified by the manufacturers to
service the commercial laundry equipment that it sells. Mac-Gray also sells
commercial laundry equipment directly to institutional purchasers, including
hospitals, restaurants and hotels, for use in their own on-premise laundry
facilities.
Mac-Gray has also established a leasing program for commercial laundry
customers who choose neither to purchase equipment nor to become a laundry route
customer. This program involves the leasing of commercial laundry equipment to
customers who maintain their own coin-operated laundry rooms, as well as to
customers (such as hotels) who operate their own on-premise laundry equipment.
Mac-Gray manages its laundry route business and its distribution and
servicing business from its corporate headquarters in Cambridge, Massachusetts,
where it has centralized its administrative, billing, marketing, purchasing and
refurbishing operations. Mac-Gray also operates sales and/or service centers in
Connecticut, Florida (three locations), Georgia, Illinois, Maine, Missouri, New
York (two locations), North Carolina, Pennsylvania, Texas, and New Jersey.
Mac-Gray's laundry business has certain intrinsic characteristics in both
its industry and its customer base, including:
RECURRING REVENUE--Mac-Gray operates laundry equipment located in
multiple housing facilities under long-term leases with property owners. In
addition, Mac-Gray's efforts are designed to maintain customer
relationships over the long-term.
HISTORICALLY NON-CYCLICAL BUSINESS--Mac-Gray has not experienced a
reduction of its business as a result of past general economic downturns,
including the recession that occurred in the early 1990s, although there
can be no assurance that this would be the case in the future. Mac-Gray
believes that many larger property owners and managers may be even more
inclined to out-source non-core operations, such as laundry services,
during economic downturns as they seek to control capital expenditures
while maximizing resident retention through the availability of quality
services and amenities.
DIVERSIFIED AND STABLE CUSTOMER BASE--Mac-Gray provides laundry
services to approximately 30,000 laundry rooms located in 33 states in the
Northeastern, Midwestern and Southeastern United States. Currently, no
lessor represents more than 1% of Mac-Gray's machine base. Mac-Gray serves
customers in a number of markets including apartment buildings, colleges
and universities, condominiums and public housing complexes.
COMPETITION--The card and coin-operated laundry services industry is
highly competitive, capital intensive and requires reliable and prompt
service. Mac-Gray believes that customers consider different factors in
selecting a laundry service provider including customer service,
reputation, rent rates (including advance rents) and range of products and
services. Mac-Gray believes that different types of customers assign varied
weight to each of these factors and that no one factor materially
influences a customer's selection of a laundry service provider. Within any
given geographic area, Mac-Gray may compete with local
independent-operators, regional operators and multi-region operators. The
industry is highly fragmented; consequently Mac-Gray has grown by
acquisitions, as well as through new machine placement. Mac-Gray believes
that it is the third largest card and coin-operated laundry services
provider in North America.
DEPENDENCE ON SUPPLIERS--The Company currently purchases a large
portion of the equipment that it utilizes in its Laundry business from
Maytag. In addition, the Company derives a portion of its revenue, as well
as certain competitive advantages, from its position as a distributor of
Maytag commercial laundry products. Although the purchase and distribution
agreements between the Company and Maytag are terminable by either party
upon written notice, the Company has never had such an agreement terminated
by Maytag. A termination
2
of, or substantial revision of the terms of, the contractual arrangements
or business relationships with Maytag could have a material adverse effect
on the Company's business, results of operations, financial condition and
prospects.
MICROFRIDGE(R) SERVICES
On March 12, 1998, Mac-Gray acquired Intirion Corporation ("Intirion").
Intirion's business ("MicroFridge") consists of supplying combination
refrigerator/freezer/microwave ovens under the brand name MicroFridge(R) to
multiple housing facilities such as colleges and universities, military bases,
hotels, motels and assisted living facilities.
The MicroFridge product line is a family of patented combination
refrigerator/freezer/microwave ovens. The product's patented circuitry has
proven to be an important feature for those customers who have concerns about
electrical capacity and seek a safer alternative to hot plates and other cooking
or heating appliances. Historically, MicroFridge sales efforts have been focused
on such "home-away-from-home" marketplaces such as colleges and universities,
military bases, hotels, motels and assisted living facilities.
Mac-Gray believes that this product line enhances the Company's ability to
provide multiple amenities to both its current customer base as well as future
customers seeking one source to fill multiple needs.
The MicroFridge division revenues are derived from the sale and rental of
MicroFridge units. Rental units are leased to institutions or individuals at
institutions on both long-term and annual bases. The Academic Living market is
composed of more than 1,700 colleges and universities that have on-campus
residence halls. MicroFridge units are sold and leased to colleges and
universities across the continental United States. Mac-Gray believes that it is
the largest refrigerator/microwave rental company serving the Academic Living
market. The second largest market is the Government Living market, consisting
principally of military bases. In this market, the MicroFridge product line is
available through government contract with the General Services Administration
and the U.S. Air Force. MicroFridge products have been installed at government
facilities throughout the world. MicroFridge brand products are also sold to the
hospitality and lodging industry throughout the continental United States
through an independent dealer network.
The MicroFridge division maintains Original Equipment Manufacturer ("OEM")
arrangements with two primary manufacturers, Sanyo E&E Corporation and Nisshin
Industry Co. Ltd. Sanyo E&E Corporation has been the Company's principal
supplier since it was founded. The principal patent underlying the MicroFridge
product is held jointly by the MicroFridge division and Sanyo. In December 1997,
Sanyo signed a non-competition agreement with the MicroFridge division whereby
Sanyo is precluded from entering the MicroFridge market. This agreement remains
in effect through the life of the patent provided that certain minimum annual
quantities of products are purchased from Sanyo. The OEM agreement with Nisshin
Industry Co. Ltd. is renewable year to year unless terminated with proper
notice.
The refrigerator/microwave industry is highly competitive. In addition
to large direct sellers, the MicroFridge division also competes with the
major retail stores and local and regional distributors who sell various
brand name compact refrigerators and microwave ovens in the markets served by
MicroFridge. Although the MicroFridge division holds a patent on combination
units utilizing internal circuitry, there has been increased competition
since 1995 from "similar look" products utilizing an external circuitry
control mechanism. There also exist local and regional competition in the
MicroFridge rental business. Management believes that its expertise gained
from being the first entrant in the market enables it to compete effectively
against new entrants in the combination appliance business. MicroFridge
principal competitors include Absocold, Avanti, General Electric, Sanyo
Fisher Sales, Sears, Tatung, Walmart, and several companies focused on the
college rental marketplace.
REPROGRAPHICS SERVICES (DOLLARS IN THOUSANDS)
On April 23, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Copico.
Founded in 1978, Copico is a major provider of card and coin-operated
reprographics equipment and services
3
to the academic and public library markets primarily in New England, New York
and Florida. Copico provides and services copiers and laser printers for the
libraries of colleges, universities, graduate schools and public libraries. The
Reprographics services business represents less than 5% of the Company's total
revenue.
In December 1999, the Company recorded an impairment charge of $8,474
related to the long lived assets, primarily goodwill, of the Copico division.
EMPLOYEE BASE
The Company employs approximately 525 full-time people. No employee is
covered by a collective bargaining agreement and the Company believes that its
relationship with its employees is good. In addition, the MicroFridge division
employs part-time employees from time to time based on the seasonality of
MicroFridge sales and rental operations in the college and university
marketplace.
SEGMENT INFORMATION
The Company operates three business units, which are based on the Company's
different product and service categories: Laundry, MicroFridge and
Reprographics. The Laundry and Reprographics business units have been aggregated
into one reportable segment (Laundry and Reprographics) since the Laundry and
Reprographics units are affected by similar economic factors. Information with
regard to reportable business segments is reported under Note 15 in the
financial statements attached hereto.
ITEM 2. PROPERTIES
Mac-Gray owns its 40,000 square foot corporate headquarters in Cambridge,
Massachusetts which houses Mac-Gray's administrative and central services,
including a 20,000 square foot warehouse for equipment, parts, and machine
refurbishment. Mac-Gray also owns sales and service facilities in Tampa, Florida
and Austell, Georgia each consisting of 12,000 square feet. Mac-Gray also leases
the following regional facilities, which are largely operated as sales and
service facilities, though limited administrative functions are also performed
at many of them:
APPROXIMATE
LOCATION SQUARE FOOTAGE
-------- --------------
Buffalo, New York....................................... 9,500
Charlotte, North Carolina............................... 9,900
Chula Vista, California................................. 25,000
E. Brunswick, New Jersey................................ 9,600
Gainesville, Florida.................................... 750
Gurnee, Illinois........................................ 12,000
Houston, Texas.......................................... 2,115
East Hartford, Connecticut.............................. 14,900
Miramar, Florida........................................ 18,490
Orlando, Florida........................................ 3,778
St. Louis, Missouri..................................... 2,400
Standish, Maine......................................... 7,500
Syracuse, New York...................................... 7,800
Walpole, Massachusetts.................................. 19,000
All properties are primarily utilized for the Laundry and Reprographics
divisions except for the Chula Vista, California, which is a MicroFridge
division facility, and the Walpole, Massachusetts, facility, which is utilized
by the MicroFridge and Copico divisions.
Mac-Gray believes that its properties are generally well maintained and in
good condition. Mac-Gray believes that its properties are adequate for present
needs and that suitable additional or replacement space will be available as
required.
4
ITEM 3. LEGAL PROCEEDINGS
Mac-Gray is from time to time a party to litigation arising in the ordinary
course of business. There can be no assurance that Mac-Gray's insurance coverage
will be adequate to cover all liabilities resulting from such claims. In the
opinion of management, any liability that Mac-Gray might incur upon the
resolution of this litigation will not, in the aggregate, have a material
adverse effect on the financial condition or results of operations of Mac-Gray.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Mac-Gray Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "TUC." The following table sets forth the high and low
sales prices for Mac-Gray Common Stock on the NYSE for the periods indicated.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
SALES PRICES SALES PRICES
HIGH LOW HIGH LOW
First Quarter............................ $ 11 1/2 $ 8 $ 4 1/16 $ 3 1/16
Second Quarter........................... 9 1/4 7 1/4 4 3/8 2 3/4
Third Quarter............................ 10 6 1/2 4 1/2 3
Fourth Quarter........................... 6 1/2 3 1/4 3 7/8 2 11/16
As of March 30, 2001 there were 189 holders of record for Mac-Gray Common
Stock.
Mac-Gray does not currently pay dividends on Mac-Gray Common Stock.
Mac-Gray's Board of Directors (the "Mac-Gray Board") currently intends to retain
future earnings, if any, for the development of Mac-Gray's businesses and does
not anticipate paying cash dividends on Mac-Gray Common Stock in the foreseeable
future. Future determinations by the Mac-Gray Board to pay dividends on Mac-Gray
Common Stock would be based primarily upon the financial condition, results of
operations and business requirements of Mac-Gray. Dividends, if any, would be
payable in the sole discretion of the Mac-Gray Board out of the funds legally
available therefor. In addition, the payment of dividends is restricted under
Mac-Gray's credit facility.
