MAC-GRAY CORP
Filing Type: 10-K
Description: Annual Report
Filing Date:
Period End: Dec 31, 2001
Primary Exchange: New York Stock Exchange
Ticker: TUC
Table of Contents
PART I .................................................................2
ITEM 1. BUSINESS ..................................................3
ITEM 2. PROPERTIES ..................................................7
TABLE 1 .................................................................7
ITEM 3. LEGAL PROCEEDINGS .........................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....9
PART II ................................................................10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY ................10
ITEM 6. SELECTED FINANCIAL DATA ................................11
Statement of Income ...................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS ...................13
REVENUE ................................................................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..........26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS .......26
PART III ...............................................................27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS ......................27
ITEM 11. EXECUTIVE COMPENSATION ..................................27
ITEM 12. SECURITY OWNERSHIP .......................................27
ITEM 13. CERTAIN RELATIONSHIPS .....................................27
PART IV .................................................................27
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS .........................27
ITEMS 14(a)(1) AND (2) ...............................................31
REPORT OF INDEPENDENT ACCOUNTANTS ..............................32
CONSOLIDATED BALANCE SHEETS .....................................33
CONSOLIDATED INCOME STATEMENTS .................................34
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ..............35
CONSOLIDATED STATEMENTS OF CASH FLOWS .........................36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................37
1. DESCRIPTION OF THE BUSINESS ..................................37
2. SIGNIFICANT ACCOUNTING POLICIES ..............................37
3. IMPAIRMENT OF GOODWILL ..........................................40
4. PURCHASE ACQUISITIONS ............................................41
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS ..................41
6. PREPAID ROUTE RENT AND OTHER ASSETS ...........................41
7. PROPERTY, PLANT AND EQUIPMENT .............................42
8. INTANGIBLE ASSETS ................................................42
9. ACCRUED EXPENSES ...................................................43
10. DEFERRED RETIREMENT OBLIGATION ..............................43
11. LONG-TERM DEBT ..................................................43
12. INCOME TAXES ....................................................45
13. REPURCHASE OF COMMON STOCK ....................................47
14. SEGMENT INFORMATION ............................................47
15. COMMITMENTS AND CONTINGENCIES ................................49
16. EMPLOYEE BENEFIT AND STOCK PLANS ............................50
17. EARNINGS PER SHARE .............................................52
18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION ................53
SCHEDULE II ............................................................54
Exhibit 23.1 ............................................................55
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBER 1-13495
-------
MAC-GRAY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3361982
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
22 WATER STREET,
CAMBRIDGE, MASSACHUSETTS 02141
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 492-4040
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant as of March 28, 2002 was $44,283,827 based
on the last sales price of $3.50 per share as of March 28, 2002 on the NYSE.
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As of March 28, 2002, 12,652,522 shares of common stock of the
registrant, par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants' Proxy Statement for the Annual Meeting of
Stockholders to be held on May 22, 2002 are incorporated by reference into Part
III of this report.
PART I
FORWARD-LOOKING STATEMENTS
Some of the statements incorporated by reference or made in this report
under the captions "Risk Factors", "Business," and "Management Discussion and
Analysis" and elsewhere in this report or in documents incorporated by reference
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
When the Company uses the words "anticipate," "assume," "believe," "estimate,"
"expect," "intend," and other similar expressions in this report, it is
generally intended to identify forward-looking statements. Investors should not
rely on forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond the Company's
control and which could materially affect actual results, performance or
achievements. Factors that could cause actual results, performance or
achievements to differ materially from those expressed or implied by these
forward-looking statements include, without limitations, the factors described
under "Risk Factors" in Item 7 of this report, the discussion set forth below,
and the matters set forth in this Form 10-K generally. Investors should
carefully review all of the factors described herein which may not be an
exhaustive list of the factors.
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ITEM 1. BUSINESS
Mac-Gray was founded in 1927. Unless the context requires otherwise,
all references in this Report to Mac-Gray or the Company shall mean Mac-Gray
Corporation and its subsidiaries and predecessors, including (i) Mac-Gray
Services, Inc., a Delaware corporation, formerly known as Mac-Gray Co., Inc.
("Mac-Gray Co."), and Mac-Gray, L.P., a Delaware limited partnership (the
"Limited Partnership"), and (ii) businesses that Mac-Gray has acquired through
December 31, 2001 from their respective dates of acquisition.
The Company's revenues are derived from the operation of three business
segments: Laundry equipment services, MicroFridge(R) services and reprographics
services.
LAUNDRY SERVICES
Mac-Gray believes that it is among North America's largest suppliers of
card/coin-operated laundry equipment services in multi-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 or leases card/coin-operated washers and
dryers in approximately 31,000 multi-housing laundry rooms located in 30 states
and the District of Columbia. Mac-Gray also believes that it is the largest user
and purchaser of commercial laundry products manufactured by The Maytag
Corporation ("Maytag"), for both its own use and for resale.
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 service laundry rooms within a multi-housing
property in exchange for a percentage of the revenue collected (referred to
herein as "route rent"). Mac-Gray has been able to retain in excess of 98% of
its existing machine base, while also adding an average of approximately 4.0% to
its machine base through internally generated growth, during the past five
years. Mac-Gray believes that its ability to retain its existing machine base,
while growing that base through internally generated growth in machine
installations, is indicative of its service of, and attention to, property
owners and managers. The Company has also been able to provide its customers
with vending card and other technologies, and continues to invest in research
and development of such technologies. The property owner or manager is usually
responsible for maintaining and cleaning, as well as the security of the
premises and payment of the utilities. Mac-Gray leases space within a property,
in some instances improves the leased space with flooring, ceilings and other
improvements ("betterments"), and then installs and services the laundry
equipment and collects the revenue. Mac-Gray sets and adjusts the vending
pricing for its machines based upon local market conditions.
Mac-Gray is also a significant distributor for several major laundry
equipment manufacturers, primarily Maytag. As an equipment distributor, Mac-Gray
sells commercial laundry equipment to public laundromats, as well as to the
multi-unit housing industry. Mac-Gray is certified by the manufacturers to
service the commercial laundry equipment that it sells. Mac-Gray also sells
commercial laundry equipment directly to institutional purchasers, including
hospitals, restaurants and hotels, for use in their own on-premises laundry
facilities.
Mac-Gray also has 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 laundry rooms, as well as to customers (such as
hotels) who operate their own on-premises laundry equipment.
Mac-Gray manages its laundry route segment and its distribution and
servicing business from its corporate headquarters in Cambridge, Massachusetts,
where it has centralized its administrative, billing, marketing, purchasing and
machine refurbishing operations. Mac-Gray also operates sales and/or service
centers in Connecticut, Florida (three locations), Georgia, Illinois, Maine, New
York (two locations), North Carolina, Pennsylvania, Texas, and New Jersey.
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Mac-Gray's laundry segment has certain intrinsic characteristics in
both its industry and its customer base, including:
RECURRING REVENUE--Mac-Gray operates laundry equipment located in
multi-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 laundry route business as a result of past general
economic downturns, although there can be no assurance that this would be
the case in the future. Mac-Gray believes that many larger property owners
and managers may be even more inclined to out-source non-core operations,
such as laundry services, during economic downturns as they seek to control
capital expenditures while maximizing resident retention through the
availability of quality services and amenities.
DIVERSIFIED AND STABLE CUSTOMER BASE--Mac-Gray provides laundry
services to approximately 31,000 laundry rooms located in 30 states in the
Northeastern, Southeastern and Midwestern United States, as well as the
District of Columbia. Currently, no customer 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/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, route rent rates (including advance rents) and a range of
products and services. Mac-Gray believes that different types of customers
assign varied weight to each of these factors and that no one factor
materially influences a customer's selection of a laundry service provider.
Within any given geographic area, Mac-Gray may compete with local
independent operators, regional operators and multi-region operators. The
industry is highly fragmented; consequently, Mac-Gray has grown by
acquisitions, as well as through new machine placement. Mac-Gray believes
that it is the third largest card/coin-operated laundry services provider
in North America.
DEPENDENCE ON SUPPLIERS--The Company currently purchases a large
portion of the equipment that it utilizes in its Laundry segment from
Maytag. In addition, the Company derives a portion of its revenue, as well
as certain competitive advantages, from its position as a distributor of
Maytag commercial laundry products. Although the purchase and distribution
agreements between the Company and Maytag are terminable by either party
upon written notice, the Company has never had such an agreement terminated
by Maytag. A termination of, or substantial revision of the terms of, the
contractual arrangements or business relationships with Maytag could have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects.
MICROFRIDGE(R) SERVICES
On March 12, 1998, Mac-Gray acquired Intirion Corporation ("Intirion").
Intirion's business ("MicroFridge(R)") consists of supplying combination
refrigerator/freezer/microwave ovens under the brand name MicroFridge(R) to
multi-housing facilities such as colleges and universities, military bases,
hotels, motels and assisted living facilities.
The MicroFridge(R) product line is a family of patented combination
refrigerator/freezer/microwave ovens. The product's patented circuitry has
proven to be an important feature for those customers who have concerns about
electrical capacity and seek a safer alternative to hot plates and other cooking
or heating appliances. Historically, MicroFridge(R) sales efforts have been
focused on such "home-away-from-home" marketplaces as colleges and universities,
military bases, hotels, motels and assisted living facilities.
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Mac-Gray believes that this product line enhances the Company's ability
to provide multiple amenities to both its current customer base as well as
future customers seeking one source to fill multiple needs.
The MicroFridge(R) segment revenues are derived from both the sale and
rental of MicroFridge(R) units. Rental units are leased to institutions, or
individuals at institutions, on both long-term and annual bases. MicroFridge(R)
units are sold and leased to colleges and universities across the continental
United States. The academic living market is composed of more than 1,700
colleges and universities that have on-campus residence halls. 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(R) product line is available through government contract with the
General Services Administration and the U.S. Air Force. MicroFridge(R) products
have been installed at selected government facilities throughout the world.
MicroFridge(R) brand products are also sold to the hospitality lodging industry
and assisted living market throughout the continental United States, directly
and through an independent dealer network.
The MicroFridge(R) segment maintains original equipment manufacturer
("OEM") arrangements with three primary manufacturers, Haier America Trading,
LLC, Sanyo E&E Corporation, and Nisshin Industry Co. Ltd. In May of 2001, the
Company entered an agreement with Haier America Trading, LLC, whereby Haier
America became a principal supplier of MicroFridge(R) products. The principal
patent underlying the MicroFridge(R) product is held jointly by the
MicroFridge(R) segment and Sanyo. In 1997, Sanyo signed a non-competition
agreement with the MicroFridge(R) segment whereby Sanyo is precluded from
entering the MicroFridge(R) market, provided that certain minimum annual
quantities of products are purchased from Sanyo. The relationship the
MicroFridge(R) segment has established with its new supplier may have an impact
on the non-compete agreement. 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(R) segment 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(R). Although the MicroFridge(R) segment 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 exists local and regional competition in
the MicroFridge(R) rental business. Management believes that its expertise
gained from being the first entrant in the market enables it to compete
effectively against new entrants in the combination appliance business.
MicroFridge(R) principal competitors include Absocold, Avanti, General Electric,
Sanyo Fisher Sales, Sears, Tatung, Walmart, and several companies focused on the
college rental marketplace.
REPROGRAPHICS SERVICES
On April 23, 1998, Mac-Gray acquired the outstanding capital stock of
Copico, Inc. ("Copico").
Copico is a major provider of card/coin-operated reprographics
equipment and services to the academic and public library markets in New
England, New York, the Mid-Atlantic, Florida and the Midwest. Copico provides
and services copiers and laser printers for the libraries of colleges,
universities, graduate schools and public libraries. The reprographics services
segment represents less than 5% of the Company's total revenue.
In December 1999, the Company recorded an impairment charge of
$8,474,000 related to the long-lived assets, primarily goodwill, of the Copico
segment.
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EMPLOYEE BASE
The Company employs approximately 515 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(R) segment
employs part-time employees from time to time based on the seasonality of
MicroFridge(R) sales and rental operations in the college and university
marketplace.
SEGMENT INFORMATION
The Company operates three business segments, which are based on the
Company's different product and service categories: laundry (including route and
equipment sales), MicroFridge(R) and reprographics. The two laundry business
units (route and equipment sales) and the reprographics business unit have been
aggregated into one reportable segment (laundry and reprographics) since many
operating functions of the laundry and reprographics operations are commingled.
Information with regard to reportable business segments is reported under Note
14 in the financial statements attached hereto.
BACKLOG
Due to the nature of the Company's route business, backlogs do not
exist in that business. On December 31, 2001 and 2000, no significant backlog of
orders existed in the Company's two sales businesses.
