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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, 1999
OR
|X| 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 27, 2000 was $13,609,118 based on
the last sales price of $3.25 Per share as of March 27, 2000 on the NYSE.
As of March 30, 2000, 12,630,874 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 24, 2000 are incorporated by reference into Part
III of this report.
PART I
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, that was 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, 1999 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 have included 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 and operates approximately 170,000 card and
coin-operated washers and dryers in more than 30,000 multiple housing laundry
rooms located in 32 states. In addition, Mac-Gray 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 4.8% 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 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 new 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 operates both smart card operated and magnetic stripe operated
("debit card") based payment systems. Since 1991 Mac-Gray has installed more
than 13,500 debit card operated laundry machines in the college and university
market. The installation of these debit card-based machines often provides
Mac-Gray with access to colleges and universities that demand card-based payment
systems as part of their procurement process.
Additionally, since 1997 Mac-Gray has installed more than 25,000 smart
card laundry machines. Smart cards are the same size as credit or debit cards
and are capable of computational operations, as well as storing data and value
for use in cashless transactions. The stored value feature of smart cards is
used with Mac-Gray's laundry
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equipment to provide laundry users the convenience and security of cashless
transactions. Mac-Gray, which has consistently experienced increased usage at
existing facilities which have been equipped with smart card readers, believes
that these smart card based payment technologies may also be used to increase
revenue by facilitating modest price increases and the implementation of
variable time pricing while also enhancing the ability to expand its existing
services and product offerings. The additional benefits associated with smart
card based transactions include reduced administrative burdens and expenditures,
reduced vandalism, improved security and more efficient revenue collections.
Mac-Gray believes that the availability of these technologies will also increase
laundry room usage and decrease the property owner's risk of lost resident
business to off-premises operators which, Mac-Gray believes, will further
enhance the attractiveness of smart card based payment systems to property
owners and managers.
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 also 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 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 and Texas.
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's laundry business has certain intrinsic characteristics in both
its industry and its customer base, these include:
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 more than 30,000 laundry rooms located in 32 states east of
the Rocky Mountains. 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, commission rates (including advance commissions) 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 and
several other independent-operators have chosen to grow by making
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. Mac-Gray believes that only Coinmach Laundry
Corporation ("Coinmach") and Web Service Company, Inc. ("Web") maintain
larger laundry machine bases than Mac-Gray.
2
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. The Company also purchases smart card based
equipment from Schlumberger, a manufacturer of card based electronic
transaction systems. The Company may choose to rely substantially in the
future on the Schlumberger technology and its relationship with
Schlumberger in general. A termination of, or substantial revision of the
terms of, the contractual arrangements or business relationships with
Maytag or Schlumberger 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 is a supplier of combination refrigerator/freezer/microwave ovens sold
under the brand name "MicroFridge", to multiple housing facilities such as
colleges and universities, military bases, hotels, motels and assisted living
facilities.
Mac-Gray believes that the addition of these items to its 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 Company currently owns approximately 46,000 MicroFridges in service
throughout the country.
The MicroFridge 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 as colleges and universities, military bases, hotels,
motels and assisted living facilities.
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 OEM arrangements with two primary
manufacturers, Sanyo E&E Corporation ("Sanyo") and Nisshin Industry Co. Ltd.
Sanyo has been the Company's principal supplier since Intirion was founded. The
principal patent underlying the MicroFridge product is held jointly by Intirion
and Sanyo. In December 1997, Sanyo signed a non-competition agreement with
Intirion 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 MicroFridge 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 MicroFridge'S rental business. The growth in
the MicroFridge rental business has been derived from both internal sales
efforts and acquisitions. Intirion 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 General Electric, Avanti, Tatung, Welbilt, Walmart, Sears,
Sanyo Fisher Sales and
3
several companies focused on the college rental marketplace.
Reprographics Services
On April 23, 1998, Mac-Gray acquired one hundred percent of the
outstanding capital stock of Copico, Inc. ( "Copico ").
Founded in 1978, Copico is a major provider of card and coin-operated
reprographics equipment and services to the academic and public library markets
primarily in New England, New York and Florida. Copico provides and services
copiers, laser printers and microform reader-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 operational and economic factors.
Information with regard to reportable business segments is reported under Note
16 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 Miami and
Tampa, Florida and Austell, Georgia consisting of 25,000, 12,000 and 12,000
square feet each, respectively. 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
Gainesville, Florida....................................... 750
Gurnee, Illinois........................................... 12,000
Houston, Texas............................................. 2,115
East Hartford, Connecticut................................. 14,900
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.
4
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.
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
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 1999.
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.
Year ended Year ended
---------- ----------
December 31, 1998 December 31, 1999
----------------- -----------------
Sales Prices Sales Prices
------------ ------------
High Low High Low
---- --- ---- ---
First Quarter........................$ 20 1/2 $ 15 3/8 $ 11 1/2 $ 8
Second Quarter....................... 17 3/4 12 3/8 9 1/4 7 1/4
Third Quarter........................ 14 15/16 9 10 6 1/2
Fourth Quarter....................... 12 1/2 7 3/4 6 1/2 3 1/4
- ----------
As of March 27, 2000 there were 190 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
Set forth below are selected historical financial data of Mac-Gray as of the
dates and for the periods indicated. The selected historical financial data of
Mac-Gray for the five years in the period ended December 31, 1999 were derived
from the historical consolidated financial statements of Mac-Gray that were
audited by PricewaterhouseCoopers LLP, whose report 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. On March 12, 1998, Mac-Gray acquired Intirion in a
transaction accounted for as a pooling of interests. The selected financial data
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.
Year ended December 31,
-------------------------------------------------------------
1995 1996 1997(1) 1998(2) 1999
--------- --------- --------- --------- ---------
Statement of Income Data:
Revenue ............................................... $ 66,352 $ 82,260 $ 104,847 $ 137,177 $ 148,563
Cost of revenue
Commissions ......................................... 20,471 25,760 31,717 41,699 47,293
Route expenditures .................................. 8,251 10,971 12,449 21,561 24,866
Depreciation and amortization ....................... 5,455 7,060 9,725 13,349 18,202
Cost of equipment sales ............................. 12,234 15,408 22,021 24,828 24,686
--------- --------- --------- --------- ---------
Total cost of revenue ............................. 46,411 59,199 75,912 101,437 115,047
--------- --------- --------- --------- ---------
Operating Expenses:
General and administration .......................... 5,804 5,939 6,923 7,003 9,148
Sales and marketing ................................. 6,455 7,718 10,181 10,333 11,848
Depreciation ........................................ 639 783 753 909 905
Impairment of Goodwill .............................. -- -- -- -- 8,474
Merger-related Costs ................................ -- -- -- 1,144 --
--------- --------- --------- --------- ---------
Total operating expenses .......................... 12,898 14,440 17,857 19,389 30,375
--------- --------- --------- --------- ---------
Income from Operations ................................ 7,043 8,621 11,078 16,351 3,141
Interest expense, net ............................... (1,328) (2,354) (2,975) (3,920) (6,085)
Other income (expense), net ......................... 55 (87) 181 (122) 120
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes ....... 5,770 6,180 8,284 12,309 (2,824)
Provision for income taxes(3) ......................... (400) (514) (5,228) (5,222) (2,727)
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ 5,370 $ 5,666 $ 3,056 $ 7,087 $ (5,551)
Accretion and dividends on redeemable preferred stock . 240 240 320 62 --
--------- --------- --------- --------- ---------
Net income (loss) available to common stockholders .... $ 5,130 $ 5,426 $ 2,736 $ 7,025 $ (5,551)
========= ========= ========= ========= =========
Net income (loss) per common share--basic ............. $ 0.68 $ 0.72 $ 0.32 $ 0.56 $ (0.44)
========= ========= ========= ========= =========
Weighted average common shares outstanding ............ 7,554 7,554 8,449 12,524 12,661
========= ========= ========= ========= =========
Net income (loss) per common share--diluted ........... $ 0.67 $ 0.71 $ 0.31 $ 0.54 $ (0.44)
========= ========= ========= ========= =========
Weighted average common shares
outstanding--diluted .................................. 7,686 7,686 8,709 12,926 12,668
========= ========= ========= ========= =========
Other Financial Data:
EBITDA(4) ........................................... $ 13,192 $ 16,377 $ 21,737 $ 30,487 $ 30,842
Depreciation and amortization ....................... 6,094 7,812 10,481 14,258 19,107
Capital expenditures ................................ 8,121 10,010 11,584 20,729 21,819
Cash flows provided by operating activities ......... 10,364 15,768 10,473 16,890 21,004
Cash flows used in investing activities ............. (8,952) (24,338) (22,791) (70,270) (24,318)
Cash flows provided by (used in) financing activities (589) 7,516 13,248 55,787 3,699
Balance Sheet Data (at end of period):
Working capital ..................................... $ (3,311) $ (8,489) $ (4,041) $ (2,840) 2,113
Total assets ........................................ 46,785 66,217 97,843 171,520 180,965
Long-term debt, net of current portion .............. 12,125 23,473 5,395 69,664 83,728
Redeemable common and preferred stock ............... 3,947 4,187 12,304 -- --
Stockholders' equity ................................ 12,165 13,774 48,302 62,941 56,139
- ----------
(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.