6
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE)
Set forth below are selected historical financial data as of the dates and
for the periods indicated. The selected historical financial data for the five
years in the period ended December 31, 2000 were derived from the historical
consolidated financial statements that were audited by PricewaterhouseCoopers
LLP, whose report for the three years ended December 31, 2000 appears elsewhere
in this Report. The selected financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements of Mac-Gray and the notes thereto included
elsewhere in this Report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1997(1) 1998(2) 1999 2000
--------- --------- ---------- ---- ----
Statement of Income Data:
Revenue.............................................. $ 82,260 $ 104,847 $ 137,177 $ 148,563 $ 154,268
Cost of revenue
Route rent......................................... 25,760 31,717 41,699 47,293 47,596
Route expenditures................................. 10,971 12,449 21,561 24,866 24,778
Depreciation and amortization...................... 7,060 9,725 13,349 18,202 18,980
Cost of equipment sales............................ 15,408 22,021 24,828 24,686 27,766
--------- ---------- --------- --------- ---------
Total cost of revenue............................ 59,199 75,912 101,437 115,047 119,120
--------- ---------- --------- --------- ---------
Operating expenses:
General and administration......................... 5,939 6,923 7,003 9,148 9,788
Sales and marketing................................ 7,718 10,181 10,333 11,848 10,542
Depreciation....................................... 783 753 909 905 1,225
Impairment of goodwill............................. -- -- -- 8,474 --
Merger-related costs............................... -- -- 1,144 -- --
--------- ---------- --------- -------- ---------
Total operating expenses......................... 14,440 17,857 19,389 30,375 21,555
--------- ---------- --------- -------- ---------
Income from operations............................... 8,621 11,078 16,351 3,141 13,593
Interest expense, net.............................. (2,354) (2,975) (3,920) (6,085) (6,770)
Other income (expense), net........................ (87) 181 (122) 120 123
--------- ---------- --------- -------- ---------
Income (loss) before provision for income taxes...... 6,180 8,284 12,309 (2,824) 6,946
Provision for income taxes(3)........................ (514) (5,228) (5,222) (2,727) (3,162)
--------- ---------- --------- -------- ---------
Net income (loss).................................... $5,666 $ 3,056 $ 7,087 $ (5,551) $ 3,784
Accretion and dividends on redeemable preferred stock 240 320 62 -- --
--------- ---------- --------- -------- ---------
Net income (loss) available to common stockholders... $5,426 $ 2,736 $ 7,025 $ (5,551) $ 3,784
========= ========== ========= ======== =========
Net income (loss) per common share--basic............. $ 0.72 $ 0.32 $ 0.56 $ (0.44) $ 0.30
========= ========== ========= ======== =========
Weighted average common shares outstanding........... 7,554 8,449 12,524 12,661 12,634
========= ========== ========= ======== =========
Net income (loss) per common share--diluted........... $ 0.71 $ 0.31 $ 0.54 $ (0.44) $ 0.30
========= ========== ========= ======== =========
Weighted average common shares outstanding--diluted... 7,686 8,709 12,926 12,668 12,634
========= ========== ========= ======== =========
Other Financial Data:
EBITDA(4).......................................... $ 16,377 $21,737 $30,487 $ 30,842 $ 33,921
Depreciation and amortization...................... 7,812 10,481 14,258 19,107 20,205
Capital expenditures............................... 10,010 11,584 20,729 21,819 13,983
Cash flows provided by operating activities........ 15,768 10,473 16,890 21,004 23,177
Cash flows used in investing activities............ (24,338) (22,791) (70,270) (24,318) (11,996)
Cash flows provided by (used in) financing activities 7,516 13,248 55,787 3,699 (11,032)
Balance Sheet Data (at end of period):
Working capital.................................... $ (8,489) $ (4,041) $ (2,840) $ 2,113 $ (2,364)
Total assets....................................... 66,217 97,843 171,520 180,965 174,625
Long-term debt, net of current portion............. 23,473 5,395 69,664 83,728 70,022
Redeemable common and preferred stock.............. 4,187 12,304 -- -- --
Stockholders' equity............................... 13,774 48,302 62,941 56,139 59,961
(1) The financial data for the year ended December 31, 1997 includes the
results of Sun Services subsequent to the acquisition date of April 17,
1997.
(2) The financial data for the year ended December 31, 1998 includes the
results of Copico and Amerivend subsequent to the acquisition dates of
April 23, 1998 and April 24, 1998, respectively.
(3) See notes to consolidated financial statements for information concerning
the Company's income tax obligations.
(4) "EBITDA" is defined herein as income before provision for income taxes,
plus depreciation and amortization expense, impairment of goodwill and
interest expense. EBITDA should not be considered as an alternative to net
income as a measure of operating results or as an alternative to cash flows
as a measure of liquidity and it is
7
not a measure of performance or financial condition under generally
accepted accounting principles. EBITDA is presented because Mac-Gray's
management believes that certain investors may find it to be a useful tool
for measuring Mac-Gray's ability to meet its future debt service
obligations, make capital expenditures and satisfy working capital
requirements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (DOLLARS IN THOUSANDS)
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto presented
elsewhere in this Report.
OVERVIEW
Mac-Gray derives its revenue principally through the operation and
maintenance of amenities in multiple housing units, including laundry and
MicroFridge products. Mac-Gray also operates card and coin-operated
reprographics equipment in academic and public libraries. Mac-Gray operates
laundry rooms, reprographics equipment and MicroFridge equipment under long-term
leases with property owners, colleges and universities and governmental
agencies. Mac-Gray's laundry services business consists of approximately 170,000
revenue-generating laundry machines, operated in approximately 30,000 multiple
housing laundry rooms located in 33 states. Mac-Gray's reprographics business is
concentrated in the northeastern United States and Florida.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag Corporation, and sells laundry
equipment manufactured by American Dryer Corp., The Dexter Company, and
Whirlpool Corporation. Additionally, the Company sells or rents laundry
equipment to restaurants, hotels, health clubs and similar institutional users
that operate their own on-premise laundry facilities.
The MicroFridge services division derives revenue through the sale and
rental of its MicroFridge products to colleges and universities, military bases,
assisted living facilities and the hotel and motel market.
IMPAIRMENT OF GOODWILL
In December 1999, the Company recorded an impairment charge of $8,474
related to the long lived assets, primarily goodwill, of the Copico division.
ACQUISITIONS
On March 12, 1998, Mac-Gray completed its acquisition of Intirion, which
has been accounted for as a pooling of interests. Mac-Gray issued approximately
1,593,000 shares of common stock and paid $1,000 in cash in exchange for all of
the outstanding equity securities of Intirion. Through Intirion, the Company
sells and leases its proprietary MicroFridge product, which is a combination
refrigerator/freezer/microwave oven utilizing patented circuitry. The product is
marketed throughout the United States to colleges and universities, the federal
government, hotels and motels and to builders of assisted living facilities. All
of Intirion's products are manufactured by outside suppliers. In addition,
Intirion also rents its products on a year to year basis to students living in
college and university residence halls.
On April 23, 1998, Mac-Gray acquired one hundred percent of the capital
stock of Copico for 250,000 shares of Mac-Gray common stock and $10,950 in cash,
less the assumption of certain liabilities. Founded in 1978, 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 and laser printers for the 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. Copico shares a facility with the MicroFridge Division of
Mac-Gray in Walpole, Massachusetts, for the storage of inventory and equipment.
Repairs of Copico equipment and certain administration functions of this
division are also performed in this facility.
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
8
payment of certain debt. Amerivend was a provider of card and coin-operated
laundry equipment in Florida and Georgia. Amerivend was also the principal
distributor of Maytag commercial laundry products in Alabama, Georgia and
Florida.
Mac-Gray funded the cash portion of the purchase price of these
acquisitions by drawing on the 1998 Senior Secured Credit Facility. See
"Liquidity and Capital Resources".
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1999
REVENUE. Revenue increased by $5,705, or 4%, to $154,268 for the year ended
December 31, 2000 from the year ended December 31, 1999. This increase is
primarily related to an increase in route revenue, which is made up of an
increase in card and coin-operated equipment of $3,844, or 4%, due to the
expansion of existing operations and the additional revenues from recognizing a
full year of revenue from route businesses acquired during 1999. Sales revenue
increased $2,985, or 8%, from the year ended December 31, 1999. This increase is
primarily a result of an increase in MicroFridge sales and sales type leases of
9%, and an increase in Laundry equipment sales and service of 6%. MicroFridge
sales revenue has increased primarily due to success in the hotel, motel and
academic markets. The Laundry sales increase is the result of increased
penetration of certain markets and price increases.
Other revenue, which consists primarily of laundry and MicroFridge rental
revenue, has decreased $1,124, or 16%, from the year ended December 31, 1999.
This decrease is due primarily to the Company's decision to continue to withdraw
from the less profitable MicroFridge academic and direct rental programs as it
attempts to convert these programs to sales and long-term leases.
ROUTE RENT. Route rent, the amount paid to the lessors, increased by $303,
or 1%, to $47,596 for the year ended December 31, 2000 from year ended December
31, 1999. This overall increase was primarily attributable to an increase in
Laundry route revenue, since route rent is generally paid based upon a
percentage of revenue earned in the Company's route locations. As a percentage
of route revenue, route rent decreased from 46% for the year ended December 31,
1999 to 45% for the year ended December 31, 2000. These fluctuations are caused
by lower route rents on new and renegotiated contracts, the impact of different
rates of 1999 acquired accounts, and also the impact of the reprographics
division's commission rate structure.
ROUTE EXPENDITURES. Route expenditures include costs associated with
installing and servicing machines, as well as the costs of collecting, counting
and depositing the revenue. Route expenditures decreased by $88 to $24,778 for
the year ended December 31, 2000 from the year ended December 31, 1999. Route
expenditures decreased from 17% of revenues for the year ended December 31, 1999
to 16% for the year ended December 31, 2000. This improvement in route
expenditures, both in the aggregate and as a percentage of sales, is
attributable in most part to improved operating procedures and increased
efficiencies in collections, installations and services, and also in part to the
consolidation of certain of the reprographics division's field operations into
the Laundry division.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization include
amounts included as a component of cost of revenue, and amounts included as an
operating expense. Aggregate depreciation and amortization increased by $1,098,
or 6%, to $20,205 for the year ended December 31, 2000 from year ended December
31, 1999. The increase was primarily attributable to an increase in the
Company's machine base due to internal growth and a full year of depreciation
and amortization in the year ended December 31, 2000 for businesses acquired
during 1999.
COST OF PRODUCT SALES. Cost of product sales increased by $3,080, or
12%, to $27,766 for the year ended December 31, 2000 from the year ended
December 31, 1999. Gross margins on product sales were 34% for the year ended
December 31, 2000 as compared to 37% for the year ended December 31, 1999.
This decrease in gross margin is attributable primarily to sales mix in the
Laundry division, that division's inability to recover suppliers' product
cost increases, and, to a lesser extent, expenses associated with obsolete
inventory. The MicroFridge division's gross margin for the year ended
December 31, 2000 was consistent with that for the year ended December 31,
1999.
GENERAL, ADMINISTRATION, SALES AND MARKETING EXPENSE. General,
Administration, Sales and Marketing expenses decreased by $666 or 3% to $20,330
for the year ended December 31, 2000 from the year ended
9
December 31, 1999. General, Administration, Sales and Marketing expenses were
13% of revenue for the year ended December 31, 2000 as compared to 14% for the
year ended December 31, 1999. This overall decrease was primarily attributable
to the elimination of various redundant functions within the divisions and
several unique one-time consulting and other outside services occurring in 1999.
INTEREST EXPENSE. Interest expense, net of interest income, increased by
$685, or 11%, to $6,770 for the year ended December 31, 2000 from year ended
December 31, 1999. This increase is primarily related to the impact of increased
interest rates. Although the total borrowings of the Company decreased during
the year ended December 31, 2000 to $77,598, from $86,829 on December 31, 1999,
the increase in interest rates resulted in higher interest expense. In addition
to general market conditions leading to higher interest rates during most of
2000, the Company also incurred increases in its cost of borrowing funds when it
entered into a new Senior Secured Credit Facility on June 29, 2000.
PROVISION FOR INCOME TAX. The effective tax rate decreased from 97% to 46%
from the year ended December 31, 1999 to the year ended December 31, 2000. The
provision for income tax is higher than the Company statutory tax rate due to
goodwill amortization deducted for financial reporting purposes which is not
deductible for federal and state tax purposes. The increase in the 1999
effective tax rate to 97% results from the impairment of goodwill and other
intangible assets which is a permanently non-deductible item.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1998
REVENUE. Revenue increased by $11,386, or 8%, to $148,563 for the year
ended December 31, 1999 from the year ended December 31, 1998. This increase is
primarily related to an increase in route revenue, which is attributable to an
increase in card and coin-operated equipment, of $9,157, or 10%, due to the
expansion of existing operations and the additional revenues from route
businesses acquired during 1999. Sales revenue increased $1,498, or 4%, from the
year ended December 31, 1998. This increase is primarily a result of entering
into new long-term lease contracts to provide MicroFridge products which have
been recorded as sales type leases during 1999.