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ITEM 2. PROPERTIES
Mac-Gray owns its 40,000 square foot corporate headquarters in
Cambridge, Massachusetts which houses the Company's administrative and central
services, including an approximately 20,000 square foot warehouse for equipment,
parts, and machine refurbishment. Mac-Gray also owns sales and service
facilities in Tampa, Florida and Austell, Georgia, each consisting of
approximately 12,000 square feet. Mac-Gray 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:
TABLE 1
APPROXIMATE ANNUAL EXPIRATION
LOCATION SQUARE FOOTAGE RENTAL RATE DATE
-------- -------------- ----------- ----------
Buffalo, New York............... 9,500 $ 48,000 9/2005
Charlotte, North Carolina....... 9,900 57,000 2/2005
Chula Vista, California......... 25,000 176,000 2/2002
E. Brunswick, New Jersey........ 9,600 53,000 5/2005
Gainesville, Florida............ 750 6,000 at will
Gurnee, Illinois................ 12,000 114,000 6/2006
Houston, Texas.................. 2,115 20,000 12/2004
East Hartford, Connecticut...... 14,900 63,000 5/2006
Miramar, Florida................ 18,490 135,000 11/2002
Orlando, Florida................ 2,100 17,000 12/2004
Westbrook, Maine................ 6,035 37,000 7/2006
Syracuse, New York.............. 7,800 45,000 10/2005
Walpole, Massachusetts.......... 19,000 113,000 5/2006
All properties are primarily utilized for the laundry and reprographics
segments except for the Chula Vista, California, which is a MicroFridge(R)
segment facility, and the Walpole, Massachusetts, facility, which is utilized by
both the MicroFridge(R) and reprographic segments.
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.
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ITEM 3. LEGAL PROCEEDINGS
From time to time Mac-Gray is 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 such litigation will not, individually or in the aggregate, have a
material adverse effect on the financial condition or results of operations of
Mac-Gray.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of security holders during the fourth
quarter of 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Mac-Gray common stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "TUC".
The Company has two classes of authorized capital stock: 30 million
shares of common stock, $0.01 par value, of which 12,649,318 were outstanding at
December 31, 2001, and 5 million shares of preferred stock, $0.01 par value,
none of which have been issued. The following table sets forth the high and low
sales prices for Mac-Gray common stock on the NYSE for the periods indicated.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
HIGH LOW HIGH LOW
First Quarter.......................$ 4.06 $ 3.06 $ 4.13 $ 3.31
Second Quarter...................... 4.38 2.75 3.91 3.30
Third Quarter....................... 4.50 3.00 3.50 3.00
Fourth Quarter...................... 3.88 2.69 3.25 2.77
As of March 28, 2002 there were 180 holders of record of Mac-Gray
common stock.
The Company does not currently pay dividends to the holders of
Mac-Gray common stock. The Company 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 Board of Directors of Mac-Gray (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 at 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.
The Company maintains an incentive stock option plan which was
approved by the Board of Directors of the Company in 1997. All officers,
employees and independent directors are eligible to receive grants under the
plan. Details of the plan are discussed in Note 16 to the Consolidated Financial
Statements. Summary plan information is as follows:
Number of shares of Mac-Gray Weighted average Number of shares of Mac-Gray
common stock to be issued upon exercise price of common stock remaining
exercise of outstanding options outstanding options available for future issuance
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779,600 $4.09 485,400
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ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE)
Set forth below are selected historical financial data as of the dates
and for the periods indicated. The selected financial data set forth below
should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements of Mac-Gray and
the notes thereto included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 (1) 1998 (2) 1999 2000 2001
--------- --------- ---------- --------- ----------
Statement of Income Data:
Revenue.............................................. $ 104,847 $ 137,177 $ 148,563 $ 154,268 $152,069
Cost of revenue
Route rent......................................... 31,717 41,699 47,293 47,596 50,039
Route expenditures and other direct costs.......... 12,449 21,561 24,866 24,778 24,786
Depreciation and amortization...................... 9,725 13,349 18,202 18,980 19,276
Cost of equipment sales............................ 22,021 24,828 24,686 27,766 27,026
--------- ---------- --------- --------- ---------
Total cost of revenue............................ 75,912 101,437 115,047 119,120 121,127
--------- ---------- --------- --------- ---------
Operating expenses:
General and administration......................... 6,923 7,003 9,148 9,788 8,823
Sales and marketing................................ 10,181 10,333 11,848 10,542 10,994
Depreciation....................................... 753 909 905 1,225 1,201
Impairment of goodwill............................. -- -- 8,474 -- --
Merger-related costs............................... -- 1,144 -- -- --
--------- --------- --------- -------- ---------
Total operating expenses......................... 17,857 19,389 30,375 21,555 21,018
--------- --------- --------- -------- ---------
Income from operations............................... 11,078 16,351 3,141 13,593 9,924
Interest expense, net.............................. (2,975) (3,920) (6,085) (6,770) (5,164)
Other income (expense), net........................ 181 (122) 120 123 24
--------- --------- --------- -------- ---------
Income (loss) before provision for income taxes...... 8,284 12,309 (2,824) 6,946 4,784
Provision for income taxes........................... (5,228) (5,222) (2,727) (3,162) (2,299)
--------- --------- --------- -------- ---------
Net income (loss).................................... $ 3,056 $ 7,087 $ (5,551) $ 3,784 2,485
Accretion and dividends on redeemable preferred stock 320 62 -- -- --
--------- --------- --------- -------- ---------
Net income (loss) available to common stockholders... $ 2,736 $ 7,025 $ (5,551) $ 3,784 $ 2,485
========= ========= ========= ======== =========
Net income (loss) per common share--basic............. $ 0.32 $ 0.56 $ (0.44) $ 0.30 $ 0.20
========= ========= ========= ======== =========
Weighted average common shares outstanding--basic..... 8,449 12,524 12,661 12,634 12,645
========= ========= ========= ======== =========
Net income (loss) per common share--diluted........... $ 0.31 $ 0.54 $ (0.44) $ 0.30 $ 0.20
========= ========= ========= ======== =========
Weighted average common shares outstanding--diluted... 8,709 12,926 12,668 12,634 12,647
========= ========= ========= ======== =========
Other Financial Data:
EBITDA(3).......................................... $ 21,737 $30,487 $ 30,842 $ 33,921 30,425
Depreciation and amortization...................... 10,478 14,258 19,107 20,205 20,477
Capital expenditures............................... 11,584 20,729 21,819 13,983 12,779
Cash flows provided by operating activities........ 10,473 16,890 21,004 23,177 18,473
Cash flows used in investing activities............ (22,791) (70,270) (24,318) (11,996) (11,917)
Cash flows provided by (used in) financing activities 13,248 55,787 3,699 (11,032) (8,046)
Balance Sheet Data (at end of period):
Working capital.................................... $ (4,041) $ (2,840) $ 2,113 $ (2,364) 195
Total assets....................................... 97,843 171,520 180,965 174,625 167,895
Long-term debt and capital lease obligations,
net of current portion............................ 5,886 70,559 84,421 70,454 62,572
Redeemable common and preferred stock.............. 12,304 -- -- -- --
Stockholders' equity............................... 48,302 62,941 56,139 59,961 60,574
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(1) The financial data for the year ended December 31, 1997 includes the
results of Sun Services subsequent to its 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 their acquisition dates of
April 23, 1998 and April 24, 1998, respectively.
(3) "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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (DOLLARS IN THOUSANDS)
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes thereto presented
elsewhere in this Report.
OVERVIEW
Mac-Gray derives its revenue principally through the operation and
maintenance of laundry equipment in multi-housing units, including laundry and
MicroFridge(R) products. Mac-Gray also operates card/coin-operated reprographics
equipment in academic and public libraries. Mac-Gray operates laundry rooms,
reprographics equipment and MicroFridge(R) equipment under long-term leases with
property owners, colleges and universities and governmental agencies. Mac-Gray's
laundry services segment is comprised of revenue-generating laundry machines,
operated in approximately 31,000 multi-housing laundry rooms located in 30
states and the District of Columbia. Mac-Gray's reprographics segment is
concentrated in the northeastern United States, the Mid-Atlantic, Florida and
the Midwest.
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(R) services segment derives revenue through the sale
and rental of its MicroFridge(R) products to colleges and universities, military
bases, the hotel and motel market, and assisted living facilities.
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 2000 AND FISCAL YEAR ENDED DECEMBER 31, 1999
REVENUE
1999 2000 2001
Laundry route .......................... $95,468 $ 99,419 $102,114
Laundry equipment sales................. 15,398 16,280 15,929
Laundry rental ......................... 2,090 1,868 2,045
Reprographic route .................... 6,962 6,855 6,127
------- ------- -------
Total Laundry & Reprographics $119,918 $124,422 $126,215
MicroFridge(R) equipment sales.......... $ 23,699 $ 25,802 $ 23,226
MicroFridge(R) rental .................. 4,946 4,044 2,628
------- ------- -------
Total MicroFridge(R) $ 28,645 $ 29,846 $ 25,854
------- ------- -------
Total revenue..................... $148,563 $154,268 $152,069
------- ------- -------
Revenue decreased by $2,199, or 1%, to $152,069 for the year ended
December 31, 2001 from the year ended December 31, 2000. This decrease is
primarily related to a decrease in MicroFridge(R) sales and rental, and to a
lesser extent, to decreases in reprographic route revenue and laundry equipment
sales. The decrease in MicroFridge(R) sales as compared to 2000 is attributable
primarily to the academic market, as several academic customers postponed or
canceled decisions to purchase MicroFridge(R) units for dormitories. However, an
increase in sales to the hotel market of 10% somewhat offset the decrease in
sales to the academic market. MicroFridge(R) sales in its two other markets,
government and assisted living, were slightly lower than sales in those markets
for the prior year. Despite a sales shortfall in fourth quarter 2001, as
compared to fourth quarter 2000, sales to the hotel market increased in 2001 as
compared to 2000, primarily due to a widening of the Company's geographical
market penetration and an increase in the range of MicroFridge(R) products
offered. Laundry equipment sales and MicroFridge(R) assisted living sales
decreased in 2001 as a result of the general US economic environment in the
second half of the year.
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Total laundry route revenue increased by $2,695, or 3%, which was
offset by a $728, or 11%, decrease in reprographics route revenue. The increase
in laundry route revenue is attributable to the increase in card/coin-operated
machines placed in service during 2001. Increases in vending rates also
contributed to the overall revenue increase.
Reprographics route revenue in 2001 was affected by the decrease in
machine use in libraries and similar facilities, as compared to 2000. As access
to the Internet and the use of non-vended laser printers continues to increase,
the number of vended copies made has decreased. The Company has made progress in
converting existing customers from variable-based fee structures to flat-rate
fee structures, and has gained new customers using a flat-rate structure.
However, the Company has thus far been unable to offset the loss of revenue and
margin caused by the accessibility of the Internet in libraries, and the
resulting switch to non-vended printing. Without the restructuring of fees and
services, the Company may continue to experience a decrease in demand for its
vended reprographics equipment at existing customers.
Other revenue, which consists primarily of laundry and MicroFridge(R)
rental revenue, decreased $1,239, or 21%, over revenue for the year 2000. This
decrease consisted of a $1,416 decrease in MicroFridge(R) rental and a $177
increase in laundry rental revenue. The MicroFridge(R) decrease resulted
primarily from the Company's continued strategy of withdrawing from the
less-profitable academic and direct-to-student rental programs, and the
corresponding effort to convert these programs to sales. In any given period,
the Company may be unable to offset losses resulting from this intended ongoing
decline in MicroFridge(R) rental revenue.
ROUTE RENT. Route rent, the amount paid to property owners or managers,
increased by $2,443, or 5%, to $50,039 for the year ended December 31, 2001 from
the year ended December 31, 2000. This overall increase was primarily
attributable to an increase in laundry route revenue, since route rent is
generally a derivative of revenue earned in the Company's route locations. As a
percentage of route revenue, route rent increased from 45% for the year ended
December 31, 2000 to 46% for the year ended December 31, 2001. Fluctuations are
caused by varying rates of route rents on new and renegotiated contracts.
Laundry route rent can also be affected by other factors such as the amount of
"prepaid rent" payments, and laundry room betterments invested in new or
renegotiated contracts. As the Company varies the amount invested in a property,
the route rent as a percentage of route revenue can vary. Prepaid rent payments
and betterments are amortized over the life of the contract. The percentage of
route rent to revenue is also impacted by the rent rate structure in the
reprographics segment. Reprographics route revenue decreased in 2001 as compared
to 2000. Because this segment has a much lower rent rate structure than the
laundry segment, any decrease in revenue as a percentage of the total
reprographics revenue will result in an increase in the overall route rent
percentage of revenue.