7
(4) "EBITDA" is defined herein as income before provision for income taxes,
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 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.
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
laundry machines, operated in over 30,000 multiple housing laundry rooms located
in 32 states. Mac-Gray's reprographics business is concentrated in the
northeast, Florida and Texas. Mac-Gray's MicroFridge business consists of leased
units located throughout the United States as well as sales of its MicroFridge
product line.
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 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, economy 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 or through long term leases
directly with the universities.
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 liability. 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, Florida and Texas.
Copico provides and services copiers, laser printers and microform
reader-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
8
shares a facility with the MicroFridge Division of Mac-Gray in Walpole,
Massachusetts, and a facility in Miami, Florida with the Laundry Division.
Copico also has an operations facility in New York, New York.
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 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. Founded
in 1959, Amerivend had 1997 revenues of $17,600.
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".
Year 2000
The Year 2000 or "Y2K" problem stems from the fact that many computer
systems use only two digits when they refer to a year. It was widely believed
that when the calendar rolled to 2000 at the end of 1999 those computers and
systems that were not updated to handle a four digit year would begin to perform
calculations where the "00" in 2000 would be interpreted as 1900. During 1998
and 1999 the Company aggressively researched and tested potential Y2K problems
within its software and systems.
As a result of this research and testing and the Company's desire to improve its
overall information technology, the Company purchased several computer systems
and upgraded several other systems. The majority of this work was performed by
outside consultants and therefore represented capital expenditures.
The Company is not aware of any computer system on which it relies that was
impacted by the Y2K problem subsequent to year end. Additionally the Company has
not been impacted by any Y2K related problems experienced by any of the
Company's suppliers or vendors. The Company will continue to monitor its
computer systems, and those of suppliers and vendors providing services to the
Company throughout 2000 for any Y2K related problems.
Through the year ended December 31, 1999 the Company has not incurred
significant costs directly associated with Y2K evaluations and corrections. The
Company does not expect to incur significant costs moving forward to rectify any
Y2K issues.
Results of Operations (Dollars in thousands)
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.
Commissions. Commissions increased by $5,594 or 13%, to $47,293 for the
year ended December 31, 1999 from the year ended December 31, 1998. This overall
increase was primarily attributable to an increase in route revenue, since
commissions are generally paid based upon a percentage of revenue earned in the
Company's route locations. As a percentage of route revenue, commissions
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
9
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. Cost of product sales was 63% of sales revenue
for the year ended December 31, 1999 as compared to 66% 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.
General, Administration, Sales and Marketing Expenses. 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 expenses related to business expansion opportunities.
Impairment of Goodwill. Since the acquisition of Copico, Inc., the
reprographics division has not met expectations with respect to its
profitability and has produced operating losses. The Company acquired
Copico, Inc. in April 1998 for approximately $10,950 in cash and 250,000 shares
of Mac-Gray common stock, less 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.
The most significant reason for the poor performance of the division has been
the impact of technological advances in the past year which have affected the
entire reprographics industry. Specifically, the introduction of the internet in
college and public libraries, and access to free laser printers have 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 corrected 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, non-
recurring 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
10
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's statutory tax rate due to
non-deductible expenditures made in 1998 as a result of certain of the Company's
acquisitions. Additionally, goodwill recorded in connection with certain 1998
business acquisitions is not deductible for tax purposes. The increase in the
effective tax rate in 1999 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.
Fiscal year ended December 31, 1998 compared to fiscal year ended December 31,
1997
Due to the differing year ends of Mac-Gray and Intirion prior to the
combination, the year ended December 31, 1997 represents consolidated results
for the period from January 1997 through December 1997 for Mac-Gray consolidated
with the results for the period from July 1996 through June 1997 for Intirion.
Revenue. Revenue increased by $32,330, or 31%, to $137,177 for the year
ended December 31, 1998 from the year ended December 31, 1997. This increase is
related to an increase in route revenue, which is made up of money collected
through card and coin-operated equipment, of $26,149, or 39%, due to the
expansion of existing operations and the additional revenues from route
businesses acquired during 1998. Sales revenue increased $4,865, or 15%, from
the year ended December 31, 1997. This increase is primarily a result of
entering into new long-term lease contracts to provide MicroFridge and Laundry
products which have been recorded as sales type leases during 1998.
Commissions. Commissions increased by $9,982 or 31%, to $41,699 for the
year ended December 31, 1998 from year ended December 31, 1997. This overall
increase was primarily attributable to an increase in route revenue, since
commissions are generally paid based upon a percentage of revenue earned in the
Company's route locations. The slower rate of increase relative to route revenue
was attributable to average commission rates on accounts acquired through
acquisition during 1998 being lower than on accounts which existed in 1997.
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 $9,112, or 73%, to
$21,561 for the year ended December 31, 1998 from the year ended December 31,
1997. The increase was due, in part, to the general increase in revenue, which
resulted in increased servicing, collecting, counting and depositing activity,
and to the addition of branch locations as a result of acquisitions. The
increase was also attributable to acquisitions made during 1998 for which the
fixed and variable cost mix associated with route expenditures is different and
causes increases in route expenditures relative to route revenue to rise during
the slower periods of the year, including June through August.
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 $3,780,
or 36%, to $14,258 for the year December 31, 1998 from year ended December 31,
1997. The increase was primarily attributable to the acquisitions of businesses
during 1998 which resulted in additional machines to depreciate, as well as an
increase in amortization. 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 increased $2,807, or 13%, to
$24,828 for the year ended December 31, 1998 from the year ended December 31,
1997. This increase was consistent with an overall increase in sales revenue.
Merger Related Costs--Merger related costs of $1,144 were recognized
during the year ended December 31, 1998. These costs included legal, accounting,
severance, and other costs directly associated with the Intirion pooling
transaction.
Interest Expense. Interest expense, net of interest income, increased by
$945, or 32%, to $3,920 for the year ended December 31, 1998 from year ended
December 31, 1997 This increase is primarily related to an increase in
outstanding borrowings which are primarily related to the significant
acquisition activity during 1998.