ROUTE RENT. Route rent, the amount paid to the lessors, increased by $5,594
or 13%, to $47,293 for the year ended December 31, 1999 from year ended December
31, 1998. This overall increase was primarily attributable to an increase in
route revenue, since route rent is generally paid based upon a percentage of
revenue earned in the Company's route locations. As a percentage of route
revenue, route rent increased from 45% for the year ended December 31, 1998 to
46% for the year ended December 31, 1999. These fluctuations are caused by
different commission rates on new contracts, accounts acquired and also in part
on the impact of the reprographics division's commission rate structure.
ROUTE EXPENDITURES. Route expenditures include costs associated with
installing and servicing machines, as well as the costs of collecting, counting
and depositing the revenue. Route expenditures increased by $3,305, or 15%, to
$24,866 for the year ended December 31, 1999 from the year ended December 31,
1998. The increase was due primarily to the general increase in revenue, which
resulted in increased servicing, collecting, counting and depositing activity.
Route expenditures increased from 16% of revenues for the year ended December
31, 1998 to 17% for the year ended December 31, 1999. This increase is
attributable in part to the addition of accounts outside of the Company's core
service markets, and the impact of higher operating costs associated with a
significant 1998 Laundry route acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization include
amounts included as a component of cost of revenue, and amounts included as an
operating expense. Aggregate depreciation and amortization increased by $4,849,
or 34%, to $19,107 for the year ended December 31, 1999 from the year ended
December 31, 1998. The increase was primarily attributable to a full year of
depreciation and amortization in the year ended December 31, 1999 for businesses
acquired during 1998. Depreciation also increased as a result of the increase in
the Company's machine base due to internal growth.
COST OF PRODUCT SALES. Cost of product sales decreased $142, or 1%, to
$24,686 for the year ended December 31, 1999 from the year ended December 31,
1998. This decrease represented an improvement in gross margin for the Laundry
and MicroFridge sales divisions. Gross margin was 37% for the year ended
December 31, 1999 as compared to 34% of the year ended December 31, 1998. This
improvement in margin is attributable in part to the increase in sales of
product in the higher-margin MicroFridge division.
10
GENERAL, ADMINISTRATION, SALES AND MARKETING EXPENSE. General,
Administration, Sales and Marketing expenses increased by $3,660 or 21% to
$20,996 for the year ended December 31, 1999 from the year ended December 31,
1998. General, Administration, Sales and Marketing expenses were 14% of revenue
for the year ended December 31, 1999 as compared to 13% for the year ended
December 31, 1998. This overall increase was primarily attributable to changes
associated with the combining of the sales and marketing efforts of the two 1998
non-Laundry acquisitions with the Laundry division, as well as consulting and
legal related to business expansion opportunities.
IMPAIRMENT OF GOODWILL. The Company acquired Copico, Inc. in April 1998
for approximately $10,950 in cash and 250,000 shares of Mac-Gray common stock,
in addition to the assumption of certain liabilities. In accordance with the
purchase method of accounting the purchase price was assigned to the assets
acquired and liabilities assumed, with any excess purchase price being allocated
to goodwill and intangibles. The goodwill and intangibles recorded in connection
with the transaction were approximately $11,200.
Since the acquisition of Copico, Inc., the reprographics division had
not met expectations with respect to its profitability and produced operating
losses. The most significant reason for the poor performance of the division was
the impact of technological advances which have affected the entire
reprographics industry. Specifically, the introduction of the internet in
college and public libraries, and access to free laser printers led to fewer
vended copies being made than in prior years. In April 1999, the Company began
to take corrective action to address certain operational difficulties the
division was encountering and to evaluate the entire impact the availability of
the internet in college and public libraries was having on the division.
The Company replaced the senior management of this division and
addressed other organizational and operational inefficiencies which had been
negatively impacting the performance of this division.
The Company continued to monitor the performance of the division for
the remainder of 1999, and due to the lack of satisfactory improvement and the
continued insurgence of the internet into its customer base, the Company
performed a full-scale reevaluation of the division and its long-term prospects
in the fourth quarter of 1999.
The result of this evaluation was the confirmation of longer term
expectations of lower operating results. Accordingly, management recognized a
non-cash impairment charge of $8,474, or $.67 per share, in the fourth quarter
of 1999. This charge was calculated in accordance with the provisions of SFAS
No. 121 "Accounting for the Impairment of Long Lived Assets and Assets to be
Disposed of".
INTEREST EXPENSE. Interest expense, net of interest income, increased by
$2,165, or 55%, to $6,085 for the year ended December 31, 1999 from year ended
December 31, 1998. This increase is primarily related to a full year of the
outstanding borrowings related to the significant acquisition activity during
1998, capital expenditures associated with internal growth, acquisition of
capital stock and higher interest rates associated with the Company's
outstanding loan balances.
PROVISION FOR INCOME TAX. The effective tax rate increased from 42% to 97%
from the year ended December 31, 1998 to the year ended December 31, 1999. The
provision for income tax is higher than the Company statutory tax rate due to
goodwill recorded in 1998 as a result of certain of the Company's acquisitions.
The increase in the effective tax rate results from the impairment of goodwill
and other intangible assets which are permanently non-deductible items. The
results of operations for the year ended December 31, 1998 include a tax benefit
of $370 due to the release of a valuation allowance on certain tax assets
available for use by Intirion.
SEASONALITY
The Company experiences moderate seasonality as a result of its significant
operations in the college and university market. Revenues derived from the
college and university market represent approximately twenty-five percent (25%)
of the Company's total revenue. Route and rental revenues are derived
substantially during the school year that includes the first, second and fourth
calendar quarters. Conversely, the Company 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, to this market are also high during the
third calendar quarter.
11
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
Mac-Gray's primary source of cash since December 31, 1999 has been
operating activities. The Company's primary uses of cash have been the purchase
of new laundry machines, MicroFridge equipment, reprographics equipment and the
reduction of bank debt. The Company anticipates that it will continue to use
cash flow from its operating activities to finance working capital needs,
including interest payments on any outstanding indebtedness, as well as capital
expenditures. To help mitigate the effect of possible higher interest rates in
the future, on February 18, 2000, the Company negotiated interest rate swaps,
and fixed $20,000 of loan interest rate for 3 years and $20,000 of loan interest
rate for 5 years.
Cash flows provided by operations were $16,890, $21,004, and $23,177 for
the years ended December 31, 1998, 1999 and 2000, respectively. Cash flow from
operations consists primarily of route revenue, product sales, laundry equipment
service revenue, and rental revenue, offset by commissions, route expenditures,
cost of product sales, cost of rental revenue, general and administration
expenses and sales and marketing expenses. The increase from 1999 to 2000 is
primarily attributable to an overall improvement in the Company's financial
performance, improved management of working capital, in particular, operating
practices which led to inventory reductions of $3,130 since December 31, 1999,
and an increase in depreciation and amortization which is a non-cash expense.
Cash used in investing activities was $70,270, $24,318, and $11,996 for the
years ended December 31, 1998, 1999 and 2000, respectively. The decrease in the
total cash used in investing activities was due primarily to the lack of
business acquisitions and lower capital expenditures in the year ended December
31, 2000. Capital expenditures were $20,729, $21,819, and $13,983 for the years
ended December 31, 1998, 1999 and 2000, respectively. The decrease in capital
expenditures was due to less equipment placed in service and the average cost of
leases decreasing in the twelve months ended December 31, 2000 as compared to
the same period in 1999 and 1998.
Cash flows from financing activities were $55,787, $3,699, and $(11,032)
for the years ended December 31, 1998, 1999 and 2000, respectively. Financing
activities for those periods consist primarily of proceeds from and repayments
of bank borrowings, and capital stock transactions. The decrease in 2000 is
principally a result of the lack of business acquisitions and capital stock
transactions, and a decrease in capital spending. As a result of these factors,
the Company was able to reduce its total bank and other debt by $10,049 for the
year ended December 31, 2000.
On June 29, 2000, the Company refinanced its outstanding Senior Secured
Credit Facility (as referenced, the "2000 Senior Secured Credit Facility") with
new lenders. This transaction retired the credit facility that had been in place
since April 23, 1998. The 2000 Senior Secured Credit Facility provided for
borrowings of up to $100,000 consisting of borrowings under a three-year
revolving line of credit of up to $65,000 and a five-year $35,000 Senior Secured
Term Loan Facility. Through principal payments made quarterly since the
inception of the 2000 Senior Secured Credit Facility, the $35,000 Senior Secured
Term Loan Facility has been reduced to $32,500. As of December 31, 2000, the
unused balance of the 2000 Senior Secured Credit Facility was $23,000. The
Company was in compliance with the terms of the credit agreement as of December
31, 2000.
Outstanding indebtedness under the 2000 Senior Secured Credit Facility
bears interest, at the Company's option, at a rate equal to the i) prime rate
plus 0.25%, or ii) LIBOR plus 2.25% for the year ended December 31, 2000. On
February 15, 2001, these rates were reduced to i) prime rate, or ii) LIBOR plus
2%, as a result of improved financial performance by the Company as defined in
the 2000 Senior Secured Credit Facility. Further reductions in interest rates
are possible if the Company's financial performance continues to improve. The
average interest rate at December 31, 2000 was approximately 9.0%.
The 2000 Senior Secured Credit Facility restricts payments of dividends and
other distributions, restricts the Company from making certain acquisitions and
incurring indebtedness, and requires it to maintain certain financial ratios.
The 2000 Senior Secured Credit Facility is collateralized by a blanket lien on
the assets of the Company and each of its subsidiaries, as well as a pledge by
the Company of all of the capital stock of its subsidiaries. The 2000 Senior
Secured Credit Facility is subject to certain financial and operational
covenants with which the Company was in compliance at December 31, 2000. The
most restrictive of these covenants is maintaining certain leverage ratios. At
December 31, 2000 outstanding letters of credit amounted to $747. The unused
balance under the 2000 Senior Secured Credit Facility was $23,000 at December
31, 2000.
The 2000 Senior Secured Credit Facility contains a commitment fee equal to
one quarter of one percent (0.25%) per annum of the average daily unused portion
of the Credit Facility.
INFLATION
The Company does not believe that its financial performance has been
materially affected by inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a non
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that
12
occurred after either December 15, 1998 or January 12, 2000. The adoption
of FIN 44 did not have a material impact on the Company's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission released
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB 101 was effective in the fourth quarter
of Fiscal 2000. Adoption of this SAB had no impact on the Company's results of
operations.
In June 1998 and June 2000, the Financial Accounting Standards Board
issued Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), and Financial Accounting
Standard No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" ("FAS 138"). These statements amend the accounting and
reporting standards for certain derivative instruments and hedging activities.
FAS 133 and FAS 138 are effective for fiscal years beginning after June 15,
2000. The Company does not believe that the implementation of FAS 133 and FAS
138 in fiscal 2001 will have a material impact on the Company's results of
operations or financial position. Under FAS 133, the Company's interest rate
swap agreements are considered "plain vanilla" cash flow hedges. Accordingly,
the fair value of the swap agreements will be recorded in Other Comprehensive
Income.
RISK FACTORS
A purchase of Mac-Gray common stock involves various risks. Investors should
consider the following principal risk factors:
THE COMPANY'S CASH FLOWS MAY NOT BE SUFFICIENT TO FINANCE THE SIGNIFICANT
CAPITAL EXPENDITURES REQUIRED TO REPLACE EQUIPMENT AND IMPLEMENT NEW TECHNOLOGY.
The Company must continue to make capital expenditures in order to replace
existing equipment, which requires significant operating financing. In addition,
the Company's plan to use smart card based technologies will also require
significant capital expenditures. While it is anticipated that existing capital
resources, as well as cash from operations, will be adequate to finance
anticipated capital expenditures, the Company cannot assure the Investor that
the Company's resources or cash flows will be sufficient. To the extent that
available resources are insufficient to fund capital requirements, the Company
may need to raise additional funds through public or private financings or
curtail certain capital expenditures. Such financings may not be available or
available only on less favorable terms and, in the case of equity financings,
could result in dilution to our stockholders.
INDEBTEDNESS MAY LIMIT THE COMPANY'S USE OF CASH FLOW AND RESTRICT ITS
FLEXIBILITY.