ROUTE EXPENDITURES. Route expenditures include costs associated with
installing and servicing laundry and reprographics route machines, as well as
the costs of collecting, counting and depositing the revenue. Route expenditures
also include the costs of delivering and servicing sold and rented laundry and
MicroFridge(R) equipment. Route expenditures increased by $8 to $24,786 for the
year ended December 31, 2001 from the year ended December 31, 2000. Route
expenditures were 16% of revenues for both the years ended December 31, 2000 and
December 31, 2001. Route expenditures did not change in 2001 as compared to
2000, due to the variability of some expenses, such as certain employee costs,
which decrease as revenues decrease, and other operating expenses which have
been reduced through cost-cutting programs, specifically in the area of vehicle
expense and parts efficiencies.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization include
amounts included as a component of cost of revenue, which are primarily related
to laundry and MicroFridge(R) equipment in the field, and amounts included as an
operating expense, which are primarily non-revenue-generating corporate assets.
Aggregate depreciation and amortization increased by $272, or 1%, from year
ended December 31, 2000, to $20,477 for the year ended December 31, 2001. The
increase was primarily attributable to an increase in the Company's machine base
due to internal growth.
COST OF PRODUCT SALES. Cost of product sales decreased by $740, or 3%,
from the year ended December 31, 2000 to $27,026 for the year ended December 31,
2001. Gross margins on product sales were 31% for the year ended December 31,
2001 as compared to 34% for the year ended December 31, 2000. This decrease in
gross margin is attributable primarily to competitive pressure in the
MicroFridge(R) markets, particularly the hotel market, where the Company made
price concessions to secure sales. Also affecting the reduction in gross margin
in the MicroFridge(R) segment was the introduction of larger-size refrigeration
units, which have a lower gross margin than smaller units, and have comprised a
larger portion of total revenue than in prior years.
The gross margin decrease was further affected by the increase in sales
of laundry equipment to government entities. The mix of product sales to
government entities and certain volume discounts associated with these sales
caused reductions in the gross margin.
GENERAL, ADMINISTRATION, SALES AND MARKETING EXPENSE. General,
Administration, Sales and Marketing expenses decreased by $513 from the year
ended December 31, 2000 to $19,817 for the year ended December 31, 2001.
General, Administration, Sales and Marketing expenses were 13% of revenue for
both the years ended December 31, 2000 and 2001. This overall decrease was
primarily attributable to certain costs incurred in 2000 which did not recur in
2001, such as legal and consulting fees, and a reduction in required bad debt
reserves as a result of improved credit approval and collection procedures. In
2001, the Company increased certain marketing expenditures over 2000, where such
spending was expected to generate increased revenue.
INTEREST EXPENSE. Interest expense, net of interest income, decreased
by $1,606, or 24%, from the year ended December 31, 2000, to $5,164 for the year
ended December 31, 2001. This decrease is primarily related to both the impact
of lower interest rates and a decrease in total borrowings. The total borrowings
of the Company decreased during the year to $70,219 at December 31, 2001, from
$77,598 at December 31, 2000.
PROVISION FOR INCOME TAX. The effective tax rate increased from 46% to
48% from the year ended December 31, 2000 to the year ended December 31, 2001.
This increase in the effective tax rate is due to certain expenses not
deductible for taxes, primarily amortization of intangible assets associated
with acquired businesses making up a greater portion of total taxable income.
The provision for income tax is higher than the Company's statutory tax rate
primarily due to goodwill amortization deducted for financial reporting
purposes, which is not deductible for federal and state tax purposes.
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1999
REVENUE. Revenue increased by $5,705, or 4%, to $154,268 for the year
ended December 31, 2000 from the year ended December 31, 1999. This increase was
primarily related to an increase in route revenue, made up of an increase in the
laundry and reprographic route segments of $3,844, or 4%, due to the expansion
of existing operations and the additional revenues from recognizing a full year
of revenue from route businesses acquired during 1999. Sales revenue increased
$2,985, or 8%, from the year ended December 31, 1999. This increase was
primarily a result of an increase in MicroFridge(R) sales of 9%, and an increase
in laundry equipment sales of 6%. MicroFridge(R) sales revenue increased
primarily due to success in expanding into new geographic markets with an
extended line of MicroFridge(R) products for the hotel, motel and academic
markets. The laundry sales increase resulted from increased penetration of
certain markets and price increases.
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Other revenue, which consists primarily of laundry and MicroFridge(R)
rental revenue, decreased $1,124, or 16%, from the year ended December 31, 1999.
This decrease was due primarily to the Company's decision to continue to
withdraw from the less profitable MicroFridge(R) academic and direct rental
programs as it attempts to convert these programs to sales and long-term
sales-type leases.
ROUTE RENT. Route rent, the amount paid to the property owners and
managers, increased by $303, or 1%, to $47,596 for the year ended December 31,
2000 from the year ended December 31, 1999. This overall increase was primarily
attributable to an increase in laundry route revenue, since route rent is
generally due to property owners and managers based upon a percentage of revenue
earned in the Company's route locations. As a percentage of route revenue, route
rent decreased from 46% for the year ended December 31, 1999 to 45% for the year
ended December 31, 2000. These fluctuations were caused by an overall lower than
average route rent rate on new and renegotiated contracts, the impact of
different rates of 1999 acquired accounts.
ROUTE EXPENDITURES. Route expenditures include costs associated with
installing and servicing machines, as well as the costs of collecting, counting
and depositing the revenue. Route expenditures decreased by $88 to $24,778 for
the year ended December 31, 2000 from the year ended December 31, 1999. Route
expenditures decreased from 17% of revenues for the year ended December 31, 1999
to 16% for the year ended December 31, 2000. This improvement in route
expenditures, both in the aggregate and as a percentage of sales, was
attributable for the most part to improved operating procedures and increased
efficiencies in collections, installations and services, and also in part to the
consolidation of certain of the reprographics segment's field operations into
the laundry segment.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization include
amounts included as a component of cost of revenue, which are primarily related
to laundry and MicroFridge(R) equipment in the field, and amounts included as an
operating expense, which are primarily non-revenue-generating corporate assets.
Aggregate depreciation and amortization increased by $1,098, or 6%, to $20,205
for the year ended December 31, 2000 from year ended December 31, 1999. The
increase was primarily attributable to an increase in the Company's machine base
due to internal growth and a full year of depreciation and amortization in the
year ended December 31, 2000 for businesses acquired during 1999.
COST OF PRODUCT SALES. Cost of product sales increased by $3,080, or
12%, to $27,766 for the year ended December 31, 2000 from the year ended
December 31, 1999. Gross margins on product sales were 34% for the year ended
December 31, 2000 as compared to 37% for the year ended December 31, 1999. This
decrease in gross margin was attributable primarily to sales mix in the Laundry
segment, that segment's inability to recover suppliers' product cost increases,
and, to a lesser extent, expenses associated with obsolete inventory. The
MicroFridge(R) segment's gross margin for the year ended December 31, 2000 was
consistent with that for the year ended December 31, 1999.
GENERAL, ADMINISTRATION, SALES AND MARKETING EXPENSE. General,
Administration, Sales and Marketing expenses decreased by $666 or 3% to $20,330
for the year ended December 31, 2000 from the year ended December 31, 1999.
General, Administration, Sales and Marketing expenses were 13% of revenue for
the year ended December 31, 2000 as compared to 14% for the year ended December
31, 1999. This overall decrease was primarily attributable to the elimination of
various redundant functions within the segments and several unique one-time
consulting projects and other outside services occurring in 1999.
INTEREST EXPENSE. Interest expense, net of interest income, increased
by $685, or 11%, to $6,770 for the year ended December 31, 2000 from year ended
December 31, 1999. This increase was primarily related to the impact of
increased interest rates. Although the total borrowings of the Company decreased
during the year ended December 31, 2000 to $77,598, from $86,829 on December 31,
1999, the increase in interest rates resulted in higher interest expense. In
addition to general market conditions leading to higher interest rates during
most of 2000, the Company also incurred increases in its cost of borrowing funds
when it entered into a new Senior Secured Credit Facility on June 29, 2000.
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PROVISION FOR INCOME TAX. The effective tax rate decreased from 97% to
46% from the year ended December 31, 1999 to the year ended December 31, 2000.
The provision for income tax was higher than the Company statutory tax rate due
to goodwill amortization deducted for financial reporting purposes which is not
deductible for federal and state tax purposes. The increase in the 1999
effective tax rate to 97% resulted from the impairment of goodwill and other
intangible assets which is a permanently non-deductible item.
IMPAIRMENT OF GOODWILL. The Company acquired Copico, Inc. in April 1998
for approximately $10,950 in cash and 250,000 shares of Mac-Gray common stock,
in addition to the assumption of certain liabilities. In accordance with the
purchase method of accounting the purchase price was assigned to the assets
acquired and liabilities assumed, with any excess purchase price being allocated
to goodwill and intangibles. The goodwill and intangibles recorded in connection
with the transaction were approximately $11,200.
Since the acquisition of Copico, Inc., the reprographics segment had
not met expectations with respect to its profitability and produced operating
losses. The most significant reason for the poor performance of the segment was
the impact of technological advances which have affected the entire
reprographics industry. Specifically, the introduction of the Internet in
college and public libraries, and access to free laser printers, led to fewer
vended copies being made than in prior years. In April 1999, the Company began
to take corrective action to address certain operational difficulties the
segment was encountering and to evaluate the entire impact the availability of
the Internet in college and public libraries was having on the segment.
The result of this evaluation was the confirmation of longer term
expectations of lower operating results. Accordingly, management recognized a
non-cash impairment charge of $8,474, or $.67 per share, in the fourth quarter
of 1999. This charge was calculated in accordance with the provisions of SFAS
No. 121 "Accounting for the Impairment of Long-lived Assets and Assets to be
Disposed of".
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 of MicroFridge(R) products, to this
market are also high during the third calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
Mac-Gray's primary source of cash has been derived from operating
activities. The Company's primary uses of cash have been the purchase of new
laundry machines, MicroFridge(R) equipment, reprographics equipment and the
reduction of bank debt. The Company anticipates that it will continue to use
cash generated 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 entered into two interest rate
swaps, and fixed $20,000 of loan interest rate for 3 years and $20,000 of loan
interest rate for 5 years. On January 9, 2002, the Company terminated the
$20,000 swap that expires in 2003 and entered into a $20,000 swap expiring in
February 2004, bearing a lower interest rate.
Cash flows provided by operations were $21,004, $23,177, and $18,473 for
the years ended December 31, 1999, 2000 and 2001, respectively. Cash flow from
operations consists primarily of activities affecting the Company's core
operating activities, such as route revenue, product sales, equipment service
revenue and rental revenue, offset by route rent, route expenditures, cost of
product sales, cost of rental revenue, general and administration expenses and
sales and marketing expenses. The decrease from 2000 to 2001 of $4,704 is
primarily attributable to a decrease in net income of $1,299, and increases in
inventory and prepaid expenses and other assets of $1,166 and $2,227,
respectively. Inventory increased primarily due to a temporary build-up of
inventory at the MicroFridge(R) segment to accommodate the transition of
equipment suppliers. Prepaid expenses and other assets increased as prepaid
rents and other investments increased as a result of laundry route contracts
added and renegotiated.
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Cash used in investing activities was $24,318, $11,996, and $11,917 for the
years ended December 31, 1999, 2000 and 2001, respectively. The most significant
component of cash flows used in investing activities is capital expenditures,
which decreased by $1,204 for the year ended December 31, 2001 as compared to
the year ended December 31, 2000. Capital expenditures were $21,819, $13,983,
and $12,779 for the years ended December 31, 1999, 2000 and 2001, respectively.
This decrease in capital expenditures resulted from lower expenditures on
laundry route equipment despite the greater number of machines which were put in
service than in the prior year. This was accomplished primarily through better
use of refurbished equipment. Proceeds from the sale of property and equipment
decreased by $1,125 as the result of sales of uneconomical outlying assets in
the year ended December 31, 2000.
Cash flows from financing activities were $3,699, $(11,032), and
$(8,046) for the years ended December 31, 1999, 2000 and 2001, respectively.
Financing activities for those periods consist primarily of proceeds from and
repayments of bank borrowings, and capital stock transactions. The decreases in
2000 and 2001 are principally the results of a concentrated effort by the
Company to pay down debt. The Company has decided that at this time reducing its
overall debt balances is the most efficient use of its cash resources. As a
result of these factors, the Company was able to reduce its total bank and other
debt by $10,049 for the year ended December 31, 2000 and another $8,049 for the
year ended December 31, 2001.