11
Provision for Income Tax. The effective tax rate decreased from 63% to 42%
from the year ended December 31, 1997 to the year ended December 31, 1998. This
decrease is primarily related to significant deferred tax expenses recognized
during the fourth quarter of 1997 resulting from the Company's change from an S
corporation to a C corporation for income tax purposes. The provision for income
tax in 1998 is higher than the Company's statutory tax rate due to
non-deductible expenditures made in 1998 as a result of certain of the Company's
acquisitions. These expenditures include merger related costs and goodwill
expensed in 1998 that is not deductible for tax purposes. 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.
Liquidity and Capital Resources (In thousands)
Mac-Gray's primary sources of cash since December 31, 1998 have been
operating activities and bank borrowings. The Company's primary uses of cash
have been the purchase of new laundry machines, MicroFridge equipment,
reprographics equipment and smart card based payment systems. The Company also
used funds available to repurchase shares of common stock, and for laundry
business acquisitions. 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
which 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 $10,473, $16,890 and $21,004 for
years ended December 31, 1997, 1998 and 1999, 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 1998 to 1999 is
primarily attributable to an increase in depreciation and amortization which is
a non-cash expense.
Cash used in investing activities was $22,791, $70,270 and $24,318 for the
years ended December 31, 1997, 1998 and 1999, respectively. Mac-Gray invested
approximately $3,762 in connection with 1999 acquisitions, compared to $51,286
and $12,196 for acquisitions in 1998 and 1997, respectively. Capital
expenditures were $11,584, $20,729 and $21,819 for the years ended December 31,
1997, 1998 and 1999, respectively.
Cash flows from financing activities were $13,248, $55,787 and $3,699 for
the years ended December 31, 1997, 1998 and 1999, respectively. Financing
activities for those periods consist primarily of proceeds from and repayments
of bank borrowings, and capital stock transactions. The decrease in 1999 is
principally a result of fewer business acquisitions than in 1998 as well as
borrowing used to fund the repurchase of common stock and capital expenditures.
The Company's current loan agreement provides for maximum borrowing of
$90,000. As of December 31, 1999 the available balance was $7,811. Although the
Company expects to fund its operations, debt service obligations, internal
growth, and acquisitions through cash generated from operations and the
available loan balance, it may be necessary to postpone some capital spending or
acquisitions until adequate cash is generated from operations or a new credit
facility is obtained. In April 2001, the Company's current loan agreement
converts to a term loan, payable over two years. The Company was in compliance
with, or had received waivers for non-compliance with, the terms of the credit
agreement as of December 31, 1999.
Inflation
The Company does not believe that its financial performance has been
materially affected by inflation.
12
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, but are not limited to, the factors
described under "Risk Factors" in this report. Investors should carefully review
all of the factors described below, which may not be an exhaustive list of these
factors.
Risk Factors
A purchase of Mac-Gray common stock involves various risks. Investors should
consider the following 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 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 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 indebtedness could:
. require use of a substantial portion of cash flow from operations to make
payments on indebtedness, leaving less cash flow available for other purposes;
. materially limit or impair the Company's ability to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate or other purposes; and
. reduce flexibility to respond to changing business and economic conditions.
The 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:
. it will be able to continue to secure long-term exclusive leases with
customers on favorable terms;
. it will be able to successfully renew existing leases as they expire;or
. it will not experience a loss of business if property owners or management
companies choose to vacate
13
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 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:
. use of common stock as acquisition consideration may result in dilution
to stockholders;
. 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;
. 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
. 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 following risks in connection with finding, completing,
and successfully integrating acquisitions:
. the inability to effectively and efficiently integrate the assets of the
acquired businesses;
14
. the inability to increase the revenue and profit of the acquired business;
. 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
. 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 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 is used in the
laundry route business from Maytag Corporation. In addition, the Company derives
a significant amount of 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 of the agreements. The Company also currently purchases
substantially all of its smart card based equipment from Schlumberger
Technologies, Inc., a manufacturer of card-based electronic transaction systems.
In addition, the Company currently procures a substantial amount of the products
used by the MicroFridge division from a limited number of suppliers, including
Sanyo E&E Corporation. 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 Intirion, 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 Intirion,
Intirion 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 its existing insurance at a cost and
level of coverage comparable to that presently in effect, if at all. In the
event that Intirion 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
the 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.
Principal stockholders, directors and executive officers could exercise control
and prevent a sale or merger.
As of March 24, 2000, Mac-Gray's principal stockholders, directors and executive
officers and their affiliates beneficially owned in the aggregate approximately
67% of the outstanding shares of the Company's common stock. This percentage
ownership does not include options to purchase 418,530 shares of common stock
held by some of these persons, 236,017 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 specific provisions of 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 shareholders
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:
15
. 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,
. a classified board of directors serving staggered three-year terms;
. the elimination of stockholder voting by written consent;
. the absence of cumulative voting for directors;
. the removal of directors only for cause;
. 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;
. the vesting of exclusive authority in the board of directors, except as
otherwise required by law, to call special meetings of stockholders;
. advance notice requirements for stockholder proposals and nominations for
election to the board of directors; and
. 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.
. 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, 1999.
December 31, 1999
-----------------
Expected maturity date (In thousands)
-------------------------------------
There-
2000 2001 2002 2003 2004 after Total
---- ---- ---- ---- ---- ----- -----
Long-term Debt:
Fixed Rate............ $1,319 $822 $548 $951 $129 $173 $3,942
Average interest rate. 8.5% 8.4% 8.3% 8.0% 7.8% 7.8% -
Variable Rate......... $0 $6,083 $11,152 $63,870 $0 $0 $81,105
Average interest rate. 8.2% 8.2% 8.2% 8.2% - - -
On February 18, 2000, the Company took steps to mitigate interest rate risks
associated with variable interest rates by securing three and five year fixed
interest rate swaps for $20,000 each.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data are contained in pages F-1
through F-23 hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
16
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 2000 Annual Meeting of Stockholders
which will be filed with the Securities and Exchange Commission by April 29,
2000 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
On June 18, 1999, the Company filed a Form 8-K announcing the adoption of
a Shareholder Rights Agreement.
17
(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 (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 asterisk (*) was previously filed as an exhibit to
Mac-Gray's Registration Statement on Form S-4 (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 (z) was previously filed as an
exhibit to Mac-Gray's Registration Statement on Form S-3, as amended (No. 333-
49795) and the number in parentheses following the description of the exhibit
refers to the exhibit number in the Form S-3. Each exhibit marked by a (y) was
previously filed as an exhibit to Mac-Gray's Form 8-K (No. 001-13495) and the
number in parentheses following the description of the exhibit refers to the
exhibit number in the Form 8-K.
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. (10.24).*
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 Shareholders Rights Agreement, dated as of June 15, 1999, by and
between the Registrant and State Street Bank and Trust Company
(4.1)y
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.
18
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).+
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
21.1 Subsidiaries of the Registrant (21.1).z
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
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 30th day of
March, 2000.
MAC-GRAY CORPORATION
/s/ Stewart Gray MacDonald, Jr.
By:
-----------------------------------------------------
Stewart Gray MacDonald, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2000
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/ William M. Crozier Jr. Director March 30, 2000
- ---------------------------
William M. Crozier Jr.