In the event the Company is unable to decrease the outstanding
indebtedness under its credit facility, the increased indebtedness could:
o require use if a substantial portion of cash flow from operations to make
payments on indebtedness, leaving less cash flow available for other
purposes;
o materially limit or impair the Company's ability to obtain financing in the
future for working capital needs,
13
capital expenditures, acquisitions, investments, general corporate or other
purposes; and
o reduce flexibility to respond to changing business and economic conditions.
The 2000 Senior Secured Credit Facility requires the Company to comply with
various financial and other operating covenants. Failure to comply with any of
these covenants, which the lender does not waive, would permit the lender to
accelerate the loan. An acceleration of the loan could have a material adverse
effect on business.
OPERATIONS COULD BE DISRUPTED IF THE COMPANY WERE UNABLE TO RENEW ITS LAUNDRY
LEASES.
The business is highly dependent upon the renewal of leases with property
owners, colleges and universities and public housing authorities. These leases
have an average length of seven to ten years with approximately 10% to 15%
renewable each year. Mac-Gray has traditionally relied upon exclusive, long-term
leases with its customers, as well as frequent customer interaction and a
historical emphasis on customer service, to assure continuity of financial and
operating results. The Company cannot assure investors that:
o it will be able to continue to secure long-term exclusive leases with
customers on favorable terms;
o it will be able to successfully renew existing leases as they expire; or
o it will not experience a loss of business if property owners or management
companies choose to vacate properties as a result of economic downturns
that impact occupancy levels.
Failure by the Company to continue to obtain long-term exclusive leases
with a substantial number of its customers, or to successfully renew existing
leases as they expire, could have a material adverse effect on business.
COMPETITION ON LOCAL AND NATIONAL LEVELS MAY HINDER THE COMPANY'S ABILITY TO
EXPAND.
The card and coin-operated laundry services industry is highly
competitive, both locally and nationally. On the local level, private businesses
tend to have long-standing relationships with property owners and managers in
their specific geographic market. On the national level, there are two
competitors, which have significantly larger installed machine bases than
Mac-Gray. These larger companies tend to have significant operational and
managerial resources to devote to expansion and to capture additional market
share. These competitive forces may increase purchase prices for future
acquisitions to levels that make the acquisitions less attractive or
uneconomical. Accordingly, the Company cannot assure that it we will be able to
compete effectively in any specific geographic location in the business of
supplying laundry equipment services to property owners and managers or in the
acquisition of other businesses.
THE COMPANY'S ABILITY TO MAKE ACQUISITIONS DEPENDS UPON ITS ABILITY TO ACCESS
CAPITAL ON ACCEPTABLE TERMS.
Partial success of the Company's growth strategy is dependent upon its
ability to identify, finance and consummate acquisitions on acceptable financial
terms. The access to capital is subject to the following risks:
o use of common stock as acquisition consideration may result in dilution to
stockholders;
o if the common stock does not maintain a sufficient valuation or if
potential acquisition candidates are unwilling to accept shares of the
Company's common stock, then the Company will be required to use more cash
resources or other consideration to make acquisitions;
o if the Company is unable to generate sufficient cash for acquisitions from
existing operations, its ability to make acquisitions could be adversely
affected unless it is able to obtain additional capital through external
financings or to borrow sufficient amounts; and
o funding the acquisition program through debt financing will result in
additional leverage.
GROWTH STRATEGY MAY NOT BE SUCCESSFUL IF THE COMPANY IS UNABLE TO ACQUIRE AND
INTEGRATE NEW BUSINESSES.
The Company's growth strategy depends, in part, on its ability to acquire
and successfully integrate and operate additional businesses. While the Company
generally believes that the management team and business structure currently in
place enables it to operate a significantly larger and more diverse operation,
it may be exposed to the
14
following risks in connection with finding, completing, and successfully
integrating acquisitions:
o the inability to effectively and efficiently integrate the assets of the
acquired business;
o the inability to increase the revenue and profit of the acquired business;
o the expenditure of a disproportionate amount of money and time integrating
acquired businesses, particularly operations located in new regions and
operations involving new lines of business; and
o future acquisitions accounted for under the purchase method of accounting
may result in the recording of goodwill and intangibles, the amortization
of which may reduce our net income.
OPERATIONS COULD BE DISRUPTED IF THE COMPANY IS UNABLE TO CONTINUE ITS
RELATIONSHIPS WITH MAYTAG AND OTHER SUPPLIERS.
Currently the Company purchases a majority of the equipment that it uses in
the laundry route business from Maytag Corporation. In addition, the Company
derives a significant amount of our non-laundry route revenue, as well as
competitive advantages, from its position as a distributor of Maytag commercial
laundry products. Although the agreements between the Company and Maytag
Corporation may be terminated by either party upon written notice, Maytag
Corporation has never terminated any agreement with the Company. In addition,
the Company currently procures a substantial amount of the products used by the
MicroFridge division from a limited number of suppliers. If any of these
suppliers terminated or demanded a substantial revision of the contracts or
business relationships currently in place, there may be a delay in finding a
replacement, and an inability to find terms as favorable as the current terms.
THE MICROFRIDGE PRODUCTS MAY BE SUSCEPTIBLE TO PRODUCT LIABILITY CLAIMS FOR
WHICH INSURANCE MAY NOT BE ADEQUATE.
Through the MicroFridge division, the Company markets and distributes
MicroFridge, a combination microwave and refrigerator. The sale and distribution
of MicroFridge, as well as other products, entails a risk of product liability
claims. Further, although MicroFridge is manufactured by third parties under
contract with MicroFridge, MicroFridge may be subject to risks of product
liability claims related to this manufacture. Potential product liability claims
may exceed the amount of insurance coverage or may be excluded from coverage.
The Company cannot assure investors that it will be able to renew our existing
insurance at a cost and level of coverage comparable to that presently in
effect, if at all. In the event that the MicroFridge division is held liable for
a claim against which it is not indemnified or for damages exceeding the limits
of insurance coverage, the claim could have a material adverse effect on
business.
RELIANCE UPON COMMON LAW AND CONTRACTUAL INTELLECTUAL PROPERTY RIGHTS MAY BE
INSUFFICIENT TO PROTECT THE COMPANY FROM ADVERSE CLAIMS.
The Company relies upon certain trademark, service mark, copyright, patent
and trade secret laws, employee and third-party non-disclosure and
non-solicitation agreements and other methods to protect proprietary rights.
Periodically the Company makes filings with the Patent and Trademark Office to
protect some of our proprietary rights, although the Company has traditionally
relied upon the protections afforded by contract rights and through common law
ownership rights. The Company cannot assure investors that these contract rights
and legal claims to ownership will adequately protect the operations from
adverse claims. In addition, any adverse claims or litigation, with or without
merit, could be costly and could divert management's attention from the
operation of the business.
CERTAIN STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS COULD EXERCISE CONTROL
AND PREVENT A SALE OR MERGER.
As of March 30, 2001, Mac-Gray's directors, executive officers, and certain
of its stockholders and their affiliates beneficially owned in the aggregate
nearly 51% of the outstanding shares of the Company's common stock. This
percentage ownership does not include options to purchase 64,000 shares of the
common stock held by some of these persons, all of which are currently
exercisable. If these affiliates exercised any of their options, then the
ownership of common stock would be further concentrated. As a result of this
concentration in ownership, these stockholders, if they were to act together,
could have the ability, as a practical matter, to significantly influence the
outcome of the election of directors and all other matters requiring approval by
a majority of stockholders. Matters requiring stockholder approval include
significant corporate transactions, such as mergers and sales of all or
substantially all of the Company's assets. The concentration of ownership in
affiliates, together, in some cases, with
15
specific provisions of the Company's charter and bylaws, as described below, and
applicable sections of the corporate law of Delaware, may have the effect of
delaying or preventing a change in control of Mac-Gray. A discussion of this
anti-takeover effect appears below.
PROVISIONS OF THE COMPANY'S CHARTER, BYLAWS, DELAWARE LAW, AND THE SHAREHOLDER
RIGHTS AGREEMENT COULD HAVE THE EFFECT OF DISCOURAGING TAKEOVERS.
Specific provisions of the Company's charter and bylaws, as described
below, sections of the corporate law of Delaware and powers of the board of
directors may discourage takeover attempts not first approved by the Board of
Directors, including takeovers which some stockholders may deem to be in their
best interests. These provisions and powers of the Board of Directors could
delay or prevent the removal of incumbent directors or the assumption of control
by stockholders, even if the particular removal or assumption of control would
be beneficial to stockholders. These provisions and powers of the Board of
Directors also could discourage or make more difficult a merger, tender offer or
proxy contest, even if these events would be beneficial, in the short term, to
the interests of stockholders. The anti-takeover provisions and powers of the
Board of Directors include, among other things:
o ability of the Board of Directors to issue shares of preferred stock and to
establish the voting rights, preferences and other terms of such preferred
stock;
o a classified Board of Directors serving staggered three-year terms;
o the elimination of stockholder voting by written consent;
o the absence of cumulative voting for directors;
o the removal of directors only for cause;
o the vesting of exclusive authority in the Board of Directors to determine
the size of the Board of Directors and, subject to the rights of holders of
any series of preferred stock, if issued, to fill vacancies thereon;
o the vesting of exclusive authority in the Board of Directors, except as
otherwise required by law, to call special meetings of stockholders;
o advance notice requirements for stockholder proposals and nominations for
election to the Board of Directors;
o ownership restrictions, under the corporate law of Delaware, with limited
exceptions, upon acquirors including their affiliates and associates of
15% or more of our common stock; and
o the Company's entry into a shareholder rights agreement providing for the
issuance of rights that will cause substantial dilution to a person or
group of persons that acquires 15% or more of the common shares unless the
rights are redeemed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates on its borrowings. In the normal course of its business, the Company
manages its exposure to these risks as described below. The Company does not
engage in trading market risk sensitive instruments for speculative purposes.
INTEREST RATES--
The table below provides information about the Company's debt obligations
that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. The fair market value of long-term debt approximates
the book value at December 31, 2000.
DECEMBER 31, 2000
EXPECTED MATURITY DATE (IN THOUSANDS)
2001 2002 2003 2004 2005 THEREAFTER TOTAL
----- -------- ---------- --------- ---------- ---------- ---------
Long-term Debt:
Fixed Rate ................. $ 821 $ 602 $ 871 $ 129 $ 123 $ 44 $ 2,590
Average interest rate ...... 7.6% 8.3% 8.0% 7.9% 7.9% 7.9% --
Variable Rate .............. $ 5,500 $ 6,500 $ 7,500 $ 8,500 $ 45,753 -- $73,753
Average interest rate ...... 9.0% 9.0% 9.0% 9.0% 9.0% -- --
16
In February 2000, the Company entered into two standard International
Swaps and Derivatives ("ISDA") interest rate swap agreements with its primary
financial institution to manage the interest rate risk associated with its
Senior Credit Facility. Each agreement has a notional amount of $20,000 and
maturity dates in February 2003 and 2005. The effect of the swap agreements
is to limit the interest rate exposure to a fixed rate of 7.38% and 7.42%
(versus the 90-day LIBOR rate) for the three year and five year swaps,
respectively. In accordance with the swap agreements and on a quarterly
basis, interest expense is calculated based on the floating 90-day LIBOR and
the fixed rate. If interest expense as calculated is greater based on the
90-day LIBOR, the financial institution pays the difference to the Company;
if interest expense as calculated is greater based on the fixed rate, the
Company pays the difference to the financial institution. Depending on
fluctuations in the LIBOR, the Company's interest rate exposure and its
related impact on interest expense and net cash flow may increase or
decrease. The Company is exposed to credit loss in the event of
nonperformance by the other party to the swap agreement; however,
nonperformance is not anticipated.
The fair value of the interest rate swaps is the estimated amount that
the Company would receive or pay to terminate the agreement at the reporting
date, taking into account current interest rates and the credit worthiness of
the counterparty. At December 31, 2000, the Company estimates that it would
have paid $1,874 to terminate these agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are contained in pages F-1
through F-22 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10, 11, 12 and 13 is included in the
Company's definitive proxy statement for its 2001 Annual Meeting of Stockholders
which will be filed with the Securities and Exchange Commission by April 30,
2001 and which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(2) AN INDEX OF FINANCIAL STATEMENTS AND SCHEDULES IS ON PAGE F-1 OF
THIS REPORT.