On June 29, 2000, the Company entered into a new senior secured credit
facility (as referenced, the "2000 Senior Secured Credit Facility"). This
transaction retired the credit facility that had been in place since April 23,
1998. The 2000 Senior Secured Credit Facility provides for borrowings of up to
$100,000 consisting of borrowings under a three-year revolving line of credit of
up to $65,000 and a five-year $35,000 senior secured term loan facility ("Senior
Secured Term Loan Facility"). Primarily through principal payments made
quarterly since the inception of the 2000 Senior Secured Credit Facility, the
$35,000 Senior Secured Term Loan Facility has been reduced to $24,800. The 2000
Senior Secured Term Loan Facility matures in quarterly increments through June
2005. As of December 31, 2001, the unused balance of the 2000 Senior Secured
Credit Facility was $21,625.
Outstanding indebtedness under the 2000 Senior Secured Credit Facility
bears interest, at the Company's option, at a rate equal to the prime rate or
LIBOR plus 1.75%. The average interest rate at December 31, 2001 was
approximately 6.0%.
The 2000 Senior Secured Credit Facility restricts payments of
dividends and other distributions, restricts the Company from making certain
acquisitions and incurring indebtedness, and requires it to maintain certain
financial ratios. The 2000 Senior Secured Credit Facility is collateralized by a
blanket lien on the assets of the Company and each of its subsidiaries, as well
as a pledge by the Company of all of the capital stock of its subsidiaries. The
2000 Senior Secured Credit Facility includes certain financial and operational
covenants. The most restrictive of these covenants is maintaining certain
leverage ratios with which the Company was in compliance at December 31, 2001.
At December 31, 2001, the Company failed to meet the required minimum EBITDA
covenant, for which a waiver was received from the Company's lenders. Concurrent
with the waiver of the covenant default, the 2000 Senior Secured Credit Facility
was amended to include a lower minimum EBITDA covenant target for the remainder
of the life of the 2000 Senior Secured Credit Facility. At December 31, 2001
outstanding letters of credit amounted to $625.
The 2000 Senior Secured Credit Facility contains a commitment fee equal
to one quarter of one percent (0.25%) per annum of the average daily unused
portion of the Credit Facility.
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INFLATION
The Company does not believe that its financial performance has been
materially affected by inflation.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies, as described in Footnote 2
of the Notes to Consolidated Financial Statements, "Significant Accounting
Policies", state the Company's policies as they relate to significant matters:
cash and cash equivalents, revenue recognition, inventories, prepaid route
expense, intangible assets, and impairment of long-lived assets. The Company
believes these accounting policies reasonably represent the economic activities
and financial results on an annual basis.
Cash and cash equivalents--The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. On occasion the Company has excess cash available for a short
period of time; when this occurs, the Company invests such excess cash in
repurchase agreements and other highly liquid short-term investments.
Accordingly, the investments are subject to minimal credit and market risk.
Included in cash and cash equivalents is an estimate of cash not yet collected
at period end, which remains at laundry and reprographics customer locations. At
December 31, 2000 and 2001, this totaled $4,526 and $3,655, respectively. The
Company records the estimated cash not yet collected as cash and cash
equivalents and route revenue net of accrued route rent, based on historical
collection trends, so that total cash at the end of each period will be
reasonably stated.
Revenue recognition--The Company recognizes 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 MicroFridge(R) products and, at the time of sale,
provides reserves for all estimated warranty costs. Shipping and handling fees
charged to customers are recognized upon shipment of the products and included
in revenue.
The Company also enters into long-term lease transactions that meet the
qualifications of a sales-type lease. For these transactions, the amount of
revenue recognized upon product shipment is the present value of the minimum
lease payments, net of executory costs, together with the profit thereon,
discounted at the interest rate implicit in the lease. Interest revenue is
recognized over the life of the rental agreement. At December 31, 2000 and 2001
the Company had $13,064 and $14,351, respectively, in receivables related to
sales-type leases. These receivables have been recorded net of unearned interest
income of $2,711 and $1,059 at December 31, 2000 and 2001. These receivables are
primarily due ratably over the next seven years and have been classified as
other current assets and other long-term assets, as appropriate, on the balance
sheet. The related reserve for doubtful accounts at December 31, 2000 and 2001
was $0 and $450, respectively.
The Company believes its accounting for route revenue, rental revenue
and long-term lease transactions is appropriate for the Company, best matching
the nature of the transaction with the proper reporting period.
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.
Based on the nature of the Company's inventory, being laundry and MicroFridge(R)
equipment, and the inventory handling practices of the Company, the Company
believes the lower of cost or market is the most appropriate valuation method
for the Company.
Intangible Assets--Intangible assets primarily consist of various
non-compete agreements, customer lists, goodwill and contract rights recorded in
connection with the acquisitions. The non-compete agreements are amortized using
the straight-line method over the life of the agreements, which range from two
to five years. Customer lists are amortized using the straight-line method over
five to fifteen years. Goodwill is amortized using the straight-line method over
fifteen or twenty years. Contract rights are amortized using the straight-line
method over fifteen years. Based on its experience, the Company believes that
these costs, associated with various acquisitions, are properly recognized and
amortized over a reasonable length of time.
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Impairment of Long-lived Assets--The Company reviews long-lived assets,
including goodwill, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Each impairment test is based on a comparison of the undiscounted cash flows to
the recorded value of the asset. If an impairment is indicated, the asset is
written down to its estimated fair value on a discounted cash flow basis. The
Company will comply with Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets," on its effective date, January 1, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 2000, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), and Financial
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" ("FAS 138"). These statements amend the accounting
and reporting standards for certain derivative instruments and hedging
activities. FAS 133 and FAS 138 are effective for fiscal years beginning after
June 15, 2000. The Company adopted FAS 133, as amended by FAS 138, effective
January 1, 2001. The Company's adoption of FAS 133, as amended, primarily
affects the accounting for the Company's derivatives used in connection with its
interest rate risk management policies (see Notes 2 and 12 to the Consolidated
Financial Statements).
On July 20, 2001, the FASB issued Financial Accounting Standard No.
141, "Business Combinations" ("FAS 141"). FAS 141 requires the purchase method
of accounting be used for all business combinations initiated after June 30,
2001 and eliminated the pooling-of-interest method. Mac-Gray does not believe
the adoption of FAS 141 will have a significant impact on its consolidated
financial statements.
On July 20, 2001, the FASB issued Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 requires that
goodwill and certain intangible assets, including those recorded in past
business combinations, no longer be amortized to earnings, but instead be tested
for impairment at least annually. Not amortizing goodwill could have the effect
of increasing annual earnings. The provisions of FAS 142 are effective for
fiscal years beginning after December 15, 2001. The Company, with the assistance
of an independent firm, has performed an evaluation of its goodwill and other
intangible assets as recorded at December 31, 2001, in accordance with FAS No.
142.
The preliminary unaudited results of this analysis suggest a write-off
of the goodwill associated with the reprographics segment, totaling less than
one million dollars. The Company anticipates no change to the goodwill balances
associated with the laundry or MicroFridge(R) segments. This analysis is
expected to be completed in time to be reported with the results of operations
for the period ending March 31, 2002.
In August, 2001, the FASB issued Financial Accounting Standard No. 143,
"Accounting for Asset Retirement Obligations," ("FAS 143") which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 is required to be adopted for fiscal years beginning after June
15, 2002. Management does not expect the adoption of this standard to have any
impact on the Company's financial position or results of operations.
In October, 2001, the FASB issued Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("FAS
144"). FAS 144 supercedes FASB Statement No. 121 ("FAS 121"), "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
of." FAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30
("APB 30"), "Reporting Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business." FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and will thus be
adopted by the Company, as required, on January 1, 2002. Management does not
expect the adoption of this standard to have any impact on the Company's
financial position or results of operations.
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RISK FACTORS
A purchase of Mac-Gray common stock involves various risks. Investors
should consider the following principal risk factors:
THE COMPANY'S CASH FLOWS MAY NOT BE SUFFICIENT TO FINANCE THE SIGNIFICANT
CAPITAL EXPENDITURES REQUIRED TO REPLACE EQUIPMENT AND IMPLEMENT NEW TECHNOLOGY.
The Company must continue to make capital expenditures in order to
replace existing equipment, which requires significant operating financing.
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 its
stockholders.
INDEBTEDNESS MAY LIMIT THE COMPANY'S USE OF CASH FLOW AND RESTRICT ITS
FLEXIBILITY.
In the event the Company is unable to decrease the outstanding
indebtedness under its credit facility, the increased indebtedness could:
- -- 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 2000 Senior Secured Credit Facility requires the Company to comply
with various financial and other operating covenants. Failure to comply with any
of these covenants, which the lender does not waive, would permit the lender to
accelerate the loan. An acceleration of the loan could have a material adverse
effect on business. At December 31, 2001, the Company failed to meet the
required minimum EBITDA covenant, for which a waiver was received from the
Company's lenders. Concurrent with the waiver of the covenant default, the 2000
Senior Secured Credit Facility was amended to include a lower minimum EBITDA
covenant target for the remainder of the life of the 2000 Senior Secured Credit
Facility.
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 properties as a result of economic downturns
that affect occupancy levels.
- --------------------------------------------------------------------------------
Page 21
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/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 with
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 long-term growth strategy is dependent
upon its ability to identify, finance and consummate acquisitions on acceptable
financial terms. 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 long-term 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 business;
- -- 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 intangible assets, the amortization of which
may reduce net income.
- --------------------------------------------------------------------------------
Page 22
OPERATIONS COULD BE DISRUPTED IF THE COMPANY IS UNABLE TO CONTINUE ITS
RELATIONSHIPS WITH MAYTAG AND OTHER SUPPLIERS.
Currently the Company purchases a majority of the equipment that it
uses in the laundry route business from Maytag Corporation. In addition, the
Company derives a significant amount of its non-laundry route revenue, as well
as competitive advantages, from its position as a distributor of Maytag
commercial laundry products. Although the agreements between the Company and
Maytag Corporation may be terminated by either party upon written notice, Maytag
Corporation has never terminated any agreement with the Company. The Company's
relationship with Maytag dates from 1927.
In addition, the Company currently procures the products used by the
MicroFridge(R) segment from a limited number of suppliers. If any of these
suppliers terminated or demanded a substantial revision of the contracts or
business relationships currently in place, there may be a delay in finding a
replacement, and an inability to find terms as favorable as the current terms.
THE MICROFRIDGE(R) PRODUCTS MAY BE SUSCEPTIBLE TO PRODUCT LIABILITY CLAIMS FOR
WHICH INSURANCE MAY NOT BE ADEQUATE.
Through the MicroFridge(R) segment, the Company markets and
distributes MicroFridge(R), a combination microwave and refrigerator. The sale
and distribution of MicroFridge(R), as well as other products, entails a risk of
product liability claims. Further, although MicroFridge(R) is manufactured by
third parties under contract with MicroFridge(R), MicroFridge(R) 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 existing insurance at a cost and level of coverage comparable to that
currently in effect, if at all. In the event that the MicroFridge(R) segment 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 its proprietary rights, although the Company has traditionally
relied upon the protections afforded by contract rights and through common law
ownership rights. The Company cannot assure investors that these contract rights
and legal claims to ownership will adequately protect the operations from
adverse claims. In addition, any adverse claims or litigation, with or without
merit, could be costly and could divert management's attention from the
operation of the business.
CERTAIN STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS COULD EXERCISE CONTROL
AND PREVENT A SALE OR MERGER.
As of March 28, 2002, Mac-Gray's directors, executive officers, and
certain of its stockholders and their affiliates beneficially owned in the
aggregate approximately 51% of the outstanding shares of the Company's common
stock. This percentage ownership does not include options to purchase 94,000
shares of the common stock held by some of these persons, all of which are
currently exercisable. If these affiliates exercised any of their options, then
the ownership of common stock would be further concentrated. As a result of this
concentration in ownership, these stockholders, acting together, could have the
ability 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 the Company's charter and bylaws, as described below, and
applicable sections of the corporate law of Delaware, may have the effect of
delaying or preventing a change in control of Mac-Gray. A discussion of this
anti-takeover effect appears below.
- --------------------------------------------------------------------------------
Page 23
PROVISIONS OF THE COMPANY'S CHARTER, BYLAWS, DELAWARE LAW, AND THE SHAREHOLDER
RIGHTS AGREEMENT COULD HAVE THE EFFECT OF DISCOURAGING TAKEOVERS.
Specific provisions of the Company's charter and bylaws, as described
below; sections of the corporate law of Delaware; the shareholder rights
agreement, 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 could also 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:
- -- 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;
- -- ownership restrictions, under the corporate law of Delaware, with limited
exceptions, upon acquirors including their affiliates and associates of 15%
or more of its common stock; and
- -- 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.
- --------------------------------------------------------------------------------
Page 24
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, 2001.
