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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO 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 IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
22 WATER STREET 02141
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 492-4040
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, par value $.01 per
share New York Stock Exchange
</TABLE>
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. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of March 10, 1998 was $84,235,669. As of
March 10, 1998, 11,581,126 shares of Common Stock, par value $.01 per share,
of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 2, 1998 are incorporated by reference into
Part III of this Report.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Unless the context requires otherwise, all references in this Report to Mac-
Gray shall mean Mac-Gray Corporation and its subsidiaries and predecessors,
including (i) Mac-Gray Services, Inc., a Delaware corporation, that was
formerly known as Mac-Gray Co., Inc. ("Mac-Gray Co."), and Mac-Gray, L.P., a
Delaware limited partnership (the "Limited Partnership"), and (ii) businesses
that Mac-Gray has acquired through December 31, 1997 from their respective
dates of acquisition, including the acquisition (the "Sun Services
Acquisition") of Sun Services of America, Inc., a Florida corporation ("SSA"),
and R. Bodden Coin-Op-Laundry, Inc., a Florida corporation ("RBCO" and,
together with SSA, "Sun Services"). Both the Sun Services Acquisition and a
reorganization of Mac-Gray Co. and the Limited Partnership occurred on April
17, 1997.
On October 22, 1997, Mac-Gray completed its initial public offering of
4,600,000 shares of Mac-Gray Common Stock at an offering price of $11 per
share (the "IPO"). Upon consummation of the IPO, Mac-Gray's status as an S
corporation automatically terminated and Mac-Gray became subject to taxation
as a C corporation for federal and state income tax purposes.
RECENT DEVELOPMENTS
On March 12, 1998, Mac-Gray acquired Intirion Corporation ("Intirion"), for
approximately 1.6 million shares of Mac-Gray Common Stock and approximately $1
million in cash (the "Intirion Acquisition"). Intirion is a supplier of
combination refrigerator/freezer/microwave ovens to multiple housing
facilities such as colleges and universities, military bases, economy hotels
and motels and assisted living facilities. For the twelve month period ended
June 30, 1997, Intirion had total revenues of approximately $23.5 million. The
transaction is being accounted for as a pooling of interests. The historical
financial statements for Intirion have been filed with the Securities and
Exchange Commission as part of a current report on Form 8-K.
On March 4, 1998, Mac-Gray entered into a Stock and Asset Purchase
Agreement, pursuant to which Mac-Gray will acquire one hundred percent of the
outstanding capital stock of Amerivend Corporation and the assets of Amerivend
Southeast Corporation (together, "Amerivend"). In addition to being the
largest provider of card and coin-operated laundry equipment in Florida,
Amerivend adds to Mac-Gray's route business in the Atlanta market. Amerivend
is also the principal distributor of Maytag commercial laundry products in
Alabama, Georgia and Florida. Founded in 1959, Amerivend had 1997 revenues of
$18.6 million and has offices in Miami, Orlando, Tampa and Atlanta. The
purchase price, which is subject to certain adjustments, will be approximately
$33.5 million in cash, including the payment of certain debt. The purchase
price will be funded by Mac-Gray by drawing on its existing credit facility.
The transaction is subject to customary closing conditions, including
regulatory filings, and is expected to close in the second quarter.
GENERAL
Mac-Gray, founded in 1927, believes that it is among North America's largest
suppliers of card and coin-operated laundry services in multiple housing
facilities such as apartment buildings, colleges and universities and public
housing complexes, and, based upon Mac-Gray's ongoing survey of colleges and
universities, is North America's largest supplier of such services to the
college and university market. Mac-Gray owns and operates approximately
120,000 card and coin-operated washers and dryers in more than 17,000 multiple
housing laundry rooms located in 26 states east of the Rocky Mountains. In
addition, Mac-Gray believes that it is the largest operator of commercial
laundry products manufactured by The Maytag Corporation ("Maytag"). Mac-Gray's
revenues, earnings before interest, taxes, depreciation and amortization
("EBITDA") and pro forma net income for the twelve months ended December 31,
1997, were approximately $81.4 million, $19.6 million and $4.7 million,
respectively.