/s/ Eugene B. Doggett Director March 30, 2000
- ---------------------------
Eugene B. Doggett
/s/ John P. Leydon Director March 30, 2000
- ---------------------------
John P. Leydon
/s/ Jerry A. Schiller Director March 30, 2000
- ---------------------------
Jerry A. Schiller
/s/ Michael J. Shea Executive Vice President, Chief March 30, 2000
- --------------------------- Financial Officer and
Michael J. Shea Treasurer (Principal Financial
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, 1998 and 1999.............. F-3
Consolidated Income Statements for the Years Ended
December 31, 1997, 1998 and 1999..................................... F-4
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31,1997, 1998, and 1999......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................................... F-6
Notes to Consolidated Financial Statements............................. F-7
The following consolidated financial statement schedules of Mac-Gray
Corporation are 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-23
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 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2000
F-2
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
----------------------
1998 1999
--------- ---------
Assets
Current assets:
Cash and cash equivalents .............................................. $ 6,181 $ 6,566
Trade receivables, net of allowance for doubtful accounts .............. 8,298 8,551
Inventory of finished goods ............................................ 5,266 6,521
Deferred income taxes .................................................. 487 637
Prepaid expenses and other current assets .............................. 6,241 8,859
--------- ---------
Total current assets ............................................... 26,473 31,134
Property, plant and equipment, net ..................................... 69,208 78,581
Intangible assets, net ................................................. 65,249 55,533
Prepaid commissions and other assets ................................... 10,590 15,717
--------- ---------
Total assets ....................................................... $ 171,520 $ 180,965
========= =========
Liabilities, Redeemable Stock and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ...................................... $ 1,433 $ 1,319
Current portion of capital lease obligations ........................... 1,011 1,089
Redeemable common stock (Note 4) ....................................... 7,644 --
Trade accounts payable ................................................. 4,950 12,521
Accrued commissions .................................................... 7,133 8,354
Accrued expenses ....................................................... 3,756 2,384
Deferred revenues and deposits ......................................... 3,386 3,354
--------- ---------
Total current liabilities .......................................... 29,313 29,021
Long-term debt ............................................................. 69,664 83,728
Long-term capital lease obligations ........................................ 895 693
Deferred income taxes ...................................................... 7,472 10,406
Deferred retirement obligation ............................................. 957 853
Other liabilities .......................................................... 278 125
Commitments and contingencies (Note 17) .................................... -- --
Stockholders' equity:
Preferred stock of Mac-Gray Corporation ($.01 par value, 5 million
shares authorized, no shares outstanding) .......................... -- --
Common stock of Mac-Gray Corporation ($.01 par value, 30 million
shares authorized, 12,843,728 issued and 12,781,628
outstanding at December 31, 1998 and 13,443,754 issued 12,627,753
outstanding at December 31, 1999 ................................... 128 134
Additional capital ..................................................... 60,896 68,540
Retained earnings (deficit) ............................................ 2,623 (2,935)
--------- ---------
63,647 65,739
Less common stock in treasury, at cost, 62,100 and 816,001 shares at
December 31, 1998 and 1999, respectively ........................... (706) (9,600)
--------- ---------
Total stockholders' equity ......................................... 62,941 56,139
--------- ---------
Total liabilities and stockholders' equity ................................. $ 171,520 $ 180,965
========= =========
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,
-----------------------------------
1997 1998 1999
--------- --------- ---------
Revenue:
Route revenue ....................................... $ 67,124 $ 93,273 $ 102,430
Sales revenue ....................................... 32,734 37,599 39,097
Other ............................................... 4,989 6,305 7,036
--------- --------- ---------
Total revenue ................................... 104,847 137,177 148,563
--------- --------- ---------
Cost of revenue:
Commissions ......................................... 31,717 41,699 47,293
Route expenditures .................................. 12,449 21,561 24,866
Depreciation and amortization ....................... 9,725 13,349 18,202
Cost of product sales ............................... 22,021 24,828 24,686
--------- --------- ---------
Total cost of revenue ........................... 75,912 101,437 115,047
--------- --------- ---------
Gross margin ............................................ 28,935 35,740 33,516
Operating expenses:
General and administration .......................... 6,923 7,003 9,148
Sales and marketing ................................. 10,181 10,333 11,848
Depreciation and amortization ....................... 753 909 905
Impairment of goodwill .............................. -- -- 8,474
Merger-related costs ................................ -- 1,144 --
--------- --------- ---------
Total operating expenses ........................ 17,857 19,389 30,375
--------- --------- ---------
Income from operations .................................. 11,078 16,351 3,141
Interest expense, net ............................... (2,975) (3,920) (6,085)
Other income (expense), net ......................... 181 (122) 120
--------- --------- ---------
Income (loss) before provision for income taxes...... 8,284 12,309 (2,824)
Provision for income taxes .......................... (5,228) (5,222) (2,727)
--------- --------- ---------
Net income (loss) ....................................... $ 3,056 $ 7,087 $ (5,551)
--------- --------- ---------
Accretion and dividends on redeemable preferred stock ... 320 62 --
--------- --------- ---------
Net income (loss) available to common stockholders ...... $ 2,736 $ 7,025 $ (5,551)
========= ========= =========
Net income (loss) per common share--basic ............... $ 0.32 $ 0.56 $ (0.44)
========= ========= =========
Weighted average common shares outstanding .............. 8,449 12,524 12,661
========= ========= =========
Net income (loss) per common share--diluted ............. $ 0.31 $ 0.54 $ (0.44)
========= ========= =========
Weighted average common shares outstanding--diluted ..... 8,709 12,926 12,668
========= ========= =========
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
------------ Retained
Number of Additional earnings
shares Value capital (deficit)
------ ----- ------- ---------
Balance, December 31, 1996 ................... 1,472,043 $ 167 $ 3,902 $18,377
Net income available to common
stockholders ............................ -- -- -- 2,736
Net change in unrealized gains (losses)
on available-for sale securities, net
of tax .................................. -- -- -- --
Comprehensive income .........................
Elimination of capital structure
(Note 1) ................................ (154,275) (154) (2,413) (6,363)
Reorganization of the Company
(Note 1) ................................ 6,367,800 64 -- (64)
Sale of Common stock (Note 5) ............. 4,600,000 46 45,128 --
Contribution of capital (Note 5) .......... -- -- 5,907 (5,907)
Dividends ................................. -- -- -- (13,124)
----------- ----- ------- -------
Balance, December 31, 1997 ................... 12,285,568 123 52,524 (4,345)
----------- ----- ------- -------
Net income available to common
stockholders (comprehensive
income) ................................. -- -- -- 7,025
Inclusion of Intirion's net equity
activity for the six months ended
December 31, 1997 ....................... -- -- (13) 15
Exchange of Intirion preferred shares
for Mac-Gray common stock ............... 275,224 3 3,821 --
Shares of Mac-Gray common stock
issued in connection with the Copico
acquisition ............................. 250,000 2 4,216 --
Intirion dividends paid ................... -- -- -- (72)
Options exercised ......................... 20,936 -- 187 --
Tax benefit associated with exercise of
certain options ......................... -- -- 8 --
Repurchase of common stock ................ (62,100) -- -- --
Expiration of put rights on redeemable
common stock ............................ 12,000 -- 153 --
----------- ----- ------- -------
Balance, December 31, 1998 ................... 12,781,628 128 60,896 2,623
----------- ----- ------- -------
Net loss to common
stockholders ............................ -- -- -- (5,551)
Repurchase of redeemable common stock ..... -- 6 7,639 --
Repurchase of common stock ................ (156,200) -- -- --
Stock granted and options exercised ....... 2,325 -- 5 (7)
----------- ----- ------- -------
Balance, December 31, 1999 ................... 12,627,753 $ 134 $68,540 $(2,935)
=========== ===== ======= =======
Net unrealized Treasury Stock
gains (losses) --------------
on security, Number
net of tax of shares Cost Total
---------- --------- ---- -----
Balance, December 31, 1996 ................... $ 258 54,275 $ (8,930) $ 13,774
Net income available to common
stockholders ............................ -- -- -- 2,736
Net change in unrealized gains (losses)
on available-for sale securities, net