DECEMBER 31, 2001
EXPECTED MATURITY DATE
(IN THOUSANDS)
2002 2003 2004 2005 2006 THEREAFTER TOTAL
----- -------- -------- ------- ------- ---------- -------
Long-term Debt:
Fixed Rate ................. $ 604 $ 871 $ 129 $ 120 $ 51 $ $ 1,775
Average interest rate ...... 8.3% 8.0% 7.9% 7.9% 7.9% -- --
Variable Rate .............. $ 6,500 $50,250 $ 8,500 $ 2,300 $ -- -- $67,550
Average interest rate ...... 9.0% 9.0% 9.0% 9.0% -- -- --
In February 2000, the Company entered into two standard International
Swaps and Derivatives Association ("ISDA") interest rate swap agreements with
its primary financial institution to manage the interest rate risk associated
with its 2000 Senior Secured Credit Facility. Each agreement has a notional
amount of $20,000 and maturity dates in February 2003 and 2005. The effect of
the swap agreements was to limit the interest rate exposure to a fixed rate of
7.38% and 7.42% (versus the 90-day LIBOR rate) for the three year and five year
swaps, respectively. On January 9, 2002, the Company terminated the $20,000 swap
that expires in 2003 and entered into a $20,000 swap expiring in February 2004,
with a fixed interest rate of 7.38% until February 2002, and 6.38% thereafter.
The Company believes the risk associated with extending this fixed rate is more
than offset by the interest expense savings the Company will realize. In
accordance with the swap agreements and on a quarterly basis, interest expense
is calculated based on the floating 90-day LIBOR and the fixed rate. If interest
expense as calculated is greater based on the 90-day LIBOR, the financial
institution pays the difference to the Company; if interest expense as
calculated is greater based on the fixed rate, the Company pays the difference
to the financial institution. Depending on fluctuations in the LIBOR, the
Company's interest rate exposure and its related impact on interest expense and
net cash flow may increase or decrease. The Company is exposed to credit loss in
the event of nonperformance by the other party to the swap agreement; however,
nonperformance is not anticipated.
The fair value of the interest rate swaps is the estimated amount that
the Company would receive or pay to terminate the agreement at the reporting
date, taking into account current interest rates and the credit worthiness of
the counterparty. At December 31, 2001, the Company estimates that it would have
cost $1,911, net of tax, to terminate these agreements.
On June 29, 2000 the Company refinanced its outstanding Senior Secured
Credit Facility (as referenced, the "2000 Senior Secured Credit Facility"). This
transaction retired the credit facility that had been in place since April 23,
1998. The 2000 Senior Secured Credit Facility provided for borrowings of up to
$100,000 consisting of borrowings under a three-year revolving line of credit of
up to $65,000 and a five-year $35,000 Senior Secured Term Loan Facility.
Primarily through principal payments made quarterly since the inception of the
2000 Senior Secured Credit Facility, the $35,000 Senior Secured Term Loan
Facility has been reduced to $24,800. As of December 31, 2001, the unused
balance of the 2000 Senior Secured Credit Facility was $21,625. The 2000 Senior
Secured Credit Facility is subject to certain financial and operational
covenants. The most restrictive of these covenants is maintaining certain
leverage ratios with which the Company was in compliance at December 31, 2001.
At December 31, 2001, the Company failed to meet the required minimum EBITDA
covenant, for which a waiver was received from the Company's lenders. Concurrent
with the waiver of the covenant default, the 2000 Senior Secured Credit Facility
was amended to include a lower minimum EBITDA covenant target for the remainder
of the life of the 2000 Senior Secured Credit Facility. The average interest
rate was approximately 6.0% at December 31, 2001.
- --------------------------------------------------------------------------------
Page 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are contained in pages F-1
through F-24 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- --------------------------------------------------------------------------------
Page 26
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 2002 Annual Meeting of Stockholders
(the "Proxy Statement"). The Proxy Statement will be filed with the Securities
and Exchange Commission by April 30, 2002 and 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 27 through 29.
(b) REPORTS ON FORM 8-K
None
(a)(3) EXHIBITS:
Certain exhibits indicated below are incorporated by reference to
documents of Mac-Gray on file with the Commission. Each exhibit marked by a
cross (+) was previously filed as an exhibit to Mac-Gray's Registration
Statement on Form S-1 filed on August 14, 1997 (No. 333-33669) and the number in
parentheses following the description of the exhibit refers to the exhibit
number in the Form S-1. Each exhibit marked by an asterisk (*) was previously
filed as an exhibit to Mac-Gray's Registration Statement on Form S-4 filed on
February 9, 1998 (No. 333-45899) and the number in parentheses following the
description of the exhibit refers to the exhibit number in the Form S-4. Each
exhibit marked by a number sign (#) was previously filed as an exhibit to
Amendment No. 1 to Mac-Gray's Registration Statement on Form S-1, filed on
September 25, 1997 (No. 333-33669) and the number in parentheses following the
description of the exhibit refers to the exhibit number in the Form S-1. Each
exhibit marked by a (z) was previously filed as an exhibit to Amendment No. 1 of
Mac-Gray's Registration Statement on Form S-1, filed on April 17, 1998 (No.
333-49795) and the number in parentheses following the description of the
exhibit refers to the exhibit number in the Form S-1. Each exhibit marked by a
(y) was previously filed as an exhibit to Mac-Gray's Form 8-K, filed on May 8,
1998 (No. 001-13495) and the number in parentheses following the description of
the exhibit refers to the exhibit number in the Form 8-K. Each exhibit marked by
a (x) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on June
18, 1999 (No. 001-13495) and the number in parentheses following the description
of the exhibit refers to the exhibit number in the Form 8-K. Each exhibit marked
by a (w) was previously filed as an exhibit to Mac-Gray's Form 10-Q filed on
August 14, 2000 (No. 001-13495) and the number in parentheses following the
description of the exhibit refers to the exhibit number in the Form 10-Q.
The following is a complete list of exhibits filed or incorporated by
reference as part of this Annual Report on Form 10-K.
2.1 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
2.2 Stock and Asset Purchase Agreement, dated as of March 4, 1998, by
and among Mac-Gray Services, Inc., Amerivend Corporation,
Amerivend Southeast Corporation, Gerald E. Pulver and Gerald E.
Pulver Grantor Retained Annuity Trust. (2.2).y
- --------------------------------------------------------------------------------
Page 27
3.1 Amended and Restated Certificate of Incorporation (3.1).+
3.2 By-laws, as amended (filed herewith). (3.2).+
4.1 Specimen certificate for shares of Common Stock, $.01 par value,
of the Registrant (4.1).#
4.2 Shareholder Rights Agreement, dated as of June 15, 1999, by and
between the Registrant and State Street Bank and Trust Company
(4.1).x
10.1 Stockholders' Agreement dated as of June 26, 1997 by and among
the Registrant and certain stockholders of the Registrant(10.2).+
10.2 Consulting Agreement dated as of April 17, 1997 by and among the
Registrant and Jeffrey C. Huenink (10.9).+
10.3 Noncompetition Agreement dated as of April 17, 1997 by and among
Registrant and Jeffrey C. Huenink (10.10).+
10.4 Form of Maytag Distributorship Agreements (10.13).+
10.5 Promissory Note dated December 31, 1992 issued by the Registrant
in favor of Donald M. Shaw (10.14).+
10.6 Consulting and Noncompete Agreement dated December 31, 1992 by
and between Donald M. Shaw and the Registrant (10.15).+
10.7 The Registrant's 1997 Stock Option and Incentive Plan (with form
of option agreements attached as exhibits) (10.16).+
10.8 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).*
10.9 Revolving Credit and Term Loan Agreement, dated June 29, 2000, by
and among the Registrant, the other Borrowers (as defined
therein), the lenders named therein and KeyBank National
Association, as agent (10.1).w
10.10 Form of Pledge Agreement between the Registrant and the Banks
(as defined therein) (10.2).w
10.11 Form of Security Agreement between the Registrant, the other
Borrowers (as defined therein) and the Banks (as defined therein)
(10.3).w
10.12 Form of Revolving Credit Note issued by the Registrant in favor
of the Banks (as defined therein) (10.4).w
10.13 Form of Term Note issued by the Registrant in favor of the Banks
(as defined therein) (10.5).w
10.14 First Amendment to Revolving Credit and Term Loan Agreement,
dated February 28, 2002, among the Registrant, the other
Borrowers (as defined therein), the Banks (as defined therein),
the Agent (as defined therein), and KeyBank National Association
as Documentation Agent (filed herewith).
10.15 Form of Noncompetition Agreement between the Registrant and its
executive officers (filed herewith). (10.11).+
10.16 Form of Director Indemnification Agreement between the Registrant
and each of its Directors (filed herewith) (10.17).+
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Page 28
10.17 April 2001 Amendment to the Mac-Gray Corporation 1997 Stock
Option and Incentive Plan (filed herewith).
21.1 Subsidiaries of the Registrant (21.1).z
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
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Page 29
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 28th DAY OF
MARCH, 2002.
MAC-GRAY CORPORATION
By: /s/ Stewart Gray MacDonald, Jr.
-------------------------------------------
STEWART GRAY MACDONALD, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: MARCH 29, 2002
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- --------------------- -------- -------------
/s/ Thomas E. Bullock Director MARCH 29, 2002
--------------------------------
THOMAS E. BULLOCK
/s/ William M. Crozier, Jr. Director MARCH 29, 2002
--------------------------------
WILLIAM M. CROZIER, JR.
/s/ John P. Leydon Director MARCH 29, 2002
--------------------------------
JOHN P. LEYDON
/s/ Jerry A. Schiller Director MARCH 29, 2002
--------------------------------
JERRY A. SCHILLER
/s/ Michael J. Shea Executive Vice President, MARCH 29, 2002
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
--------------------------------
MICHAEL J. SHEA
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Page 30
ITEMS 14(a)(1) AND (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
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, 2000 and 2001............. F-3
Consolidated Income Statements for the Years Ended December 31, 1999,
2000 and 2001..................................................... F-4
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1999, 2000, and 2001................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001.................................. F-6
Notes to Consolidated Financial Statements............................ F-7
The following consolidated financial statement schedule of
Mac-Gray Corporation is included in Item 14 (a)(2) and should be read in
conjunction with the financial statements included herein.