(a)(3) EXHIBITS
See attached exhibit listing on pages 18 and 19.
(b) REPORTS ON FORM 8-K
None
(a)(3) EXHIBITS:
Certain exhibits indicated below are incorporated by reference to
documents of Mac-Gray on file with the Commission. Each exhibit marked by a
cross (+) was previously filed as an exhibit to Mac-Gray's Registration
Statement on Form S-1 filed on August 14, 1997 (No. 333-33669) and the number
in parentheses following the description of the exhibit refers to the exhibit
number in the Form S-1. Each exhibit marked by an ampersand (&) was
previously filed as an exhibit to Amendment No. 4 to Mac-Gray's Registration
Statement on Form S-1 filed on June 10, 1998. Each exhibit marked by an
asterisk (*) was previously filed as an exhibit to Mac-Gray's Registration
Statement on Form S-4 filed on February 9, 1998 (No. 333-45899) and the
number in parentheses following the description of the exhibit refers to the
exhibit number in the Form S-4. Each exhibit marked by a number sign (#) was
previously filed as an exhibit to Amendment No. 1 to Mac-Gray's Registration
Statement on Form S-1, filed on September 25, 1997 (No. 333-33669) and the
number in parentheses following the description of the exhibit refers to the
exhibit number in the Form S-1. Each exhibit marked by a (z) was previously
filed as an exhibit to Amendment No. 1 of Mac-Gray's Registration Statement
on Form S-1, filed on April 17, 1998 (No. 333-49795) and the number in
parentheses following the description of the exhibit refers to the exhibit
number in the Form S-1. Each exhibit marked by a (y) was previously filed as
an exhibit to Mac-Gray's Form 8-K, filed on May 8, 1998 (No. 001-13495) and
the number in parentheses following the description of the exhibit refers to
the exhibit number in the Form 8-K. Each exhibit marked by a (x) was
previously filed as an exhibit to Mac-Gray's Form 8-K filed on June 18, 1999
(No. 001-13495) and the number in parentheses following the description of
the exhibit refers to the exhibit number in the Form 8-K. Each
17
exhibit marked by a (w) was previously filed as an exhibit to Mac-Gray's Form
10-Q filed on August 14, 2000 (No. 001-13495) and the number in parentheses
following the description of the exhibit refers to the exhibit number in the
Form 10-Q.
The following is a complete list of exhibits filed or incorporated by reference
as part of this Annual Report on Form 10-K.
2.1 Agreement and Plan of Merger, dated as of December 22, 1997, by
and among Mac-Gray Corporation, MI Acquisition Corp., Intirion
Corporation and Robert P. Bennett (2.1).*
2.2 Stock Purchase Agreement, dated as of March 31, 1998, by and
among Mac-Gray Services, Inc., Copico, Inc. and the stockholders
of Copico, Inc. (10.20).z
2.3 Stock and Asset Purchase Agreement, dated as of March 4, 1998, by
and among Mac-Gray Services, Inc., Amerivend Corporation,
Amerivend Southeast Corporation, Gerald E. Pulver and Gerald E.
Pulver Grantor Retained Annuity Trust. (2.2).y
3.1 Amended and Restated Certificate of Incorporation (3.1).+
3.2 By-laws (3.2).+
4.1 Specimen certificate for shares of Common Stock, $.01 par value,
of the Registrant (4.1).#
4.2 Shareholder Rights Agreement, dated as of June 15, 1999, by and
between the Registrant and State Street Bank and Trust Company
(4.1).x
10.1 Stockholders' Agreement dated as of April 17, 1997 by and among
the Registrant and certain stockholders of the Registrant
(10.1).+
10.2 Stockholders' Agreement dated as of June 26, 1997 by and among
the Registrant and certain stockholders of the Registrant
(10.2).+
10.3 Agreement and Plan of Merger dated as of April 17, 1997 by and
among the Registrant and the other parties named therein (10.3).+
10.4 Credit Agreement dated April 23, 1998, by and among the
Registrant, the other Borrowers (as defined therein), the lenders
named therein and State Street Bank and Trust Company, as agent
(10.4).&
10.5 Security Agreement dated as of April 23, 1998 by and among the
Registrant, the other Borrowers (as defined therein) and the
Banks (as defined therein) (10.5).&
10.6 Revolving Line of Credit Note dated April 23, 1998 issued by the
Registrant in favor of the Banks (as defined therein) (10.6).&
10.7 Pledge Agreement dated as of April 23, 1998 by and among the
Registrant and the Banks (as defined therein) (10.7).*
10.8 Consulting Agreement dated as of April 17, 1997 by and among the
Registrant and Jeffrey C. Huenink (10.9).+
10.9 Noncompetition Agreement dated as of April 17, 1997 by and among
Registrant and Jeffrey C. Huenink (10.10).+
10.10 Form of Noncompetition Agreement between the Registrant and its
executive officers (10.11).+
10.11 Form of Maytag Licensing Agreement for "Red Carpet Service"
(10.12).+
18
10.12 Form of Maytag Distributorship Agreements (10.13).+
10.13 Promissory Note dated December 31, 1992 issued by the Registrant
in favor of Donald M. Shaw (10.14).+
10.14 Consulting and Noncompete Agreement dated December 31, 1992 by
and between Donald M. Shaw and the Registrant (10.15).+
10.15 The Registrant's 1997 Stock Option and Incentive Plan (with form
of option agreements attached as exhibits) (10.16).+
10.16 Form of Director Indemnification Agreement between the Registrant
and each of its Directors (10.17).+
10.17 Form of Registration Rights Agreement by and among the
Registrant, Robert P. Bennett, Gelco Corporation, Eastech II
Limited Partnership and Eastech III Limited Partnership (10.18).*
10.18 Form of Escrow Agreement by and among the Registrant, Gelco
Corporation, Michael Shanahan, the former security holders of
Intirion Corporation and State Street Bank and Trust Company, as
escrow agent (10.19).*
10.19 Form of Noncompetition Agreement by and between the Registrant
and Robert P. Bennett (10.22).*
10.20 Distribution Agreement by and between Schlumberger Technologies,
Inc. and Mac-Gray Services, Inc., dated as of October 27, 1997
(certain portions of this exhibit were omitted pursuant to the
grant of a request for confidential treatment) (10.23).*
10.21 Registration Rights Agreement dated April 23, 1998 by and among
Mac-Gray Corporation, Peter B. Finn, Edward J. Goulart, Ronald R.
Jalbert, Robert W. LaRoche, David Luongo, Joseph J. Tischler and
Massachusetts Capital Resource Company (10.1).z
10.22 Revolving Credit and Term Loan Agreement, dated June 29, 2000, by
and among the Registrant, the other Borrowers (as defined
therein), the lenders named therein and KeyBank National
Association, as agent (10.1).w
10.23 Form of Pledge Agreement between the Registrant and the Banks
(as defined therein) (10.2).w
10.24 Form of Security Agreement between the Registrant, the other
Borrowers (as defined therein) and the Banks (as defined
therein) (10.3).w
10.25 Form of Revolving Credit Note issued by the Registrant in favor
of the Banks (as defined therein) (10.4).w
10.26 Form of Term Note issued by the Registrant in favor of the Banks
(as defined therein) (10.5).w
21.1 Subsidiaries of the Registrant (21.1).z
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, THIS 2ND DAY OF
APRIL, 2001.
MAC-GRAY CORPORATION
By: /s/ Stewart Gray MacDonald, Jr.
-------------------------------------------
STEWART GRAY MACDONALD, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: April 2, 2001
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------------------- -------- --------------
/s/ Thomas E. Bullock Director April 2, 2001
--------------------------------
THOMAS E. BULLOCK
/s/ William M. Crozier, Jr. Director April 2, 2001
--------------------------------
WILLIAM M. CROZIER, JR.
/s/ Eugene B. Doggett Director April 2, 2001
--------------------------------
EUGENE B. DOGGETT
/s/ John P. Leydon Director April 2, 2001
--------------------------------
JOHN P. LEYDON
/s/ Jerry A. Schiller Director April 2, 2001
--------------------------------
JERRY A. SCHILLER
/s/ Michael J. Shea Executive Vice President, Chief April 2, 2001
Financial Officer, Treasurer and
-------------------------------- Secretary (Principal Financial
MICHAEL J. SHEA and Accounting Officer)
20
ITEMS 14(a)(1) AND (2)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the registrant and its
subsidiaries required to be included in Item 8 are listed below.
MAC-GRAY CORPORATION
Report of Independent Accountants.................................................................... F-2
Consolidated Balance Sheets at December 31, 1999 and 2000............................................ F-3
Consolidated Income Statements for the Years Ended December 31, 1998, 1999 and 2000.................. F-4
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1998, 1999,
and 2000.......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000........... F-6
Notes to Consolidated Financial Statements........................................................... F-7
The following consolidated financial statement schedule of Mac-Gray
Corporation is included in Item 14 (a)(2) and should be read in conjunction
with the financial statements included herein.