of tax .................................. (258) -- -- (258)
--------
Comprehensive income ......................... 2,478
Elimination of capital structure
(Note 1) ................................ -- (54,275) 8,930 --
Reorganization of the Company
(Note 1) ................................ -- -- -- --
Sale of Common stock (Note 5) ............. -- -- -- 45,174
Contribution of capital (Note 5) .......... -- -- -- --
Dividends ................................. -- -- -- (13,124)
-------- -------- -------- --------
Balance, December 31, 1997 ................... -- -- -- 48,302
-------- -------- -------- --------
Net income available to common
stockholders (comprehensive
income) ................................. -- -- -- 7,025
Inclusion of Intirion's net equity
activity for the six months ended
December 31, 1997 ....................... -- -- -- 2
Exchange of Intirion preferred shares
for Mac-Gray common stock ............... -- -- -- 3,824
Shares of Mac-Gray common stock
issued in connection with the Copico
acquisition ............................. -- -- -- 4,218
Intirion dividends paid ................... -- -- -- (72)
Options exercised ......................... -- -- -- 187
Tax benefit associated with exercise of
certain options ......................... -- -- -- 8
Repurchase of common stock ................ -- 62,100 (706) (706)
Expiration of put rights on redeemable
common stock ............................ -- -- -- 153
-------- -------- -------- --------
Balance, December 31, 1998 ................... -- 62,100 (706) 62,941
-------- -------- -------- --------
Net loss to common
stockholders ............................ -- -- -- (5,551)
Repurchase of redeemable common stock ..... -- 600,026 (7,645) --
Repurchase of common stock ................ -- 156,200 (1,269) (1,269)
Stock granted and options exercised ....... -- (2,325) 20 18
-------- -------- -------- --------
Balance, December 31, 1999 ................... $ -- 816,001 $ (9,600) $ 56,139
======== ======== ======== ========
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,
------------------------
1997 1998 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) ................................................... $ 3,056 $ 7,087 $ (5,551)
Adjustments to reconcile net income (loss) to net cash flows provided
by operating activities:
Depreciation and amortization ................................... 10,481 14,258 19,107
Impairment of goodwill .......................................... -- -- 8,474
Allowance for doubtful accounts ................................. 136 (199) 104
Loss (gain) on sale of assets ................................... (178) 49 (352)
Deferred income taxes ........................................... 4,235 2,227 2,784
Increase in accounts receivable ................................. (2,041) (1,220) (357)
Decrease (increase) in inventory ................................ (2,149) 3,808 (1,255)
Increase in prepaid expenses and other assets ................... (3,009) (10,681) (9,185)
Increase (decrease) in accounts payable, accrued commissions
and accrued expenses .......................................... (65) 588 7,267
Increase in deferred revenues and customer deposits ............. 7 973 (32)
-------- -------- --------
Net cash flows provided by operating activities .............. 10,473 16,890 21,004
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ................................................ (11,584) (20,729) (21,819)
Acquisition of businesses (Notes 3 and 4) ........................... (12,196) (51,286) (3,539)
Proceeds from sale of property and equipment ........................ 656 1,745 1,040
Proceeds from sale of securities .................................... 333 -- --
-------- -------- --------
Net cash flows used in investing activities ................. (22,791) (70,270) (24,318)
-------- -------- --------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations ............ (3,658) (2,709) (2,857)
Retirement of line-of-credit and term loan .......................... (19,512) -- --
Advances on line-of-credit, net ..................................... 4,668 59,354 15,445
Contribution of capital and proceeds from sale of common stock ...... 45,174 187 20
Cash dividends paid ................................................. (13,124) (72) --
Cash paid to repurchase shares of common stock ...................... -- (706) (8,909)
Cash paid for refinancing of long term debt ......................... (300) (267) --
-------- -------- --------
Net cash flows provided by financing activities ............. 13,248 55,787 3,699
-------- -------- --------
Increase in cash and cash equivalents ................................... 930 2,407 385
Cash and cash equivalents, beginning of period .......................... 2,844 3,774 6,181
-------- -------- --------
Cash and cash equivalents, end of period ................................ 3,774 6,181 6,566
======== ======== ========
Supplemental cash flow information:
Interest paid ....................................................... 3,272 3,851 7,020
Income taxes paid ................................................... 1,116 3,362 (5)
Supplemental disclosure of non cash investing activities (Note 7)
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. Basis of Presentation and Description of the Business
Basis of Presentation--The historical financial statements include the
combined accounts of Mac-Gray Co., Inc. and Mac-Gray, L.P. On April 17, 1997,
Mac-Gray Co., Inc. and Mac-Gray, L.P. were reorganized to create Mac-Gray
Corporation ("Mac-Gray" or the "Company"). The consolidated financial statements
for the current fiscal year include the accounts of Mac-Gray Corporation and its
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Description of the Business--The company generates the majority of its
revenue from card and coin-operated laundry rooms located in the Northeastern,
Midwestern and Southeastern 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 majority of the Company's purchases
of coin route laundry equipment is from one supplier.
2. Impairment of Goodwill
Since the acquisition of Copico, Inc., the reprographics division has
produced operating losses. The Company acquired Copico, Inc. in April 1998 for
approximately $10,950 in cash and 250,000 shares of Mac-Gray common stock, less
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.
The most significant reason for the poor performance of the division has
been the impact of technological advances, which have effected the entire
reprographics industry. Specifically, the introduction of the internet in
college and public libraries, and access to free laser printers has led to fewer
vended copies being made than in prior years.
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.
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 of $8,474, or $0.67 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." Accordingly, the Company used a discounted
cash flow model to calculate the amount of the impairment charge after it was
determined that pre writedown, the carrying amount of the Copico long lived
assets exceeded the estimated undiscounted future cash flows expected to result
from operating this division.
3. 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.
Due to the differing year ends of Mac-Gray and Intirion, financial
information for dissimilar periods has been
F-7
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
combined in the consolidated financial statements. As such, the historical
annual financial statements were restated by combining the June 30 financial
statements of Intirion with the December 31 financial statements of Mac-Gray.
Intirion's results of operations and cash flows for its twelve months ended June
30, 1996 and 1997 were combined with Mac-Gray's results of operations and cash
flows for the years ended December 31, 1996 and 1997, and Intirion's balance
sheet at June 30, 1997 was combined with Mac-Gray's balance sheet at December
31, 1997. As such, results of operations for Intirion for the six months ended
December 31, 1997 (including revenue and net income of $13,355 and $289,
respectively) were not included in the consolidated statement of operations for
the year ended December 31, 1997.
No adjustments to the net assets of the combining companies were required
to adopt the same accounting practices and there were no inter company
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.
The following table reconciles the revenues and net income previously
reported by Mac-Gray prior to the Intirion combination to the results currently
reported in the 10-K.
Year Ended December 31,
-----------------------
1996 1997
---- ----
Net Revenues:
Mac-Gray ......................... $ 64,427 $ 81,370
Intirion ......................... 17,833 23,477
-------- --------
$ 82,260 $104,847
======== ========
Net Income:
Mac-Gray ......................... $ 5,527 $ 2,686
Intirion ......................... 139 370
-------- --------
$ 5,666 $ 3,056
======== ========
4. 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 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.
F-8
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
The following supplemental pro forma financial information reflects the
Amerivend acquisition as if it occurred on January 1, 1997.
Unaudited Unaudited
Supplemental Pro Supplemental Pro
Forma Results Forma Results
for for
the year ended the year ended
December 31, December 31,
1997 1998
---------------- ----------------
Revenue ........................................................ $ 122,474 $ 142,063
Net income ..................................................... $ 4,251 $ 7,615
Net income available to common stockholders .................... $ 3,931 $ 7,553
Net income per share--basic .................................... $ 0.47 $ 0.60
Net income per share--diluted .................................. $ 0.45 $ 0.58
In 1998, the Company also acquired certain assets of several coin-operated
laundry and MicroFridge(R) 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.