Schedule II Valuation and Qualifying Accounts........................ F-24
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
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Page 31
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, 2000 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements and schedule in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and schedule are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 28, 2002
F-2
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Page 32
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
2000 2001
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 6,715 $ 5,225
Trade receivables, net of allowance for doubtful accounts....................... 7,992 7,729
Inventory of finished goods..................................................... 3,391 4,557
Deferred income taxes........................................................... 818 844
Prepaid expenses and other current assets....................................... 8,722 8,928
-------- --------
Total current assets....................................................... 27,638 27,283
Property, plant and equipment, net.............................................. 77,367 75,598
Intangible assets, net.......................................................... 52,118 47,912
Prepaid route rent and other assets............................................. 17,502 17,102
-------- --------
Total assets............................................................... $174,625 $167,895
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 6,321 $ 7,104
Current portion of capital lease obligations.................................... 823 543
Trade accounts payable.......................................................... 7,971 7,278
Accrued route rent.............................................................. 8,149 7,990
Accrued expenses................................................................ 4,109 2,200
Deferred revenues and deposits.................................................. 2,629 1,973
-------- --------
Total current liabilities.................................................. 30,002 27,088
Long-term debt....................................................................... 70,022 62,221
Long-term capital lease obligations.................................................. 432 351
Deferred income taxes................................................................ 13,444 15,105
Deferred retirement obligation....................................................... 749 645
Other liabilities.................................................................... 15 1,911
Commitments and contingencies (Note 16).............................................. -- --
Stockholders' equity:
Preferred stock ($.01 par value, 5 million shares authorized, no shares
outstanding)......................................................................... -- --
Common stock ($.01 par value, 30 million shares authorized, 13,443,754 issued and
12,637,639 outstanding at December 31, 2000, and 13,443,754 issued and 12,649,318
outstanding at December 31, 2001..................................................... 134 134
Additional paid-in capital........................................................... 68,540 68,540
Accumulated other comprehensive loss................................................. -- (1,911)
Retained earnings ................................................................... 771 3,158
-------- --------
69,445 69,921
Less: common stock in treasury, at cost, 806,115 and 794,436 shares
at December 31, 2000 and 2001, respectively................................ (9,484) (9,347)
-------- --------
Total stockholders' equity...................................................... 59,961 60,574
-------- --------
Total liabilities and stockholders'equity............................................ $174,625 $167,895
======== ========
The accompanying notes are an integral part of these financial
statements
F-3
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Page 33
MAC-GRAY CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
------- -------- -------
Revenue:
Route revenue....................................................... $102,430 $106,274 $108,241
Sales .............................................................. 39,097 42,082 39,155
Other .............................................................. 7,036 5,912 4,673
-------- -------- --------
Total revenue.................................................. 148,563 154,268 152,069
-------- -------- --------
Cost of revenue:
Route rent.......................................................... 47,293 47,596 50,039
Route expenditures and other direct costs........................... 24,866 24,778 24,786
Depreciation and amortization....................................... 18,202 18,980 19,276
Cost of product sales............................................... 24,686 27,766 27,026
-------- -------- --------
Total cost of revenue.......................................... 115,047 119,120 121,127
-------- -------- --------
Gross margin............................................................. 33,516 35,148 30,942
-------- -------- --------
Operating expenses:
General and administration.......................................... 9,148 9,788 8,823
Sales and marketing................................................. 11,848 10,542 10,994
Depreciation and amortization....................................... 905 1,225 1,201
Impairment of goodwill.............................................. 8,474 -- --
-------- -------- -------
Total operating expenses....................................... 30,375 21,555 21,018
-------- -------- -------
Income from operations................................................... 3,141 13,593 9,924
Interest expense, net............................................... (6,085) (6,770) (5,164)
Other income, net................................................... 120 123 24
-------- -------- -------
Income (loss) before provision for income taxes..................... (2,824) 6,946 4,784
Provision for income taxes.......................................... (2,727) (3,162) (2,299)
-------- -------- -------
Net income (loss)........................................................ $(5,551) $ 3,784 $ 2,485
-------- -------- -------
Net income (loss) per common share--basic................................ $ (0.44) $ 0.30 $ 0.20
======== ======== =======
Weighted average common shares outstanding -- basic...................... 12,661 12,634 12,645
======== ======== =======
Net income (loss) per common share--diluted.............................. $ (0.44) $ 0.30 $ 0.20
======== ======== =======
Weighted average common shares outstanding--diluted...................... 12,668 12,634 12,647
======== ======== =======
The accompanying notes are an integral part of these financial
statements
F-4
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MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED TREASURY STOCK
---------------- ADDITIONAL RETAINED OTHER COMPREHENSIVE --------------
NUMBER OF PAID-IN EARNINGS COMPREHENSIVE INCOME (LOSS) NUMBER
SHARES VALUE CAPITAL (DEFICIT) LOSS OF SHARES COST TOTAL
---------- ----- ------- --------- --------- ------------ --------- ---- -------
Balance, December 31, 1998........ 12,781,628 $128 $60,896 $2,623 62,100 $ (706) $62,941
Net loss........................ -- -- -- (5,551) -- -- (5,551)
Repurchase of redeemable
common stock -- 6 7,639 -- 600,026 (7,645) --
Repurchase of common stock...... (156,200) -- -- -- 156,200 (1,269) (1,269)
Stock granted and options
exercised 2,325 -- 5 (7) (2,325) 20 18
---------- ----- ------- ------- ------- ------ -------
Balance, December 31, 1999........ 12,627,753 134 68,540 (2,935) 816,001 (9,600) 56,139
Net income...................... -- -- -- 3,784 -- -- 3,784
Stock granted................... 9,886 -- -- (78) (9,886) 116 38
---------- ----- ------- ------- ------- ------ -------
Balance, December 31, 2000........ 12,637,639 134 68,540 771 806,115 (9,484) 59,961
Net income...................... -- -- -- 2,485 $2,485 2,485
Other comprehensive income (loss):
Cumulative effect of adopting
FAS 133, net of tax of $750 $(1,124) (1,124)
Unrealized derivative instrument
loss, net of tax of $524 ( 787) ( 787) ( 787)
-----------
Comprehensive income $1,698
Stock granted 10,679 (89) (10,679) 125 36
Options exercised 1,000 ( 9) ( 1,000) 12 3
---------- ----- ------- ------ -------- ------- ------ -------
Balance, December 31, 2001........ 12,649,318 $134 $68,540 $3,158 $( 1,911) 794,436 $(9,347) $60,574
========== ===== ======= ====== ======== ======= ====== =======
The accompanying notes are an integral part of these financial
statements
F-5
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MAC-GRAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
1999 2000 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss)..................................................... $ (5,551) $ 3,784 $ 2,485
Adjustments to reconcile net income (loss) to net cash flows provided
by operating activities:
Depreciation and amortization.................................... 19,107 20,205 20,477
Impairment of goodwill........................................... 8,474 -- --
Allowance for doubtful accounts and lease reserves............... 104 79 525
Gain on sale of assets........................................... (352) (201) (52)
Deferred income taxes............................................ 2,784 2,857 1,635
Director stock grant............................................. -- 38 36
(Increase) decrease in accounts receivable....................... (357) 480 192
Decrease (increase) in inventory................................. (1,255) 3,130 (1,166)
Increase in prepaid expenses and other assets.................... (9,185) (3,440) (2,227)
Increase (decrease) in accounts payable, accrued route rent
and accrued expenses.......................................... 7,267 (3,030) (2,776)
Decrease in deferred revenues and customer deposits.............. (32) (725) (656)
-------- ------- -------
Net cash flows provided by operating activities............. 21,004 23,177 18,473
-------- ------- -------
Cash flows from investing activities:
Capital expenditures.................................................. (21,819) (13,983) (12,779)
Acquisition of businesses (Notes 4 and 5)............................. (3,539) -- --
Proceeds from sale of property and equipment.......................... 1,040 1,987 862
-------- ------- -------
Net cash flows used in investing activities................. (24,318) (11,996) (11,917)
-------- ------- -------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations.............. (2,857) (2,697) (1,846)
Advances (payments) on 2000 Senior Secured Credit Facility, net....... 15,445 (7,352) (6,203)
Proceeds from exercise of stock options............................... 20 -- 3
Cash paid to repurchase shares of common stock........................ (8,909) -- --
Cash paid for refinancing of long term debt........................... -- (983) --
-------- ------- -------
Net cash flows provided by (used in) financing activities... 3,699 (11,032) (8,046)
-------- ------- -------
Increase (decrease) in cash and cash equivalents........................... 385 149 (1,490)
Cash and cash equivalents, beginning of period............................. 6,181 6,566 6,715
-------- ------- -------
Cash and cash equivalents, end of period................................... $ 6,566 $ 6,715 $ 5,225
======== ======= =======
Supplemental cash flow information:
Interest paid......................................................... $ 7,020 $ 6,706 $ 6,774
Income taxes paid (received).......................................... $ (5) $ (243) $ 230
Supplemental disclosure of non-cash investing activities: During the
years ended December 31, 2000 and 2001, the Company acquired various vehicles
under capital lease agreements totaling $606 and $566, respectively.
The accompanying notes are an integral part of these financial
statements
F-6
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MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE BUSINESS-- Mac-Gray Corporation ("Mac-Gray" or the
"Company") generates the majority of its revenue from card/coin-operated laundry
rooms located in the Northeastern, Southeastern and Midwestern United States. A
large portion of its revenue is also derived from the sale and lease of the
Company's MicroFridge(R) product lines. The Company's principal customer base is
the multi-housing market, which includes apartments, condominium units, colleges
and universities, and military bases. The Company also sells, services and
leases commercial laundry equipment to commercial laundromats, multi-housing
properties and institutions. The Company also generates revenue from
card/coin-operated reprographics equipment located in university and municipal
libraries, and other buildings. The majority of the Company's purchases of
laundry equipment is from one supplier.
BASIS OF PRESENTATION--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. On occasion the Company has excess cash available for a short
period of time; when this occurs, the Company invests such excess cash in
repurchase agreements and other highly liquid short-term investments.
Accordingly, the investments are subject to minimal credit and market risk.
Included in cash and cash equivalents is an estimate of cash not yet collected
which remains at laundry and reprographics customer locations. At December 31,
2000 and 2001, this estimate was $4,526 and $3,655, respectively.
REVENUE RECOGNITION--The Company recognizes 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 MicroFridge(R) products and, at the time of sale,
provides reserves for all estimated warranty costs. Shipping and handling fees
charged to customers are recognized upon shipment of the products and included
in revenue.
The Company also enters into long-term lease transactions that meet the
qualifications of a sales-type lease. For these transactions, the amount of
revenue recognized upon product shipment is the present value of the minimum
lease payments, net of executory costs, together with the profit thereon,
discounted at the interest rate implicit in the lease. Interest revenue is
recognized over the life of the rental agreement. At December 31, 2000 and 2001
the Company had $13,064 and $14,351, respectively, in receivables related to
sales-type leases. These receivables have been recorded net of unearned interest
income of $2,711 and $1,059 at December 31, 2000 and 2001. These receivables are
primarily due ratably over the next seven years and have been classified as
other current assets and other long-term assets, as appropriate, in the balance
sheet. The related reserve for doubtful accounts at December 31, 2000 and 2001
was $0 and $450, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS--The Company maintains an allowance for
doubtful trade accounts receivable of $492 at December 31, 2000 and $567 at
December 31, 2001.
F-7
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MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
expose the Company to concentration of credit risk include trade and lease
receivables generated by the Company as a result of the selling and leasing of
laundry equipment and MicroFridge(R) products. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed and reserves
are maintained. The Company typically does not require collateral.
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, 2000 and 2001, based upon
terms currently available to the Company in financial markets.
INVENTORIES--Inventories are stated at the lower of cost (as determined
using the first-in, first-out method) or market, and consist of finished goods.
PREPAID ROUTE RENT--Prepaid route rent consists of cash advances paid
to property owners and managers 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. Upon retirement or sale, the cost of assets disposed of and
their related accumulated depreciation or amortization are removed from the
accounts, with the resulting gain or loss reflected in income.
COIN ROUTE EQUIPMENT-NOT YET PLACED IN SERVICE--These assets represent
laundry machines that management estimates will be installed in route laundry
rooms and have not been purchased for commercial sale.
ADVERTISING COSTS--Advertising costs are expensed as incurred. These
costs were $11,848, $10,542 and $10,994 for the years ended December 31, 1999,
2000 and 2001, respectively.
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 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--The Company reviews long-lived assets,
including goodwill, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Each impairment test is based on a comparison of the undiscounted cash flows to
the recorded value of the asset. If an impairment is indicated, the asset is
written down to its estimated fair value on a discounted cash flow basis.
F-8
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MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME TAXES--The Company accounts for income taxes utilizing the
asset and liability method as prescribed by Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under the provisions of FAS 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" ("APB No. 25"). The Company uses the disclosure
requirements of Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation". Under APB No. 25, the Company does not recognize
compensation expense on stock options granted to employees, because the exercise
price of each option is equal to the market price of the underlying stock on the
date of the grant.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE--The Company accounts for earnings per share in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 requires the presentation of basic earnings
per share ("EPS") and diluted earnings per share. Basic EPS includes no dilution
and is computed by dividing net income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. Diluted earnings per share has been calculated using the treasury
stock method.
OTHER COMPREHENSIVE INCOME--The Company accounts for comprehensive
income in accordance with Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income". This statement requires
disclosure of comprehensive income and its components in interim and annual
reports. Comprehensive income includes all changes in stockholders' equity
during a period except those resulting from investments by stockholders and
distributions to stockholders.
FINANCIAL INSTRUMENTS AND HEDGING--The Company uses interest rate swap
agreements to manage interest costs and the risks associated with changing
interest rates. As interest rates change, the differential paid or received is
recognized in interest expense of the period.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998 and June 2000, the
Financial Accounting Standards Board issued Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
and Financial Accounting Standard No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("FAS 138"). These statements amend
the accounting and reporting standards for certain derivative instruments and
hedging activities. FAS 133 and FAS 138 are effective for fiscal years beginning
after June 15, 2000. The Company adopted FAS 133 and FAS 138 on January 1, 2001.
F-9
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MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On July 20, 2001, the FASB issued Financial Accounting Standard No.
141, "Business Combinations" ("FAS 141"). FAS 141 requires the purchase method
of accounting be used for all business combinations initiated after June 30,
2001 and eliminated the pooling-of-interest method. Mac-Gray does not believe
the adoption of FAS 141 will have a significant impact on its consolidated
financial statements.
On July 20, 2001, the FASB issued Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 requires that
goodwill and certain intangible assets, including those recorded in past
business combinations, no longer be amortized to earnings, but instead be tested
for impairment at least annually. The provisions of FAS 142 are effective for
fiscal years beginning after December 15, 2001. The Company, with the assistance
of an independent firm, has performed an evaluation of its goodwill and other
intangible assets as recorded at December 31, 2001, in accordance with FAS No.
142.
The preliminary conclusions of this analysis suggest a write-off of the
goodwill associated with the reprographics segment, totaling less than one
million dollars. The Company anticipates no change to the goodwill balances
associated with the laundry or MicroFridge(R) businesses. This analysis is
expected to be completed by May 1, 2002, and reported with the results of
operations for the period ending March 31, 2002.
In August, 2001, the FASB issued Financial Accounting Standard No. 143,
"Accounting for Asset Retirement Obligations," ("FAS 143") which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 is required to be adopted for fiscal years beginning after June
15, 2002. Management does not expect the adoption of this standard to have any
impact on the Company's financial position or results of operations.