Schedule II Valuation and Qualifying Accounts........................................................ F-22
All other schedules for which provision is made in the applicable
accounting regulations of the Security and Exchange Commission are not required
under the related instructions or are not material, and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Mac-Gray Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Mac-Gray Corporation and its subsidiaries (the "Company") at
December 31, 1999 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000,
in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 2001
F-2
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
1999 2000
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 6,566 $ 6,715
Trade receivables, net of allowance for doubtful accounts....................... 8,551 7,992
Inventory of finished goods..................................................... 6,521 3,391
Deferred income taxes........................................................... 637 818
Prepaid expenses and other current assets....................................... 8,859 8,722
-------- --------
Total current assets....................................................... 31,134 27,638
Property, plant and equipment, net.............................................. 78,581 77,367
Intangible assets, net.......................................................... 55,533 52,118
Prepaid route rent and other assets............................................. 15,717 17,502
-------- --------
Total assets............................................................... $180,965 $174,625
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 1,319 $ 6,321
Current portion of capital lease obligations.................................... 1,089 823
Trade accounts payable.......................................................... 12,521 7,971
Accrued route rent.............................................................. 8,354 8,149
Accrued expenses................................................................ 2,384 4,109
Deferred revenues and deposits.................................................. 3,354 2,629
-------- --------
Total current liabilities.................................................. 29,021 30,002
Long-term debt....................................................................... 83,728 70,022
Long-term capital lease obligations.................................................. 693 432
Deferred income taxes................................................................ 10,406 13,444
Deferred retirement obligation....................................................... 853 749
Other liabilities.................................................................... 125 15
Commitments and contingencies (Note 16).............................................. -- --
Stockholders' equity:
Preferred stock ($.01 par value, 5 million shares authorized, no shares
outstanding).................................................................... -- --
Common stock ($.01 par value, 30 million shares authorized, 13,443,754
issued and 12,627,753 outstanding at December 31, 1999, and
13,443,754 issued and 12,637,639 outstanding at December 31, 2000............... 134 134
Additional paid-in capital...................................................... 68,540 68,540
Retained earnings (accumulated deficit)......................................... (2,935) 771
-------- --------
65,739 69,445
Less common stock in treasury, at cost, 816,001 and 806,115 shares at
December 31, 1999 and 2000, respectively..................................... (9,600) (9,484)
-------- --------
Total stockholders' equity................................................. 56,139 59,961
-------- --------
Total liabilities and stockholders' equity........................................... $180,965 $174,625
======== ========
The accompanying notes are an integral part of these financial
statements
F-3
MAC-GRAY CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- ------
Revenue:
Route revenue....................................................... $93,273 $102,430 $106,274
Sales ............................................................ 37,599 39,097 42,082
Other ............................................................ 6,305 7,036 5,912
-------- -------- --------
Total revenue.................................................. 137,177 148,563 154,268
-------- -------- --------
Cost of revenue:
Route rent.......................................................... 41,699 47,293 47,596
Route expenditures.................................................. 21,561 24,866 24,778
Depreciation and amortization....................................... 13,349 18,202 18,980
Cost of product sales............................................... 24,828 24,686 27,766
-------- -------- --------
Total cost of revenue.......................................... 101,437 115,047 119,120
-------- -------- --------
Gross margin............................................................. 35,740 33,516 35,148
-------- -------- --------
Operating expenses:
General and administration.......................................... 7,003 9,148 9,788
Sales and marketing................................................. 10,333 11,848 10,542
Depreciation and amortization....................................... 909 905 1,225
Impairment of goodwill.............................................. -- 8,474 --
Merger-related costs................................................ 1,144 -- --
-------- -------- --------
Total operating expenses....................................... 19,389 30,375 21,555
-------- -------- --------
Income from operations................................................... 16,351 3,141 13,593
Interest expense, net............................................... (3,920) (6,085) (6,770)
Other income (expense), net......................................... (122) 120 123
-------- -------- --------
Income before provision for income taxes............................ 12,309 (2,824) 6,946
Provision for income taxes.......................................... (5,222) (2,727) (3,162)
-------- -------- --------
Net income (loss)........................................................ $7,087 $(5,551) $ 3,784
-------- -------- --------
Accretion and dividends on redeemable preferred stock.................... 62 -- --
-------- -------- --------
Net income (loss) available to common stockholders....................... $7,025 $(5,551) $ 3,784
======== ======== ========
Net income (loss) per common share--basic................................. $ 0.56 $ (0.44) $ 0.30
======== ======== ========
Weighted average common shares outstanding............................... 12,524 12,661 12,634
======== ======== ========
Net income (loss) per common share--diluted............................... $ 0.54 $ (0.44) $ 0.30
======== ======== ========
Weighted average common shares outstanding--diluted....................... 12,926 12,668 12,634
======== ======== ========
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
--------------------- ADDITIONAL RETAINED ----------------
NUMBER OF PAID-IN EARNINGS NUMBER
SHARES VALUE CAPITAL (DEFICIT) OF SHARES COST TOTAL
Balance, December 31, 1997........... 12,285,568 123 52,524 (4,345) -- -- 48,302
Net income available to common
stockholders..................... -- -- -- 7,025 -- -- 7,025
Inclusion of Intirion's net equity
activity for the six months ended
December 31, 1997................. -- -- (13) 15 -- -- 2
Exchange of Intirion preferred shares
for Mac-Gray common stock........ 275,224 3 3,821 -- -- -- 3,824
Shares of Mac-Gray common stock
issued in connection with the
Copico acquisition............... 250,000 2 4,216 -- -- -- 4,218
Intirion dividends paid............ -- -- -- (72) -- -- (72)
Options exercised.................. 20,936 -- 187 -- -- -- 187
Tax benefit associated with exercise
of certain options............... -- -- 8 -- -- -- 8
Repurchase of common stock......... (62,100) -- -- -- 62,100 (706) (706)
Expiration of put rights on
redeemable common stock.......... 12,000 -- 153 -- -- -- 153
---------- ------ ------- ------- ------- ------ --------
Balance, December 31, 1998.......... 12,781,628 128 60,896 2,623 62,100 (706) 62,941
---------- ------ ------- ------- ------- ------ --------
Net loss available to common
stockholders..................... -- -- -- (5,551) -- -- (5,551)
Repurchase of redeemable common stock -- 6 7,639 -- 600,026 (7,645) --
Repurchase of common stock......... (156,200) -- -- -- 156,200 (1,269) (1,269)
Stock granted and options exercised 2,325 -- 5 (7) (2,325) 20 18
---------- ------ ------- ------- ------- ------ --------
Balance, December 31, 1999........... 12,627,753 $ 134 $68,540 $(2,935) 816,001 (9,600) $ 56,139
---------- ------ ------- ------- ------- ------ --------
Net income available to common
stockholders..................... -- -- -- 3,784 -- -- 3,784
Stock granted...................... 9,886 -- -- (78) (9,886) 116 38
---------- ------ ------- ------- ------- ------ --------
Balance, December 31, 2000........... 12,637,639 $ 134 $68,540 $ 771 806,115 (9,484) $ 59,961
========== ====== ======= ======= ======= ====== ========
The accompanying notes are an integral part of these financial
statements
F-5
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1998 1999 2000
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss)..................................................... $ 7,087 $ (5,551) $3,784
Adjustments to reconcile net income (loss) to net cash flows provided
by operating activities:
Depreciation and amortization.................................... 14,258 19,107 20,205
Impairment of goodwill........................................... -- 8,474 --
Allowance for doubtful accounts.................................. (199) 104 79
Loss (gain) on sale of assets.................................... 49 (352) (201)
Deferred income taxes............................................ 2,227 2,784 2,857
Director stock grant............................................. -- -- 38
(Increase) decrease in accounts receivable....................... (1,220) (357) 480
Decrease (increase) in inventory................................. 3,808 (1,255) 3,130
Increase in prepaid expenses and other assets.................... (10,681) (9,185) (3,440)
Increase (decrease) in accounts payable, accrued route rent
and accrued expenses.......................................... 588 7,267 (3,030)
Increase (decrease) in deferred revenues and customer deposits... 973 (32) (725)
-------- ------- -------
Net cash flows provided by operating activities............. 16,890 21,004 23,177
-------- ------- -------
Cash flows from investing activities:
Capital expenditures.................................................. (20,729) (21,819) (13,983)
Acquisition of businesses (Notes 4 and 5)............................. (51,286) (3,539) --
Proceeds from sale of property and equipment.......................... 1,745 1,040 1,987
-------- ------- -------
Net cash flows used in investing activities................. (70,270) (24,318) (11,996)
-------- ------- -------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations.............. (2,709) (2,857) (2,697)
Advances (payments) on Credit Facility, net........................... 59,354 15,445 (7,352)
Proceeds from exercise of stock options............................... 187 20 --
Cash dividends paid................................................... (72) -- --
Cash paid to repurchase shares of common stock........................ (706) (8,909) --
Cash paid for refinancing of long term debt........................... (267) -- (983)
-------- ------- -------
Net cash flows provided by (used in) financing activities... 55,787 3,699 (11,032)
-------- ------- -------
Increase in cash and cash equivalents...................................... 2,407 385 149
Cash and cash equivalents, beginning of period............................. 3,774 6,181 6,566
-------- ------- -------
Cash and cash equivalents, end of period................................... 6,181 6,566 6,715
======== ======= =======
Supplemental cash flow information:
Interest paid......................................................... 3,851 7,020 6,706
Income taxes paid (received).......................................... 3,362 (5) (243)
Supplemental disclosure of non cash investing activities (Note 6)
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)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE BUSINESS-- Mac-Gray Corporation ("Mac-Gray" or the
"Company") generates the majority of its revenue from card and coin-operated
laundry rooms located in the Northeastern, Southeastern and Midwestern United
States. A large portion of its revenue is also derived from the sale and lease
of the Company's MicroFridge(R) product lines. The Company's principal customer
base is the multi-housing market, which consists of apartments, condominium
units, colleges and universities. The Company also sells, services and leases
commercial laundry equipment to commercial laundromats and institutions. The
Company also generates revenue from card and coin-operated reprographics
equipment located in school and municipal libraries, and other buildings. The
majority of the Company's purchases of coin route laundry equipment is from one
supplier.
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. On occasion the Company has excess cash available for a short
period of time; when this occurs, the Company invests such excess cash in
repurchase agreements and other highly liquid short-term investments.
Accordingly, the investments are subject to minimal credit and market risk.
Included in cash and cash equivalents is an estimate of cash not yet collected
which remains at laundry and reprographics customer locations. At December 31,
1999 and 2000, this totaled $4,738 and $4,526, respectively.
REVENUE RECOGNITION--The Company recognizes coin route revenue on the
accrual basis. Rental revenue is recognized ratably over the related contractual
period, which is generally 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.
The Company from time to time enters into long-term lease transactions
that meet the qualifications of a sales type lease. For these transactions,
revenue is recognized upon shipment of the products at fair market value.
Interest revenue is recognized over the life of the rental agreement. At
December 31, 1999 and 2000 the Company had $8,824 and $13,064, respectively,
in receivables related to sales type leases. These receivables have been
recorded net of unearned interest income of $2,553 and $2,711 at December 31,
1999 and 2000. These receivables have been classified as other assets on the
balance sheet (current or long-term, as appropriate). These receivables are
primarily due ratably over the next seven years and have been classified as
other current assets and other long-term assets in the balance sheet.
ALLOWANCE FOR DOUBTFUL ACCOUNTS--The Company maintains an allowance for
doubtful accounts of $413 at December 31, 1999 and $492 at December 31, 2000.
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 the selling and leasing of laundry
machines and MicroFridge products. To minimize this risk, ongoing credit
evaluations of customers' financial condition are performed and reserves are
maintained. The Company typically does not require collateral.
F-7
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1999 and 2000, 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 of finished goods.
PREPAID ROUTE RENT--Prepaid rent consists of cash advances paid to lessors
under laundry service contracts. The prepaid amount is amortized ratably over
the life of the contract.
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. 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, customer lists, goodwill and contract rights recorded
in connection with the acquisitions (Notes 4 and 5). The non-compete
agreements are amortized using the straight-line method over the life of the
agreements, which range from two to five years. Customer lists are amortized
using the straight-line method over five to fifteen years. Goodwill is
amortized using the straight-line method over fifteen or twenty years.
Contract rights are amortized using the straight-line method over fifteen
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--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 are provided for temporary
differences between the income tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes.
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 Standard 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 Standards No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation of
basic earnings per share ("EPS") and diluted earnings per share. 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
F-8
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
an entity. Diluted earnings per share has been calculated using the treasury
stock method.
OTHER COMPREHENSIVE INCOME--The Company accounts for comprehensive
income in accordance with Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income". This statement requires
disclosure of comprehensive income and its components in interim and annual
reports. Comprehensive income includes all changes in stockholders' equity
during a period except those resulting from investments by stockholders and
distributions to stockholders. The Company had no comprehensive income in the
three years ended December 31, 2000.
FINANCIAL INSTRUMENTS AND HEDGING--The Company uses interest rate swap
agreements to manage interest costs and the risks associated with changing
interest rates. As interest rates change, the differential paid or received is
recognized in interest expense of the period.
NEW ACCOUNTING PRONOUNCEMENTS-- In March 2000, the Financial Accounting
Standard Board issued FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among
other issues clarifies the following: the definition of an employee for purposes
of applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a non compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The adoption of FIN 44 did not have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission released
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. SAB 101 was effective in the fourth quarter
of Fiscal 2000. Adoption of this SAB had no impact on the Company's results of
operations.
In June 1998 and June 2000, the Financial Accounting Standards Board
issued Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), and Financial Accounting
Standard No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" ("FAS 138"). These statements amend the accounting and
reporting standards for certain derivative instruments and hedging activities.
FAS 133 and FAS 138 are effective for fiscal years beginning after June 15,
2000. The Company does not believe that the implementation of FAS 133 and FAS
138 in fiscal 2001 will have a material impact on the Company's results of
operations or financial position. Under FAS 133, the Company's interest rate
swap agreements are considered "plain vanilla" cash flow hedges. Accordingly,
the fair value of the swap agreements will be recorded in Other Comprehensive
Income.
3. IMPAIRMENT OF GOODWILL
During 1999, the Company recorded a non-cash impairment charge of $8,474,
or $0.67 per share, related to the goodwill and intangible assets of Copico,
Inc. Since the acquisition of Copico, Inc. in 1998, the reprographics division
produced operating losses. In accordance with the purchase method of accounting
the purchase price was assigned to the assets acquired and liabilities assumed,
with any excess purchase price being allocated to goodwill and intangibles. The
goodwill and intangibles recorded in connection with the transaction was
approximately $11,200.
The most significant reason for the poor performance of the division was
the impact of technological advances, which affected the entire reprographics
industry. Specifically, the introduction of the internet in college and public
libraries, and access to free laser printers led to fewer vended copies being
made than in prior years.