On April 17, 1997, the Company acquired, in exchange for 612,026 shares of
its common stock, (approximate value of $7,797), approximately $2,170 in cash,
$850 of a deferred payment obligation, and the assumption of approximately
$2,787 in debt, each of Sun Services of America, Inc. and R. Bodden Coin-Op
Laundry, Inc. (collectively, "Sun Services"). The shares of the Company's common
stock were redeemable at the election of the shareholder. The redeemable common
stock was valued at a contractual put price of $12.74 per common share (which
was in excess of market as of that date). In December 1998, the shareholder
exercised his put right on his remaining holdings, 600,026 shares. In January
1999, the Company paid $7,645 to the shareholder in exchange for these shares.
The amount payable to the shareholder at December 31, 1998 is recorded as a
current liability on the balance sheet at December 31, 1998. Sun Services of
America, Inc. and R. Bodden Coin-Op Laundry were 100% owned by the same
shareholder. These acquisitions were accounted for pursuant to the purchase
method of accounting, and resulted in goodwill of approximately $11,600.
In October and November, 1997, the Company acquired certain assets of two
additional coin-operated laundry businesses for approximately $7,150. 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. Purchase price in excess of
the fair value of assets acquired was allocated to goodwill and amounted to
approximately $6,228.
The Company's consolidated financial statements include the results of the
1997, 1998, and 1999 acquisition from their respective acquisition dates.
5. Initial Public Offering of Common Stock
Mac-Gray Corporation completed its initial public offering of 4,600,000
shares of common stock at $11 per share on October 22, 1997. The net proceeds
from the sale of the common stock of $45,174 were used primarily to repay
existing indebtedness outstanding under the 1997 Senior Secured Credit Facility
(Note 12) and to fund a distribution of $9,000 of previously taxed but
undistributed earnings to the Company's shareholders of record as of October 16,
1997. As a result of the initial public offering, the Company's S corporation
status was terminated. Retained earnings of $5,907 as of that date were
reclassified to additional paid-in capital to reflect additional contributions
of capital by the S-corporation shareholders.
F-9
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
6. Significant Accounting Policies
Cash, Cash Equivalents and Available-For-Sale Security--The Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The Company invests excess cash in repurchase
agreements and other highly liquid short-term investments. Accordingly, the
investments are subject to minimal credit and market risk. At December 31, 1997
the Company held short-term investments under repurchase agreements of $904.
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, 1998 and 1999 the Company had $3,391 and $8,824, respectively, in
receivables related to sales type leases. These receivables have been recorded
net of unearned interest income of $1,276 and $2,553 at December 31, 1998 and
1999, respectively. 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. These amounts 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 $309 at December 31, 1998 and $413 at December 31, 1999.
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. To minimize this risk, ongoing credit evaluations of customers'
financial condition are performed and reserves are maintained. The Company
typically does not require collateral.
Fair Value of Financial Instruments--For purposes of financial reporting,
the Company has determined that the fair value of financial instruments
approximates book value at December 31, 1998 and 1999, 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 commissions--Prepaid commissions 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 (Note 4). 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
F-10
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
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--Mac-Gray Co., Inc. which elected S corporation status, and
Mac-Gray, L.P. were "pass through" entities for income tax purposes prior to the
reorganization on April 17, 1997. From April 17, 1997 through October 16, 1997,
Mac-Gray Corporation also elected S corporation status. Accordingly, earnings
and losses were included on the income tax returns of the respective equity
owners through October 16, 1997. On October 16, 1997, the Company's S
corporation status was terminated as a result of the initial public offering.
The Company accounts for income taxes utilizing the asset and liability
method as prescribed by Statement of Financial Accounting Standard 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 Standard No. 128, "Earnings
Per Share" (SFAS 128). SFAS 128 replaces APB Opinion No. 15 "Earnings Per Share"
and requires the presentation of basic earnings per share and diluted earnings
per share (EPS). Basic EPS includes no dilution and is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted EPS under APB 15. Diluted earnings per share has been calculated using
the treasury stock method.
Other comprehensive Income--In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standard 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. Accordingly, the components of comprehensive income include net
income and unrealized gains and losses on available-for-sale securities.
Reclassification adjustments and deferred taxes on unrealized gains and losses
on available-for-sale securities are not material.
7. Supplemental disclosures of non cash investing activities
During the years ended December 31, 1997 and 1998, common stock with an
approximate value of $7,797 and $4,218 was issued in connection with the
acquisitions of Sun Services and Copico, respectively.
F-11
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
No cash adjustment is reflected in the 1998 amounts for the period July 1
through December 31, 1997 for Intirion, since Intirion's ending cash balance at
June 30, 1997 and December 31, 1997 was $0.
During the years ended December 31, 1998 and 1999, the Company acquired
automobiles under capital lease agreements totaling $1,520 and $1,134,
respectively.
8. Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
December 31,
------------
1998 1999
---- ----
Prepaid commissions ........................ $1,269 $1,657
Prepaid supplies ........................... 2,037 2,360
Other ...................................... 2,935 4,842
------ ------
$6,241 $8,859
====== ======
9. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Estimated December
--------- --------
useful life 1998 1999
-------- ------- --------
Coin route equipment.................................. 10 years $93,515 $111,162
Rental equipment...................................... 7 years 11,496 13,185
Buildings and improvements............................ 15-39 years 9,173 10,462
Furniture, fixtures and computer equipment............ 2-7 years 5,461 6,170
Trucks and autos...................................... 3-5 years 4,046 4,880
Tooling costs......................................... 3 years 306 306
Land and improvements................................. -- 403 403
------- -------
124,400 146,568
Less: accumulated depreciation........................ 58,518 70,512
------- -------
65,882 76,056
Coin route equipment not yet placed in service........ 3,326 2,525
------- -------
Property, plant and equipment, net.................... $69,208 $78,581
======= =======
Depreciation and amortization of property, plant and equipment totaled
$7,683, $10,588, and $14,587 for the years ended December 31, 1997, 1998, and
1999, respectively.
At December 31, 1998 and 1999, truck and autos included $3,604 and $4,438,
respectively, of capital leased equipment with an accumulated amortization
balance of $1,510 and $2,544, respectively.
F-12
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
10. Intangible Assets
Intangible assets consist of the following:
December 31,
------------
1998 1999
------- -------
Goodwill ................................... $65,627 $59,172
Covenants-not-to-compete ................... 3,806 4,981
Customer lists ............................. 2,352 2,477
Other ...................................... 908 867
------- -------
72,693 67,497
Less: accumulated amortization ............. 7,444 11,964
------- -------
Intangible assets, net ..................... $65,249 $55,533
======= =======
Amortization expense associated with the above intangible assets amounted to
$1,912, $3,670 and $4,520 for the years ended December 31, 1997, 1998 and 1999,
respectively.
11. Accrued Expenses
Accrued expenses consist of the following:
December 31,
------------
1998 1999
------ ------
Accrued interest ..................................... $ 450 $ 45
Accrued salaries ..................................... 314 513
Warranty ............................................. 158 158
Current portion of deferred retirement obligation .... 104 104
Current portion of deferred payment obligation ....... 196 --
Other ................................................ 2,534 1,564
------ ------
$3,756 $2,384
====== ======
12. Deferred Retirement Obligation
The deferred retirement obligation at December 31, 1998 and 1999
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.