In October, 2001, the FASB issued Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets," ("FAS
144"). FAS 144 supercedes FASB Statement No. 121 ("FAS 121"), "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
of." FAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30
("APB 30"), "Reporting Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business." FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and will thus be
adopted by the Company, as required, on January 1, 2002. Management is currently
determining what effect, if any, FAS 144 will have on its financial position and
results of operations.
3. IMPAIRMENT OF GOODWILL
During 1999, the Company recorded a non-cash impairment charge of
$8,474, or $0.67 per share, related to the goodwill and intangible assets of
Copico, Inc. Since the acquisition of Copico, Inc. in 1998, the reprographics
segment produced operating losses. In accordance with the purchase method of
accounting the purchase price was assigned to the assets acquired and
liabilities assumed, with any excess purchase price being allocated to goodwill
and intangibles. The goodwill and intangibles recorded in connection with the
transaction was approximately $11,200.
The most significant reason for the poor performance of the segment was
the impact of technological advances, which affected the entire reprographics
industry. Specifically, the introduction of the Internet in college and public
libraries, and access to free laser printers led to fewer vended copies being
made than in prior years.
F-10
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MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
After initiating several strategic and operational changes throughout
1999, the Company performed a full-scale evaluation of the segment and its
long-term prospects in the fourth quarter of 1999. As a result of this
evaluation, management determined that the carrying amount of the Copico
long-lived assets exceeded the estimated undiscounted future cash flows expected
to result from operating this segment, and recognized a non-cash, non-recurring
impairment charge in the fourth quarter of 1999 as indicated above. This charge
was calculated in accordance with the provisions of SFAS No. 121 "Accounting for
the Impairment of Long-lived Assets and Assets to be Disposed Of."
4. 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.
The Company's consolidated financial statements include the results of the
1999 acquisitions from their respective acquisition dates.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other assets consist of the following:
DECEMBER 31,
2000 2001
Prepaid route rent................... $1,779 $1,862
Prepaid supplies..................... 2,471 2,325
Lease receivable..................... 2,754 3,382
Prepaid taxes........................ 851 615
Other................................ 867 744
------ ------
$8,722 $8,928
====== ======
6. PREPAID ROUTE RENT AND OTHER ASSETS
Prepaid route rent and other assets consist of the following:
DECEMBER 31,
2000 2001
Prepaid route rent................... $6,404 $6,153
Lease receivable..................... 9,129 9,223
Other................................ 1,969 1,726
------ ------
$17,502 $17,102
====== ======
F-11
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MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIFE 2000 2001
----------- ---- ----
Coin route equipment..................................... 10 years $101,964 $112,992
Rental equipment......................................... 7 years 12,010 10,080
Buildings and improvements............................... 15-39 years 9,671 10,278
Furniture, fixtures and computer equipment............... 2-7 years 6,660 7,418
Trucks and autos......................................... 3-5 years 5,108 5,305
Tooling costs............................................ 3 years 306 306
Land and improvements.................................... -- 221 221
-------- --------
135,940 146,600
Less: accumulated depreciation........................... 60,357 72,816
-------- --------
75,583 73,784
Coin route equipment, not yet placed in service.......... 1,784 1,814
-------- --------
Property, plant and equipment, net....................... $77,367 $75,598
======== ========
Depreciation and amortization of property, plant and equipment totaled
$14,587, $15,806, and $16,237 for the years ended December 31, 1999, 2000, and
2001, respectively.
At December 31, 2000 and 2001, trucks and autos included $4,745 and
$4,826, respectively, of capital leased equipment with an accumulated
amortization balance of $3,489 and $3,931, respectively.
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
2000 2001
Goodwill.................................. $59,172 $59,071
Covenants-not-to-compete.................. 4,981 4,481
Customer lists............................ 2,477 2,477
Other..................................... 1,670 1,635
------- -------
68,300 67,664
Less: accumulated amortization............ 16,182 19,752
------- -------
Intangible assets, net.................... $52,118 $47,912
======= =======
Amortization expense associated with the above intangible assets
amounted to $4,520, $4,399, and $4,240 for the years ended December 31, 1999,
2000 and 2001, respectively.
F-12
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Page 42
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
2000 2001
Accrued interest.................................... $939 $371
Accrued salaries.................................... 401 510
Accrued warranty.................................... 158 149
Current portion of deferred retirement obligation... 104 104
Accrued professional fees........................... 286 257
Customer deposits................................... 462 450
Accrued sales tax................................... 318 233
Accrued insurance................................... 407 --
Other accrued expenses.............................. 1,034 126
------ ------
$4,109 $2,200
====== ======
10. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at December 31, 2000 and 2001
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.
11. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
2000 2001
---- ----
Senior Secured Credit Facility................................................ $73,753 $67,550
Various fixed interest rate notes, (8.4%-11.51%) due through June 1, 2003..... 1,047 789
Discount note, 6% imputed interest rate (estimated fair market rate), quarterly
installments, due December 31, 2003..................................... .. 936 482
Acquisition note payable, 8% imputed interest rate (estimated fair market rate),
monthly payments, due May 31, 2006......................................... 607 504
-------- -------
Total long-term debt.......................................................... 76,343 69,325
Less: current portion......................................................... 6,321 7,104
-------- -------
$70,022 $62,221
======== =======
CREDIT AGREEMENT AND REVOLVING CREDIT FACILITY
On June 29, 2000 the Company entered into a new Senior Secured Credit
Facility with a group of banks. This transaction retired the April 23, 1998
Senior Facility which was due to convert to a term loan in April 2001.
The new revolving line of credit and term loan facility (the "2000
Senior Secured Credit Facility") provided for borrowings of up to $100,000. The
2000 Senior Secured Credit Facility provides for borrowings under a three-year
revolving line of credit of up to $65,000, and included a five-year $35,000
Senior Secured Term Loan Facility. Primarily through principal payments made
quarterly since the inception of the 2000 Senior Secured Credit Facility, the
$35,000 Senior Secured Term Loan Facility has been reduced to $24,800.
F-13
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Page 43
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Outstanding indebtedness under the 2000 Senior Secured Credit Facility
bears interest, at the Company's option, at a rate equal to the prime rate or
LIBOR plus 1.75%. The average interest rate at December 31, 2001 was
approximately 6.0%.
The 2000 Senior Secured Credit Facility restricts payments of
dividends and other distributions, restricts the Company from making certain
acquisitions and incurring indebtedness, and requires it to maintain certain
financial ratios. The 2000 Senior Secured Credit Facility is collateralized by a
blanket lien on the assets of the Company and each of its subsidiaries, as well
as a pledge by the Company of all of the capital stock of its subsidiaries. The
2000 Senior Secured Credit Facility is subject to certain financial and
operational covenants. The most restrictive of these covenants is maintaining
certain leverage ratios with which the Company was in compliance at December 31,
2001. At December 31, 2001, the Company failed to meet the required minimum
EBITDA covenant, for which a waiver was received from the Company's lenders.
Concurrent with the waiver of the covenant default, the 2000 Senior Secured
Credit Facility was amended to include a lower minimum EBITDA covenant target
for the remainder of the life of the 2000 Senior Secured Credit Facility. At
December 31, 2001 outstanding letters of credit amounted to $625. The 2000
Senior Secured Term Loan Facility matures in quarterly increments through June
2005. The unused balance under the 2000 Senior Secured Credit Facility was
$21,625 at December 31, 2001.
In February 2000, the Company entered into two standard International
Swaps and Derivatives Association ("ISDA") interest rate swap agreements with
its primary financial institution to manage the interest rate risk associated
with its Senior Credit Facility. Each agreement has a notional amount of $20,000
and maturity dates in February 2003 and 2005. The effect of the swap agreements
is to limit the interest rate exposure to a fixed rate of 7.38% and 7.42%
(versus the 90-day LIBOR rate) for the three year and five year swaps,
respectively. On January 9, 2002, the Company terminated the $20,000 swap that
expires in 2003 and entered into a $20,000 swap expiring in February 2004, with
a fixed interest rate of 7.38% until February 2002, and 6.38% thereafter. The
Company believes the risk associated with extending this fixed rate is more than
offset by the interest expense savings the Company will realize. In accordance
with the swap agreements and on a quarterly basis, interest expense is
calculated based on the floating 90-day LIBOR and the fixed rate. If interest
expense as calculated is greater based on the 90-day LIBOR, the financial
institution pays the difference to the Company; if interest expense as
calculated is greater based on the fixed rate, the Company pays the difference
to the financial institution. Depending on fluctuations in the LIBOR, the
Company's interest rate exposure and its related impact on interest expense and
net cash flow may increase or decrease. The Company is exposed to credit loss in
the event of non-performance by the other party to the swap agreement; however,
nonperformance is not anticipated.
The fair value of the interest rate swaps is the estimated amount that
the Company would receive or pay to terminate the agreement at the reporting
date, taking into account current interest rates and the credit worthiness of
the counterparty. At December 31, 2001, the Company estimates that it would have
paid $1,911, net of tax, to terminate these agreements.
The 2000 Senior Secured Credit Facility contains a commitment fee equal
to one quarter of one percent (0.25%) per annum of the average daily unused
portion of the Credit Facility.
F-14
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Page 44
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FUTURE PAYMENTS
As of December 31, 2001, the scheduled future principal payments of
long-term debt are as follows:
2002.......................................... 7,104
2003.......................................... 51,121
2004.......................................... 8,629
2005.......................................... 2,420
2006.......................................... 51
Thereafter.................................... --
-------
$69,325
=======
12. INCOME TAXES
The provision for state and federal income taxes consists of the
following:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 2000 2001
---- ---- ----
Current state income tax $ 106 $ 209 $ 276
Deferred state income tax 611 534 232
Current federal income tax (163) 96 388
Deferred federal income tax 2,173 2,323 1,403
---------------------------------------------------------
Total income taxes $ 2,727 $ 3,162 $2,299
=========================================================
The net deferred tax liability in the accompanying balance sheets
includes the following amounts of deferred tax assets and liabilities at
December 31:
2000 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards $1,286 $ 771
Alternative minimum tax credit carryforwards 1,087 1,538
Accounts receivable 193 398
Deferred compensation 725 497
Amortization 193 124
Deferred Revenue 181 213
Other 243 233
-------- ---------
3,908 3,774
-------- ---------
Deferred tax liabilities:
Depreciation 13,955 14,885
Sales-type leases 2,579 3,150
-------- ---------
16,534 18,035
-------- ---------
Net deferred tax liabilities $12,626 $14,261
======== =========
F-15
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Page 45
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the year ended December 31, 1999, 2000, and 2001 the statutory
income tax rate differed from the effective rate primarily as a result of the
following differences:
1999 2000 2001
---- ---- ----
Taxes computed at federal statutory rate (34.0%) 34.0% 34.0%
State income taxes, net of federal benefit (5.3) 6.0 6.5
Non-deductible goodwill 18.1 3.3 4.7
Impairment of non-deductible goodwill 117.8 -- --
Other -- 2.2 2.9
--------------------------------
Income tax provision 96.6% 45.5% 48.1%
================================
At December 31, 2001, the Company has the following net operating loss
carryforwards available to reduce certain future federal taxable income:
Net operating loss carryforwards relating to certain losses incurred in the
year ending June 30, 1995 $ 931
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 2000 2
-------
$ 933
=======
At December 31, 2001, the Company has the following net operating loss
carryforwards available to reduce certain future state taxable income:
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 1999 $4,113
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 2000 2,268
Net operating loss carryforwards relating to certain losses incurred in the
year ending December 31, 2001 2,252
-------
$8,633
=======
The state net operating loss carryforwards from the years ended
December 31, 1999, 2000 and 2001 expire 20 years from the year in which they
were incurred, except for the Massachusetts portion. The Massachusetts portion
of the net operating loss carryforward is $3,977, of which $3,363 expires in the
year ending December 31, 2004, and $614 expires in the year ending December 31,
2005.
The federal net operating loss carryfoward from the year ended June 30,
1995 expires 15 years from the year in which it was incurred. The federal net
operating loss carryforward from the year ended December 31, 2000 expires 20
years from the year in which it was incurred.
F-16
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Page 46
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. REPURCHASE OF COMMON STOCK
On October 29, 1998, the Board of Directors authorized the Company to
repurchase up to $8,000 of its common stock through the open market. Mac-Gray
repurchased 62,100, and 156,200 shares through December 31, 1998 and 1999 under
the plan for a total cash outlay of $706 and $1,269, respectively.
In January 1999, the Company paid $7,645 to a shareholder for shares of
stock originally issued in connection with a 1997 acquisition. These shares of
the Company's common stock were redeemable at the election of the shareholder.