F-9
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
After initiating several strategic and operational changes throughout 1999,
the Company performed a full-scale evaluation of the division and its long-term
prospects in the fourth quarter of 1999. As a result of this evaluation,
management determined that the carrying amount of the Copico long lived assets
exceeded the estimated undiscounted future cash flows expected to result from
operating this division, and recognized a non-cash, non-recurring impairment
charge in the fourth quarter of 1999 as indicated above. This charge was
calculated in accordance with the provisions of SFAS No. 121 "Accounting for the
Impairment of Long Lived Assets and Assets to be Disposed Of."
4. POOLING-OF-INTERESTS TRANSACTION
On March 12, 1998, Mac-Gray acquired Intirion Corporation ("Intirion") in a
transaction accounted for as a pooling of interests. The accompanying
consolidated financial statements have been prepared to give retroactive effect
to the pooling transaction and include the accounts of Mac-Gray, Intirion and
their respective wholly owned subsidiaries. Mac-Gray issued approximately
1,593,000 shares of common stock and paid $1,033 in cash in exchange for all of
the outstanding equity securities of Intirion. Costs directly associated with
the pooling transaction of $1,144 were incurred during 1998. These costs include
legal, accounting and severance costs directly associated with the transaction
and are classified as merger-related costs on the income statement.
No adjustments to the net assets of the combining companies were required
to adopt the same accounting practices and there were no transactions between
Mac-Gray and Intirion prior to the combination. During 1998, an adjustment was
required to record Intirion's net equity activity for the six months ended
December 31, 1997 in order to change the fiscal year of Intirion from June to
December. This adjustment is presented on the consolidated statement of
stockholders' equity. All of the accounts and results of both companies are
included in the results for the twelve months ended December 31, 1998.
5. PURCHASE ACQUISITIONS
In 1999, the Company acquired certain assets of two coin operated laundry
businesses for approximately $3,369. 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. The purchase price in excess of the fair market value of the assets
acquired was allocated to various intangible assets, including goodwill,
amounted to approximately $2,019.
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 using the purchase method of
accounting. Assuming this acquisition had occurred at January 1, 1997 the pro
forma results of operations 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 using the
purchase method of accounting.
Approximately $800 of professional and other acquisition costs were
capitalized in connection with these acquisitions.
The December 31, 1998 financial statements include the results of Copico
and Amerivend for the period
F-10
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
subsequent to the dates of their respective acquisition. Goodwill and other
intangible assets amounting to approximately $37,000 were recorded in connection
with these acquisitions.
In 1998, the Company also acquired certain assets of several coin-operated
laundry and MicroFridge related businesses for approximately $5,000. These
acquisitions were also 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. The purchase price in excess
of fair market value of the assets acquired was allocated to various intangible
assets, including goodwill, and amounted to approximately $3,000.
The Company's consolidated financial statements include the results of the
1998 and 1999 acquisitions from their respective acquisition dates.
6. SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING ACTIVITIES
During the year ended December 31, 1998, common stock with an approximate
value $4,218 was issued in connection with the acquisition of Copico.
During the years ended December 31, 1999 and 2000, the Company acquired
automobiles under capital lease agreements totaling $1,134 and $606,
respectively.
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other assets consist of the following:
DECEMBER 31,
1999 2000
Prepaid route rent................... $1,657 $1,779
Prepaid supplies..................... 2,360 2,471
Lease receivable..................... 1,794 2,754
Other................................ 3,048 1,718
------ ------
$8,859 $8,722
====== ======
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIFE 1999 2000
----------- ---- ----
Coin route equipment..................................... 10 years $111,162 $101,964
Rental equipment......................................... 7 years 13,185 12,010
Buildings and improvements............................... 15-39 years 10,462 9,671
Furniture, fixtures and computer equipment............... 2-7 years 6,170 6,660
Trucks and autos......................................... 3-5 years 4,880 5,108
Tooling costs............................................ 3 years 306 306
Land and improvements.................................... -- 403 221
-------- --------
146,568 135,940
Less: accumulated depreciation........................... 70,512 60,357
-------- ------
76,056 75,583
Coin route equipment, not yet placed in service.......... 2,525 1,784
-------- -------
Property, plant and equipment, net....................... $78,581 $77,367
======== =======
Depreciation and amortization of property, plant and equipment totaled
$10,588, $14,587, and $15,806 for the
F-11
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
years ended December 31, 1998, 1999, and 2000, respectively.
At December 31, 1999 and 2000, trucks and autos included $4,438 and $4,745,
respectively, of capital leased equipment with an accumulated amortization
balance of $2,544 and $3,489, respectively.
During 2000, the Company disposed of $23,138 of fully depreciated laundry
route related fixed assets.
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
1999 2000
Goodwill.................................. $59,172 $59,172
Covenants-not-to-compete.................. 4,981 4,981
Customer lists............................ 2,477 2,477
Other..................................... 867 1,670
------- -------
67,497 68,300
Less: accumulated amortization............ 11,964 16,182
------- -------
Intangible assets, net.................... $55,533 $52,118
======= =======
Amortization expense associated with the above intangible assets amounted
to $3,670, $4,520, and $4,399 for the years ended December 31, 1998, 1999 and
2000, respectively.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
1999 2000
Accrued interest....................................... $ 45 $ 939
Accrued salaries....................................... 513 401
Warranty............................................... 158 158
Current portion of deferred retirement obligation...... 104 104
Other.................................................. 1,564 2,507
------- -----
$2,384 $4,109
11. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at December 31, 1999 and 2000 relates to
payments due to a former shareholder of the Company in connection with a
retirement agreement which provides for annual payments of $104 until the death
of the former shareholder. The liability has been estimated based upon the life
expectancy of the former shareholder utilizing actuarial tables.
12. LONG-TERM DEBT
Long-term debt consists of the following:
F-12
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
1999 2000
---- ----
Senior Secured Credit Facility....................................................... $81,105 $73,753
Various fixed interest rate notes, (8.4%-11.51%) due through June 1, 2003............ 1,055 1,047
Variable rate note, lesser of prime rate plus 2% or 9%, quarterly principal
payments beginning January 1, 1996................................................ 805 --
Discount note, 6% imputed interest rate (estimated fair market rate), quarterly
installments, due December 31, 2003............................................... 1,363 936
Acquisition note payable, 8% imputed interest rate (estimated fair market rate),
monthly payments, due May 31, 2006................................................ 719 607
-------- -------
Total long-term debt................................................................. 85,047 76,343
Less: current portion................................................................ 1,319 6,321
-------- -------
$83,728 $70,022
======== =======
CREDIT AGREEMENT AND REVOLVING CREDIT FACILITY
On June 29, 2000 the Company refinanced its outstanding Senior Secured
Credit Facility with a group of banks. This transaction retired the April 23,
1998 Senior Facility which was due to convert to a term loan in April 2001.
The new revolving line of credit and term loan facility (the "2000 Senior
Secured Credit Facility") provided for borrowings of up to $100,000. The 2000
Senior Secured Credit Facility provided for borrowings under a three-year
revolving line of credit of up to $65,000, and included a five-year $35,000
Senior Secured Term Loan Facility. Through principal payments made quarterly
since the inception of the 2000 Senior Secured Credit Facility, the $35,000
Senior Secured Term Loan Facility has been reduced to $32,500.
Outstanding indebtedness under the 2000 Senior Secured Credit Facility
bears interest, at the Company's option, at a rate equal to the i) prime rate
plus 0.25%, or ii) LIBOR plus 2.25% for the year ended December 31, 2000. On
February 15, 2001, these rates were reduced to i) prime rate, or ii) LIBOR plus
2%, as a result of improved financial performance by the Company as defined in
the 2000 Senior Secured Credit Facility. Further reductions in interest rates
are possible if the Company's financial performance continues to improve. The
average interest rate at December 31, 2000 was approximately 9.0%.
The 2000 Senior Secured Credit Facility restricts payments of dividends and
other distributions, restricts the Company from making certain acquisitions and
incurring indebtedness, and requires it to maintain certain financial ratios.
The 2000 Senior Secured Credit Facility is collateralized by a blanket lien on
the assets of the Company and each of its subsidiaries, as well as a pledge by
the Company of all of the capital stock of its subsidiaries. The 2000 Senior
Secured Credit Facility is subject to certain financial and operational
covenants with which the Company was in compliance at December 31, 2000. The
most restrictive of these covenants is maintaining certain leverage ratios. At
December 31, 2000 outstanding letters of credit amounted to $747. The unused
balance under the 2000 Senior Secured Credit Facility was $23,000 at December
31, 2000.
In February 2000, the Company entered into two standard International Swaps
and Derivatives ("ISDA") interest rate swap agreements with its primary
financial institution to manage the interest rate risk associated with its
Senior Credit Facility. Each agreement has a notional amount of $20,000 and
maturity dates in February 2003 and 2005. The effect of the swap agreements is
to limit the interest rate exposure to a fixed rate of 7.38% and 7.42% (versus
the 90-day LIBOR rate) for the three year and five year swaps, respectively. In
accordance with the swap agreements and on a quarterly basis, interest expense
is calculated based on the floating 90-day LIBOR and the fixed rate. If interest
expense as calculated is greater based on the 90-day LIBOR, the financial
institution pays the
F-13
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
difference to the Company; if interest expense as calculated is greater based on
the fixed rate, the Company pays the difference to the financial institution.
Depending on fluctuations in the LIBOR, the Company's interest rate exposure and
its related impact on interest expense and net cash flow may increase or
decrease. The Company is exposed to credit loss in the event of nonperformance
by the other party to the swap agreement; however, nonperformance is not
anticipated.
The fair value of the interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the agreement at the reporting date,
taking into account current interest rates and the credit worthiness of the
counterparty. At December 31, 2000, the Company estimates that it would have
paid $1,874 to terminate these agreements.
The 2000 Senior Secured Credit Facility contains a commitment fee equal to
one quarter of one percent (0.25%) per annum of the average daily unused portion
of the Credit Facility.
FUTURE PAYMENTS
As of December 31, 2000, the scheduled future principal payments of
long-term debt are as follows:
2001.......................................... $6,321
2002.......................................... 7,102
2003.......................................... 8,371
2004.......................................... 8,629
2005.......................................... 45,876
Thereafter.................................... 44
-------
$76,343
=======
13. INCOME TAXES
The provision for state and federal income taxes consists of the following:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1999 2000
---- ---- ----
Current state income tax $ 621 $ 106 $ 209
Deferred state income tax 462 611 534
Current federal income tax 2,374 (163) 96
Deferred federal income tax 1,765 2,173 2,323
---------------------------------------------------------
Total income taxes $5,222 $ 2,727 $ 3,162
=========================================================
The net deferred tax liability in the accompanying balance sheets includes
the following amounts of deferred tax assets and liabilities at December 31:
F-14
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1999 2000
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 739 $ 1,286
Alternative minimum tax credit carryforwards 1,072 1,087
Accounts receivable 162 193
Deferred compensation 939 725
Amortization 216 193
Deferred Revenue 227 181
Other 127 243
-------- ---------
3,482 3,908
-------- ---------
Deferred tax liabilities:
Depreciation 11,797 13,955
Sales type leases 1,454 2,579
-------- ---------
13,251 16,534
-------- ---------
Net deferred tax liabilities $ 9,769 $ 12,626
======== =========
A valuation allowance was applied against deferred tax assets at December
31, 1997. During the year ended December 31, 1998, the valuation allowance on
deferred tax assets of $370 was released. Based on the results of operations of
Intirion subsequent to the combination, management believes that it is likely
that such assets will be realized.
For the year ended December 31, 1998, 1999, and 2000 the statutory income
tax rate differed from the effective rate primarily as a result of the following
differences:
1998 1999 2000
---- ---- ----
Taxes computed at federal statutory rate 34.0% (34.0%) 34.0%
State income taxes, net of federal benefit 5.7 (5.3) 6.0
Non-deductible goodwill 2.9 18.1 3.3
Impairment of non-deductible goodwill -- 117.8 --
Non-deductible merger related costs 2.4 -- --
Change in valuation allowance on deferred tax asset (3.0) -- --
Other .4 -- 2.2
--------------------------------
Income tax provision 42.4% 96.6% 45.5%
================================
At December 31, 2000, 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 in the
year ending June 30, 1995 $ 457
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 1999 1,150
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 2000 1,091
----------------
$ 2,698
================
F-15
At December 31, 2000, the Company has the following net operating loss
carryforwards available to reduce certain future state taxable income:
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 1999 $3,413
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 2000 4,113
----------------
$ 7,526
================
Since the $457 loss from June 30, 1995 occurred during a short tax year,
the loss is not immediately available to offset future taxable income. The loss
is made available over a six year period, to be deducted ratably in accordance
with applicable tax regulations. At December 31, 2000, the amount of this loss
available is $304. The remaining $153 will become available in the year ended
December 31, 2001.