F-13
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
13. Long-term Debt
Long-term debt consists of the following:
December 31,
------------
1998 1999
------- -------
1998 Senior Secured Credit Facility ................................. $65,660 $81,105
Various fixed interest rate notes, (8.4%-11.5%) due through June .... 1,173 1,055
1, 2003 Variable rate note, lesser of prime rate plus 2% or 9%,
quarterly principal payments beginning January 1, 1996 ............ 1,503 805
Discount note, 6% imputed interest rate (estimated fair market rate),
quarterly installments, due December 31, 2003 ..................... 1,940 1,363
Acquisition note payable, 8% imputed interest rate (estimated fair
market rate), monthly payments, due May 31, 2006 .................. 821 719
------- -------
Total long-term debt ................................................ 71,097 85,047
Less: current portion ............................................... 1,433 1,319
------- -------
$69,664 $83,728
======= =======
Credit Agreement and Revolving Credit Facility
On April 23, 1998, the outstanding debt under the 1997 Senior Secured
Credit Facility was refinanced under a new revolving line of credit and term
loan facility (the "1998 Senior Secured Credit Facility"). The 1998 Senior
Secured Credit Facility provides for borrowings under a revolving line of credit
of up to $90,000, and converts to a term loan after three years for the
outstanding balance at the date of conversion. Outstanding indebtedness under
the 1998 Senior Secured Credit Facility bears interest, at the Company's option,
at a rate equal to the (i) prime rate minus .5%, or (ii) LIBOR plus the
applicable margin (either (a) 1.5% for loans outstanding which aggregate less
than $50,000, or (b) 1.75% for loans outstanding which exceed $50,000), or the
rate at which funds were offered in the secondary market ("Cost of Funds") plus
the applicable margin. At December 31, 1999 the interest rate was approximately
7.8%.
The 1998 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 1998 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 1998
Senior Secured Credit Facility imposes certain financial and operational
covenants on the Company, including restrictions on indebtedness, certain
capital expenditures, investments and acquisitions and on the Company's ability
to pay dividends, to make distributions and to repurchase stock. At December 31,
1999 outstanding letters of credit amounted to $1,084. The available balance
under the 1998 Senior Secured Credit Facility was $7,811 at December 31, 1999.
The Company was in compliance with, or had received waivers for non-compliance
with, the terms of the credit agreement as of December 31, 1999.
The 1998 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.
F-14
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
Future Payments
As of December 31, 1999, the scheduled future principal payments of
long-term debt are as follows:
2000........................................................... $ 1,319
2001........................................................... 4,905
2002........................................................... 10,740
2003........................................................... 67,781
2004........................................................... 129
Thereafter..................................................... 173
-------
$85,047
=======
14. Income Taxes
On October 16, 1997, the Company's S corporation status was automatically
terminated due to the initial public offering (Note 5). As a result, the 1997
provision includes a charge of $4,037 to provide for net deferred tax
liabilities resulting from the change in income tax status from an S corporation
to a C corporation, in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The following information
relates to the temporary differences at October 16, 1997.
Accounts receivable $ (627)
Fixed assets 16,051
Deferred compensation (3,415)
Other (147)
-------
Total $11,862
=======
Prior to October 16, 1997, the historical income tax provision was
established only to provide for income taxes in states that did not recognize
Subchapter S corporations, using a statutory income tax rate of 6%. The
effective rate differed from the statutory rate in 1996 and 1997 (prior to
October 16, 1997) due to meals and entertainment expenses and goodwill
amortization recorded for book purposes that are not deductible for income tax
purposes.
The provision for state and federal income taxes consists of the
following:
Years ended December 31,
---------------------------------
1997 1998 1999
---- ---- ----
Current state income tax ......... $ 460 $ 621 $ 106
Deferred state income tax ........ 505 462 611
Current federal income tax ....... 533 2,374 (163)
Deferred federal income tax ...... 3,730 1,765 2,173
------- ------- -------
Total income taxes ........... $ 5,228 $ 5,222 $ 2,727
======= ======= =======
F-15
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
The net deferred tax liability in the accompanying balance sheets includes
the following amounts of deferred tax assets and liabilities at December 31:
1998 1999
---- ----
Deferred tax assets:
Federal and State Net operating loss carryforwards $ 977 $ 739
Alternative minimum tax credit carryforwards 50 1,072
Accounts receivable 123 162
Deferred compensation 1,150 939
Amortization 271 216
Deferred Revenue -- 227
Other 216 127
--------------------------
2,787 3,482
--------------------------
Deferred tax liabilities:
Fixed assets 9,285 11,797
Sales type leases 487 1,454
--------------------------
9,772 13,251
--------------------------
Net deferred tax liabilities $ 6,985 $ 9,769
==========================
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 years ended December 31, 1998 and 1999, the statutory income tax
rate differed from the effective rate primarily as a result of the following
differences:
1998 1999
---- ----
Taxes computed at federal statutory rate 34.0% (34.0%)
State income taxes, net of federal benefit 5.7 (5.3)
Non-deductible goodwill 2.9 18.1
Impairment of nondeductible goodwill - 117.8
Non-deductible merger related costs 2.4 -
Change in valuation allowance on deferred tax
asset (3.0) -
Other .4 -
---------- ----------
Income tax provision 42.4% 96.6%
========== ==========
As the Company maintained its S corporation election through October 16,
1997, the provision for income taxes recorded for the year ended December 31,
1997 differs significantly from the amount of income taxes determined by
applying the applicable U.S. statutory federal income tax rate to pretax income.
For the period subsequent to the termination of the S corporation, the statutory
income tax rate differed from the effective rate primarily as a result of the
following differences:
%
-
Taxes computed at federal statutory rate 34.0%
State income taxes, net of federal benefit 2.3
Other (1.0)
-------------
Income tax provision 35.3%
=============
The current provision for income taxes recorded for fiscal 1997 includes
$314 in tax while the Company was an S corporation and $679 in tax for the
period subsequent to the termination of the S corporation election.
F-16
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
At December 31, 1999, 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 ended June 30, 1995 $ 931
Net operating loss carryforwards relating to certain losses
incurred in the year ended December 31, 1999 387
-------------
$ 1,318
=============
At December 31, 1999, 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 ended June 30, 1995 $ 105
Net operating loss carryforwards relating to certain losses
incurred in the year ended December 31, 1999 3,545
-------------
$ 3,650
=============
Since the $931 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, 1999, the amount of this loss
available is $474. The remaining $457 will become available as follows:
Year ended:
December 31, 2000 $ 304
December 31, 2001 153
-----------------
$457
=================
Subsequent ownership changes could further affect the limitations in
future years. 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 carryforward from the year ended December 31, 1999 expires 20 years from
the year in which it was incurred.
15. 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. As discussed
in note 4, during 1999 the Company repurchased 600,012 shares for approximately
$7,645 from a shareholder.
16. Segment Information
The Company operates three business units which are based on the Company's
different product and service categories: Laundry, MicroFridge(R) and
Reprographics. These three business units have been aggregated into two
reportable segments ("Laundry and Reprographics" and "MicroFridge"(R)). The
Laundry and Reprographics business units have been aggregated into one
reportable segment (Laundry and Reprographics) since these divisions are
affected by similar operating and 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(R) 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.
The table below presents information about the reported operating income
of Mac-Gray's segments for the years ended December 31, 1999, 1998 and 1997.
F-17
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
Year ended December 31, 1999
----------------------------
Laundry
and
Reprographic MicroFridge(R) 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, 1998
----------------------------
Laundry
and
Reprographic MicroFridge(R) 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, 1997
----------------------------
Laundry
and
Reprographic MicroFridge(R) Total
------------ -------------- -----
Revenues .................... $81,370 $23,477 $104,847
Gross margin ................ 20,599 8,336 28,935
Depreciation and amortization 8,635 1,343 9,978
Capital expenditures ........ 8,064 2,903 10,967
Total assets ................ $76,478 $13,599 $ 90,077
The following are reconciliations to corresponding totals in the
accompanying consolidated financial statements:
1997 1998 1999
-------- -------- --------
Income (loss)
Total gross margin for reportable segments $ 28,935 $ 35,740 $ 33,516
Operating expenses ....................... (17,857) (19,389) (30,375)
Interest expense, net .................... (2,975) (3,920) (6,085)
Other income (expense), net .............. 181 (122) 120
-------- -------- --------
Income (loss) before provision for
income taxes ................................ $ 8,284 $ 12,309 $ (2,824)
======== ======== ========
1997 1998 1999
-------- -------- --------
Depreciation and amortization
Total for reportable segments ............ $ 9,978 $ 13,691 $ 18,649
Corporate ................................ 503 567 458
-------- -------- --------
Total depreciation and amortization .......... $ 10,481 $ 14,258 $ 19,107
======== ======== ========
1997 1998 1999
-------- -------- --------
Capital expenditures
Total for reportable segments ............ $ 10,967 $ 18,735 $ 21,021
Corporate ................................ 617 1,994 798
-------- -------- --------
Total capital expenditures ................... $ 11,584 $ 20,729 $ 21,819
======== ======== ========
F-18
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
1997 1998 1999
-------- -------- --------
Assets
Total for reportable segments $ 90,077 $142,821 $148,563
Corporate (1) ............... 7,195 28,212 31,765
Deferred income taxes ....... 571 487 637
-------- -------- --------
Total assets .................... $ 97,843 $171,520 $180,965
======== ======== ========
(1) Principally cash, prepaid expenses, property, plant & equipment.