14. SEGMENT INFORMATION
The Company operates three business segments which are based on the
Company's different product and service categories: Laundry, MicroFridge(R) and
reprographics. These three business segments have been aggregated into two
reportable segments ("Laundry and Reprographics" and "MicroFridge(R)"). The
laundry and reprographics business segments have been aggregated into one
reportable segment (laundry and reprographics) since many operating functions of
the laundry and reprographics operations are commingled. The Laundry segment
provides card/coin-operated laundry equipment to multi-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
card/coin-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 tables below present information about the reported operating income of
Mac-Gray for the years ended December 31, 1999, 2000, and 2001.
YEAR ENDED DECEMBER 31, 1999
---------------------------------
LAUNDRY
AND
REPROGRAPHICS MICROFRIDGE(R) TOTAL
------------- ----------- -----
Revenues.................................................. $119,918 $28,645 $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.............................................. 155,058 16,863 171,921
YEAR ENDED DECEMBER 31, 2000
---------------------------------
LAUNDRY
AND
REPROGRAPHICS MICROFRIDGE(R) TOTAL
------------- ----------- -----
Revenues............................................... $ 124,422 $29,846 $154,268
Gross margin........................................... 25,033 10,115 35,148
Depreciation and amortization.......................... 17,191 2,104 19,295
Capital expenditures................................... 12,341 167 12,508
Total assets........................................... 145,988 20,559 166,547
F-17
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Page 47
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001
---------------------------------
LAUNDRY
AND
REPROGRAPHICS MICROFRIDGE(R) TOTAL
------------- ----------- -----
Revenues................................................ $ 126,215 $ 25,854 $ 152,069
Gross margin............................................ 23,318 7,624 30,942
Depreciation and amortization........................... 17,772 1,784 19,556
Capital expenditures.................................... 11,949 316 12,265
Total assets............................................ 136,994 23,569 160,563
The following are reconciliations to corresponding totals in the
accompanying consolidated financial statements:
1999 2000 2001
------ ------ ------
Income
Total gross margin for reportable segments............. $33,516 $35,148 $30,942
Operating expenses..................................... (30,375) (21,555) (21,018)
Interest expense, net.................................. (6,085) (6,770) ( 5,164)
Other expense, net..................................... 120 123 24
------- ------- -------
Income (loss) before provision for income taxes............. $(2,824) $ 6,946 $ 4,784
======= ======= =======
1999 2000 2001
------ ------ ------
Depreciation and amortization
Total for reportable segments.......................... $ 18,649 $ 19,295 $ 19,556
Corporate.............................................. 458 910 921
------- -------- --------
Total depreciation and amortization......................... $ 19,107 $20,205 $ 20,477
======= ======== ========
1999 2000 2001
------ ------ ------
Capital expenditures
Total for reportable segments.......................... $21,021 $12,508 $ 12,265
Corporate.............................................. 798 1,475 514
------- -------- --------
Total capital expenditures.................................. $21,819 $13,983 $ 12,779
======= ======== ========
1999 2000 2001
------ ------ ------
Assets
Total for reportable segments........................... $ 171,921 $ 166,547 $ 160,563
Corporate (1)........................................... 8,407 7,260 6,488
Deferred income taxes................................... 637 818 844
-------- --------- --------
Total assets................................................. $ 180,965 $ 174,625 $ 167,895
======== ========= ========
(1) Principally cash, prepaid expenses, property, plant & equipment. Certain
prior year reclassifications have been made between corporate and reportable
segments to more accurately distribute assets.
F-18
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Page 48
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. 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,
2002............................................................... $ 571 $ 859
2003............................................................... 274 694
2004............................................................... 68 668
2005............................................................... -- 510
2006 and thereafter................................................ -- 223
------- -------
Future lease payments.............................................. 913 $ 2,954
=======
Less: amount representing interest (LIBOR of 1.85% at December 31, 2001).. 19
------
894
Present value future minimum lease payments less amounts due within
one year.............................................................. 543
------
Amounts due after one year....................................................... $ 351
======
Rent expense incurred by the Company under non-cancelable operating
leases totaled $875, $934, and $1,169 for the years ended December 31, 1999,
2000 and 2001, respectively.
GUARANTEED ROUTE RENT PAYMENTS--The Company operates coin laundry
routes under various lease agreements in which the Company is required to make
minimum guaranteed rent payments to the respective lessors. The following is a
schedule by years of future minimum guaranteed rent payments required under
these lease agreements that have initial or remaining non-cancelable contract
terms in excess of one year as of December 31, 2001:
2002.................................... $4,450
2003.................................... 3,902
2004.................................... 3,271
2005.................................... 2,084
2006.................................... 1,615
Thereafter.............................. 3,496
-------
$18,818
=======
F-19
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Page 49
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LITIGATION--The Company is involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Company's ultimate liability, if any, under pending litigation would not
materially affect its financial condition or the results of its operations.
16. 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 $597, $623 and $643, for the years
ended December 31, 1999, 2000 and 2001, respectively.
STOCK OPTION AND INCENTIVE PLANS--On April 7, 1997, the Board of
Directors adopted, and the Company's stockholders approved, the 1997 Stock
Option and Incentive Plan for the Company (the "1997 Stock Plan"). The 1997
Stock Plan is designed and intended as a performance incentive for officers,
employees, consultants and directors to promote the financial success and
progress of the Company. All officers, employees and independent directors are
eligible to participate in the 1997 Stock Plan. Awards, when made, may be in the
form of stock options, restricted stock, unrestricted stock options, and
dividend equivalent rights. The 1997 Stock Plan requires the maximum term of
options to be ten years.
Employee options generally vest such that twenty percent (20%) of the
options will become exercisable on each of the first through fifth anniversaries
of the date of grant of the options; however, the Administrator of the 1997
Stock Plan may determine, at its discretion, the vesting schedule for any option
award. In the event of termination of the optionees' relationship with the
Company, vested options not yet exercised terminate within 90 days. The 1997
Stock Plan also provided for the automatic annual grant to each of the
independent directors to purchase 1,000 shares of common stock. The
non-qualified options granted to independent directors are exercisable
immediately and will terminate on the tenth anniversary of the grant. The
exercise prices are the fair market value of the shares underlying the options
on the respective dates of the grants. Other than the stock option grants, there
were no other grants of equity-based compensation awards.
The 1997 Stock Plan provides for the issuance of up to the greater of
750,000 shares of common stock or ten percent of the outstanding shares of
common stock. At December 31, 2001, approximately 1,265,000 shares of common
stock were reserved for issuance under the 1997 Stock Plan, of which 779,600
shares were subject to outstanding options and 485,400 remained available for
issuance.
During 2000 a significant number of options granted in prior years were
forfeited. All forfeited options had an exercise price in excess of the market
price on the date of forfeiture. These forfeitures had no impact on the results
of operations for the year ended December 31, 2000.
F-20
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Page 50
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:
1999 2000 2001
--------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- ----------
Outstanding, beginning of year..... 890,940 $10.09 899,949 $ 9.80 136,000 $ 9.39
Granted............................ 176,935 $ 9.01 25,500 $ 3.25 740,100 $ 3.47
Exercised.......................... (630) $ 8.82 -- -- ( 1,000) $ 3.13
Canceled........................... -- -- -- -- -- --
Forfeited.......................... (167,296) $10.60 (789,449) $ 9.64 (95,500) $ 6.85
-------- ------ -------- ------- -------- ------
Outstanding, end of year........... 899,949 $ 9.80 136,000 $ 9.39 779,600 $ 4.09
======== ====== ======= ====== ======= ======
Exercisable, end of year........... 424,679 $ 9.50 85,500 $ 9.59 153,100 $ 5.74
======== ====== ======= ====== ======= ======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER AVERAGE
OUTSTANDING REMAINING AVERAGE EXERCISE EXERCISABLE EXERCISE
AT 12/31/01 CONTRACTUAL LIFE PRICE AT 12/31/01 PRICE
------------ ---------------- ---------------- ------------- -----------
$3.13-$3.70............... 719,600 9.4 $ 3.68 93,100 $ 3.65
$7.94-$8.50............... 55,000 7.3 $ 8.49 55,000 $ 8.49
$11.00-$16.06............. 5,000 6.2 $14.49 5,000 $14.49
------- ------ ------- ------- -------
779,600 9.2 $ 4.09 153,100 $ 5.74
======= ====== ======= ======= =======
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), $3,699 and $2,446 or
($0.48), $0.29 and $0.19 per share in 1999, 2000 and 2001, respectively compared
to reported net income (loss) of ($5,551), $3,784, and $2,485, or ($0.44), $0.30
and $0.20 per share in 1999, 2000 and 2001, respectively.
The fair value of the Company's options was estimated as of the date of
grant using a Black-Scholes option pricing model with the following components:
December 31,
----------------------------------
1999 2000 2001
-------- --------- --------
Fair value of options granted at grant date....... $ 5.68 $1.76 $1.87
Risk free interest rate........................... 5.3% 5.1% 4.4%-4.8%
Expected option term--Employees................... 7 years 7 years 7 years
Expected option term--independent directors....... 3 years 3 years 3 years
Expected volatility............................... 50% 50% 45%
F-21
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Page 51
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
MAC-GRAY CORPORATION 2001 EMPLOYEE STOCK PURCHASE PLAN--The Company
established the Mac-Gray Corporation 2001 Employee Stock Purchase Plan (the
"ESPP") in May of 2001. Under the terms of the ESPP, eligible employees may have
between 1% and 15% of eligible compensation deducted from their pay to purchase
common stock. The per share purchase price is 85% of the fair market value of
the stock on the relevant date. Up to 200,000 shares may be offered pursuant to
the ESPP. The plan includes certain restrictions, such as the holding period of
the stock by employees. At December 31, 2001 the Company had accumulated
employee withholdings associated with this plan of $28, for acquisition of stock
in 2002.
17. EARNINGS PER SHARE
FOR THE YEAR ENDED 2001
---------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net income--basic............................................. $ 2,485 12,645 $ 0.20
======= ====== ======
Effect of dilutive securities:
Stock options............................................ 2
------
Net income--diluted. ......................................... $ 2,485 12,647 $ 0.20
======= ====== ======
FOR THE YEAR ENDED 2000
------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net income--basic............................................. $ 3,784 12,634 $ 0.30
======= ====== ======
Effect of dilutive securities:
Stock options............................................ --
------
Net income--diluted........................................... $ 3,784 12,634 $ 0.30
======= ====== ======
FOR THE YEAR ENDED 1999
------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Net income--basic............................................. $ (5,551) 12,661 $ (0.44)
======== ====== -======
Effect of dilutive securities:
Stock options............................................ 7
------
Net income--diluted........................................... $ (5,551) 12,668 $ (0.44)
======== ====== -======
F-22
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Page 52
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (unaudited)
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 2001
------------------------------------------- -------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr TOTAL 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr TOTAL
------- ------- ------- ------- -------- ------- ------- ------- ------- --------
Revenue.........................$37,213 $39,086 $39,186 $38,783 $154,268 $38,220 $36,574 $38,974 $38,301 $152,069
Cost of revenue................. 28,894 30,498 30,346 29,382 119,120 30,276 29,708 31,030 30,113 121,127
Operating expenses.............. 5,562 5,327 5,384 5,282 21,555 5,338 4,892 5,439 5,349 21,018
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations.......... 2,757 3,261 3,456 4,119 13,593 2,606 1,974 2,505 2,839 9,924
Interest expense, net........... 1,581 1,502 1,880 1,684 6,647 1,506 1,304 1,277 1,053 5,140
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before provision
for income taxes.............. 1,176 1,759 1,576 2,435 6,946 1,100 670 1,228 1,786 4,784
Provision for income taxes(3)... 561 786 717 1,098 3,162 520 351 599 829 2,299
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income ..................... $ 615 $ 973 $ 859 $1,337 $3,784 $ 580 $ 319 $ 629 $ 957 $2,485
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net income per common
share - basic................. $0.05 $0.08 $0.07 $0.11 $0.30 $0.05 $0.03 $0.05 $0.08 $0.20
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted average common
shares outstanding............ 12,630 12,632 12,635 12,637 12,634 12,640 12,644 12,646 12,649 12,645
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net income per common
share - diluted............... $0.05 $0.08 $0.07 $0.11 $0.30 $0.05 $0.03 $0.05 $0.08 $0.20
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted average common shares
outstanding - diluted......... 12,630 12,633 12,635 12,638 12,634 12,644 12,646 12,646 12,649 12,647
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
F-23
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Page 55
MAC-GRAY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
BALANCE CHARGED TO BALANCE
BEGINNING COST AND AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
Year Ended December 31, 2001:
Allowance for doubtful accounts and lease reserves..... $ 492 $ 706 $ (181) $1,017
Year Ended December 31, 2000:
Allowance for doubtful accounts and lease reserves..... $ 413 $ 1,420 $(1,341) $ 492
Year ended December 31, 1999:
Allowance for doubtful accounts and lease reserves..... $ 309 $ 643 $ (539) $ 413
F-24
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Page 54