The net operating loss carryfoward from the year ended June 30, 1995
expires 15 years from the year in which it was incurred. The net operating loss
carryforwards from the years ended December 31, 1999 and 2000 expire 20 years
from the year in which they were incurred.
14. REPURCHASE OF COMMON STOCK
On October 29, 1998, the Board of Directors authorized the Company to
repurchase up to $8,000 of its common stock through the open market. Mac-Gray
repurchased 62,100, and 156,200 shares through December 31, 1998 and 1999 under
the plan for a total cash outlay of $706 and $1,269, respectively.
In January 1999, the Company paid $7,645 to a shareholder for shares of
stock originally issued in connection with a 1997 acquisition. These shares of
the Company's common stock were redeemable at the election of the shareholder.
15. SEGMENT INFORMATION
The Company operates three business units which are based on the Company's
different product and service categories: Laundry, MicroFridge and
Reprographics. These three business units have been aggregated into two
reportable segments ("Laundry and Reprographics" and "MicroFridge"). The Laundry
and Reprographics business units have been aggregated into one reportable
segment (Laundry and Reprographics) since these divisions are affected by
similar economic factors. The Laundry segment provides coin and card-operated
laundry equipment to multiple housing facilities such as apartment buildings,
colleges and universities and public housing complexes. The Laundry segment also
operates as a distributor of and provides service to commercial laundry
equipment in public laundromats, as well as institutional purchasers, including
hospitals, restaurants and hotels, for use in their own on-premise laundry
facilities. The Reprographics segment provides coin and card-operated
reprographics equipment to academic and public libraries. The MicroFridge
segment sells, rents, and services its own proprietary line of
refrigerator/freezer/microwave oven combinations to a customer base which
includes colleges and universities, government, hotel, motel and assisted living
facilities.
There are no intersegment revenues.
F-16
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The table below presents information about the reported operating income of
Mac-Gray for the years ended December 31, 1998, 1999, and 2000.
YEAR ENDED DECEMBER 31, 1998
---------------------------------
LAUNDRY
AND
REPROGRAPHICS MICROFRIDGE TOTAL
------------- ----------- -----
Revenues..................................................... $ 110,949 $26,228 $137,177
Gross margin................................................. 26,621 9,119 35,740
Depreciation and amortization................................ 11,931 1,760 13,691
Capital expenditures......................................... 16,508 2,227 18,735
Total assets................................................. 123,054 19,767 142,821
YEAR ENDED DECEMBER 31, 1999
---------------------------------
LAUNDRY
AND
REPROGRAPHICS MICROFRIDGE TOTAL
------------- ----------- -----
Revenues........................................................ $119,919 $28,644 $148,563
Gross margin.................................................... 23,408 10,108 33,516
Depreciation and amortization................................... 16,574 2,075 18,649
Capital expenditures............................................ 18,201 2,820 21,021
Total assets.................................................... 131,700 16,863 148,563
YEAR ENDED DECEMBER 31, 2000
---------------------------------
LAUNDRY
AND
REPROGRAPHICS MICROFRIDGE TOTAL
------------- ----------- -----
Revenues..................................................... $ 123,566 $30,702 $154,268
Gross margin................................................. 25,033 10,115 35,148
Depreciation and amortization................................ 17,191 2,104 19,295
Capital expenditures......................................... 12,341 167 12,508
Total assets................................................. $ 120,707 $ 20,559 $ 141,266
The following are reconciliations to corresponding totals in the
accompanying consolidated financial statements:
1998 1999 2000
------ ------ ------
Income
Total gross margin for reportable segments.............. $35,740 $33,516 $35,148
Operating expenses...................................... (19,389) (30,375) (21,555)
Interest expense, net................................... (3,920) (6,085) (6,770)
Other expense, net...................................... (122) 120 123
------- ------- -------
Income (loss) before provision for income taxes.............. $12,309 $(2,824) $ 6,946
======= ======= =======
1998 1999 2000
------ ------ ------
Depreciation and amortization
Total for reportable segments........................... $13,691 $ 18,649 $ 19,295
Corporate............................................... 567 458 910
------- -------- --------
Total depreciation and amortization.......................... $14,258 $ 19,107 $20,205
======= ======== ========
F-17
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 1999 2000
------ ------ ------
Capital expenditures
Total for reportable segments........................... $18,735 $ 21,021 $12,508
Corporate............................................... 1,994 798 1,475
------- -------- -------
Total capital expenditures................................... $20,729 $ 21,819 $13,983
======= ======== =======
1998 1999 2000
------ ------ ------
Assets
Total for reportable segments........................... $142,821 $148,563 $141,266
Corporate (1)........................................... 28,212 31,765 32,541
Deferred income taxes................................... 487 637 818
-------- -------- --------
Total assets................................................. $171,520 $180,965 $174,625
======== ======== ========
(1) Principally cash, prepaid expenses, property, plant & equipment.
16. 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:
CAPITAL OPERATING
LEASES LEASES
Year ended December 31,
2001........................................................................ $ 845 $ 864
2002........................................................................ 397 654
2003........................................................................ 95 497
2004........................................................................ -- 472
2005 and thereafter......................................................... -- 464
------ -------
Future lease payments....................................................... 1,337 $ 2,951
=======
Less: amount representing interest (LIBOR of 6.65% at December 31, 2000)......... 82
------
1,255
Present value future minimum lease payments less amounts due within
one year...................................................................... 823
-----
Amounts due after one year....................................................... $ 432
=====
Rent expense incurred by the Company under non-cancelable operating leases
totaled $604, $875, and $934 for the years ended December 31, 1998, 1999 and
2000, respectively.
GUARANTEED ROUTE RENT PAYMENTS--The Company operates coin laundry routes
under various lease agreements in which the Company is required to make minimum
guaranteed rent payments to the respective lessors. The following is a schedule
by years of future minimum guaranteed rent payments required under these lease
agreements that have initial or remaining non-cancelable contract terms in
excess of one year as of December 31, 2000:
F-18
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2001.................................... $5,058
2002.................................... 4,348
2003.................................... 3,805
2004.................................... 3,084
2005.................................... 1,886
Thereafter.............................. 4,575
-------
$22,756
=======
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.
17. 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 $581, $597 and $623, for the years ended December 31,
1998, 1999 and 2000, respectively.
STOCK OPTION AND INCENTIVE PLANS--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. The 1997 Stock Plan requires the maximum term of options to
be ten years.
Employee options generally 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; however, the Administrator
of the 1997 Stock Plan may determine at its discretion the vesting schedule
for any option award. In the event of termination of the optionees'
relationship with the Company, vested options not yet exercised terminate
within 90 days. The 1997 Stock Plan also provided for the automatic annual
grant to each of the independent directors to purchase 1,000 shares of common
stock. The non-qualified options granted to independent directors are
exercisable immediately and will terminate on the tenth anniversary of the
grant. The exercise prices are 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.
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 outstanding shares of
common stock. At December 31, 2000, a total of 1,263,764 shares of common stock
are reserved for issuance under the 1997 Stock Plan, of which 136,000 shares are
subject to outstanding options and 1,127,764 remaining available for issuance.
During 2000 a significant number of options granted in prior years were
forfeited. All forfeited options had an exercise price in excess of the market
price on the date of forfeiture. These forfeitures have no impact on the results
of operations for the year ended December 31, 2000. There were no options
granted to employees who forfeited options in the six months prior to and
subsequent to the date of forfeiture.
The following is a summary of stock option plan activity:
F-19
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1999 2000
------------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- -------- ------------
Outstanding, beginning of year.................... 890,940 $ 10.09 899,949 $ 9.80
Granted........................................... 176,935 $ 9.01 25,500 $ 3.25
Exercised......................................... (630) $ 8.82 -- --
Canceled.......................................... -- -- -- --
Forfeited......................................... (167,296) $ 10.60 (789,449) $ 9.64
-------- -------- -------- ------
Outstanding, end of year.......................... 899,949 $ 9.80 136,000 $ 9.39
======= ======== ======== ======
Exercisable, end of year.......................... 424,679 $ 9.50 85,500 $ 9.59
======= ======== ======== ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER AVERAGE
OUTSTANDING REMAINING AVERAGE EXERCISE EXERCISABLE EXERCISE
AT 12/31/00 CONTRACTUAL LIFE PRICE AT 12/31/00 PRICE
------------ ---------------- ---------------- ------------- -----------
$3.13-$3.63........................ 25,500 9 $ 3.25 5,000 $ 3.23
$7.94-$8.75........................ 55,500 8 $ 8.49 55,500 $ 8.49
$11.00-$16.06...................... 55,000 7 $ 13.14 25,000 $ 13.30
------- --- ------- ------ -------
136,000 8 $ 9.39 85,500 $ 9.59
======= = ====== ====== =======
The Company has adopted the disclosure-only provision 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 ($6,174), and $3,699 or ($0.48)
and $0.29 per share in 1999 and 2000, respectively compared to reported net
income of ($5,551), and $3,784, or ($0.44) and $0.30 per share in 1999 and 2000,
respectively.
The fair value of the Company's options was estimated as of the date of
grant using a Black-Scholes option pricing model with the following components:
DECEMBER 31,
---------------------
1999 2000
---------- -------
Fair value of options granted at grant date........................... $5.68 $1.76
Risk free interest rate............................................... 5.3% 5.1%
Expected option term--Employees........................................ 7 years 7 years
Expected option term--independent directors............................ 3 years 3 years
Expected volatility................................................... 50% 50%
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 SHARE AND PER SHARE DATA)
18. EARNINGS PER SHARE
FOR THE YEAR ENDED 2000
---------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net income.................................................... $ 3,784
Less: Accretion and dividends on redeemable
preferred stock............................................ --
-------
Net income available to common stockholder--basic.............. $ 3,784 12,634 $ 0.30
======= ====== ======
Effect of dilutive securities:
Stock options............................................ --
Contingent shares........................................ --
Net income available to common stockholders--diluted........... $ 3,784 12,634 $ 0.30
======= ====== ======
FOR THE YEAR ENDED 1999
------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net Loss...................................................... $ (5,551)
Less: Accretion and dividends on redeemable
preferred stock............................................ --
--------
Net Loss available to common stockholder--basic................ $ (5,551) 12,661 $ (0.44)
======== ====== ========
Effect of dilutive securities:
Stock options............................................ 7
Contingent shares........................................ --
-----------
Net Loss available to common stockholders--diluted............. $ (5,551) 12,668 $ (0.44)
======== =========== ========
FOR THE YEAR ENDED 1998
------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net income.................................................... $ 7,087
Less: Accretion and dividends on redeemable
preferred stock............................................ (62)
--------
Net income available to common stockholder--basic.............. $ 7,025 12,524 $ 0.56
======== ====== ======
Effect of dilutive securities:
Stock options............................................ 243
Contingent shares........................................ 159
------
Net income available to common stockholders--diluted........... $ 7,025 12,926 $ 0.54
======== ====== ======
F-21
MAC-GRAY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
BALANCE CHARGED TO BALANCE
BEGINNING COST AND AT END
OF YEAR EXPENSES(1) DEDUCTIONS OF YEAR
Year Ended December 31, 2000:
Allowance for doubtful accounts........................ 413 1,420 (1,341) 492
Year Ended December 31, 1999:
Allowance for doubtful accounts........................ 309 643 (539) 413
Year ended December 31, 1998:
Allowance for doubtful accounts........................ 508 511 (710) 309
Valuation allowance for deferred tax asset............. 370 -- (370) --
(1) The year ended December 31, 1998 includes $73 recorded on the books of
Intirion during the six months ended December 31, 1997 for which there is
no income statement presented.
F-22