17. 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,
2000....................................... $ 1,060 $ 567
2001....................................... 622 403
2002....................................... 149 76
2003....................................... -- 47
2004 and thereafter........................ -- 57
------- -------
Future lease payments...................... 1,831 $ 1,150
=======
Less: amount representing interest
(6.4% at December 31, 1999).................. 49
-------
1,782
Present value future minimum lease
payments less amounts due within one year..... 1,089
-------
Amounts due after one year....................... $ 693
=======
Rent expense incurred by the Company under non-cancelable operating leases
totaled $675, $604, and $875 for the years ended December 31, 1997, 1998 and
1999, respectively.
Guaranteed Commission Payments--The Company operates coin laundry routes
under various lease agreements in which the Company is required to make minimum
guaranteed commission payments to the respective property owners. The following
is a schedule by years of future minimum guaranteed commission payments required
under these lease agreements that have initial or remaining non-cancelable
contract terms in excess of one year as of December 31, 1999:
2000.................................................. $ 4,538
2001.................................................. 3,590
2002.................................................. 2,823
2003.................................................. 2,205
2004.................................................. 1,574
Thereafter............................................ 3,230
-------
$17,960
=======
Litigation--The Company is involved in various litigation proceedings
arising in the normal course of
F-19
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
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.
18. 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 $285, $581 and $597, for the years ended December 31,
1997, 1998 and 1999, respectively.
Stock Option and Incentive Plans--In December 1996, the Board of Directors
of Mac-Gray Co., Inc. adopted, and the stockholders approved, the Mac-Gray Co.
Inc., 1996 Stock Option and Incentive Plan (the "Predecessor Plan"). On April 7,
1997, the Board of Directors adopted, and the Company's stockholders approved
the 1997 Stock Option and Incentive Plan for the Company (the "1997 Stock
Plan"). The 1997 Stock Plan is designed and intended as a performance incentive
for officers, employees, consultants and directors to promote the financial
success and progress of the Company. All officers, employees and independent
directors are eligible to participate in the 1997 Stock Plan. Awards, when made,
may be in the form of stock options, restricted stock, unrestricted stock
options, and dividend equivalent rights. The 1997 Stock Plan requires the
maximum term of options to be ten years.
On December 30, 1996, Mac-Gray Co., Inc. granted 556,350 options to
purchase shares of common stock with an exercise price of $9.99 per share
pursuant to the Predecessor Plan. Concurrent with the reorganization of the
Company, the options issued pursuant to the Predecessor Plan were assumed by the
Company under the 1997 Stock Plan, and the Predecessor Plan was terminated. The
exercise price of the options was adjusted to $8.80 in August 1997, in order to
restore the economic position of the option holders as a result of the $9,000
distribution (Note 6). The change in the exercise price of these options has
been reflected as a cancellation of the $9.99 options and a grant of the $8.80
options on the following option rollforward. Employee options principally vest
so that twenty percent (20%) of the options will become exercisable on each of
the first through fifth anniversaries of the date of grant of the options. In
the event of termination of the optionees' relationship with the Company,
options not yet exercised terminate within 90 days. The 1997 Stock Plan also
provided for the automatic grant to each of the independent directors to
purchase 1,000 shares of common stock. The non-qualified options granted to
independent directors were exercisable immediately and will terminate on the
tenth anniversary of the grant. The exercise prices were determined by the Board
of Directors to be the fair market value of the shares underlying the options on
the respective dates of the grants. Other than the stock option grants, there
were no other grants of equity-based compensation awards.
The 1997 Stock Plan provides for the issuance of up to the greater of
750,000 shares of common stock or ten percent of the then outstanding shares of
common stock. Subsequent to the initial public offering (Note 6), a total of
1,158,000 shares of common stock are reserved for issuance under the 1997 Stock
Plan, of which approximately 900,000 shares are subject to outstanding options
and 258,000 remaining available for issuance.
F-20
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
The following is a summary of stock option plan activity:
1998 1999
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
Outstanding, beginning of year 638,590 $ 8.88 890,940 $ 10.09
Granted ...................... 461,120 $ 13.17 176,935 $ 9.01
Exercised .................... (20,936) $ 8.94 (630) $ 8.82
Canceled ..................... -- -- -- --
Forfeited .................... (187,834) $ 13.67 (167,296) $ 10.60
-------- -------- -------- --------
Outstanding, end of year ..... 890,940 $ 10.09 899,949 $ 9.80
======== ======== ======== ========
Exercisable, end of year ..... 229,062 $ 9.82 424,679 $ 9.50
======== ======== ======== ========
Options Outstanding Options Exercisable
-------------------------- -------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
at 12/31/99 Life Price at 12/31/99 Price
----------- ---- ----- ----------- -----
$7.94-$9.25.................. 682,719 7 $ 8.79 369,932 $ 8.77
$11.00-$15.13................ 168,980 9 $ 11.85 28,497 $ 12.30
$16.03-$17.00................ 48,250 8 $ 16.44 26,250 $ 16.58
------- - ------- ------- -------
899,949 8 $ 9.78 424,679 $ 9.50
======= = ======= ======= =======
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 ($6,172) or $0.47
and ($0.48) per share in 1998 and 1999, respectively compared to reported net
income of $7,097, and ($5,551), or $0.54 and ($0.44) per share in 1998 and 1999,
respectively.
December 31,
------------
1998 1999
---- ----
Fair value of options granted at grant date...... $8.33 $5.68
Risk free interest rate.......................... 5.1% 5.3%
Expected option term--Employees.................. 7 years 7 years
Expected option term--independent directors...... 3 years 3 years
Expected volatility.............................. 60% 50%
Option valuation method.......................... Black-Scholes
option-pricing model
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-21
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share and per share data)
19. Earnings per Share
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 stockholders--basis... $ (5,551) 12,661 $ (0.44)
======== ========= =======
Effect of dilutive securities:
Stock options.................................. 7
---------
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 stockholders--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
======= ========= =======
For the year ended 1997
-----------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income......................................... $ 3,056
Less: Accretion and dividends on redeemable
preferred stock.................................. (320)
-------
Net income available to common stockholders--basic. $ 2,736 8,449 $ 0.32
======= ========= =======
Effect of dilutive securities:
Stock options.................................. 128
Contingent shares.............................. 132
---------
Net income available to common stockholders--diluted $ 2,736 8,709 $ 0.31
======= ========= =======
F-22
MAC-GRAY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998, and 1997
Balance Charged to Balance
Beginning Cost and at End
of Year Expenses(1) Deductions of Year
------- ----------- ---------- -------
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) --
Year Ended December 31, 1997:
Allowance for doubtful accounts.............. 372 205 (69) 508
Valuation allowance for deferred tax asset... 503 -- (133) 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-23