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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, which have an average remaining
life of more than seven years, Mac-Gray typically receives the exclusive right
to operate laundry rooms within a multiple housing property in exchange for a
percentage of the revenue collected. Mac-Gray has been able to retain 99% of
its existing machine base, while also adding an average of 5.1% to its machine
base, during each of the past five years. Mac-Gray believes that its ability
to retain its existing machine base in the past, while growing its machine
base through acquisitions, is indicative of its service of, and attention to,
property owners and managers. The property owner or manager is usually
responsible for maintaining and cleaning the premises and for payment of the
utilities. Mac-Gray leases space within a property, in some instances improves
the leased space with new flooring, ceilings and other improvements, and then
installs and services the laundry equipment and collects the revenue. Mac-Gray
sets and adjusts the pricing for its machines based upon local market
conditions.
Mac-Gray is also a significant distributor for several major equipment
manufacturers, including Maytag. As an equipment distributor, Mac-Gray sells
commercial laundry equipment to public laundromats, as well as to the real
estate industry. Mac-Gray is also certified by the manufacturers to service
the commercial laundry equipment that it sells. Mac-Gray also sells commercial
laundry equipment directly to institutional purchasers, including hospitals,
restaurants and hotels, for use in their own on-premise laundry facilities.
Mac-Gray manages its laundry route business and its distribution and
servicing business from its corporate headquarters in Cambridge,
Massachusetts, where it has centralized its administrative, billing,
marketing, purchasing and refurbishing operations. Mac-Gray also operates
sales and/or service centers in Connecticut, Florida (three locations),
Georgia, Illinois, Maine, Missouri, New York (two locations), North Carolina
and Pennsylvania.
FINANCIAL CHARACTERISTICS OF MAC-GRAY'S BUSINESS
Mac-Gray's business has the following financial and operational
characteristics:
RECURRING REVENUE--Mac-Gray operates laundry equipment located in
multiple housing facilities under long-term leases with property owners. In
addition, Mac-Gray's efforts are designed to maintain customer
relationships over the long-term.
HISTORICALLY NON-CYCLICAL BUSINESS--Mac-Gray has not experienced a
reduction of its business as a result of past general economic downturns,
including the recession that occurred in the early 1990s, although there
can be no assurance that this would be the case in the future. Mac-Gray
believes that many larger property owners and managers may be even more
inclined to outsource non-core operations, such as laundry services, during
economic downturns as they seek to control capital expenditures while
maximizing resident retention through the availability of quality services
and amenities.
DIVERSIFIED AND STABLE CUSTOMER BASE--Mac-Gray provides laundry services
to more than 17,000 laundry rooms located in 26 states east of the Rocky
Mountains. Currently, no lessor represents more than 1% of Mac-Gray's
machine base. Mac-Gray serves customers in a number of markets including
apartment buildings, colleges and universities, condominiums and public
housing complexes.
INDUSTRY OVERVIEW
The card and coin-operated laundry services industry serves multiple housing
markets such as apartment buildings, colleges and universities, condominiums
and public housing complexes. Mac-Gray estimates, based upon its analysis of
1990 U.S. Department of Census data on multi-family housing units and colleges
and universities, as well as its analysis of related U.S. Department of Census
research surveys conducted during 1996, that these markets contain more than
3.5 million machines nationally, generating more than $2.0 billion in annual
revenues, and approximately 1.7 million machines in Mac-Gray's current
geographic markets. Trends in the real estate market generally, and in the
multiple housing industry specifically, are having a significant impact on the
laundry services industry and have resulted in increasing consolidation.
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The consolidation taking place in the real estate ownership and management
industries, including consolidation caused by the growth of REITs and large
national property management companies, has begun to have an impact on the
multiple housing environment, most noticeably through ownership and operation
of apartment complexes by larger organizations and more geographically diverse
property managers. Many of these larger, more geographically diverse entities
are beginning to outsource on-premise services to enable the property owner or
manager to focus on their core business. By outsourcing services, property
owners and managers are able to respond more quickly and efficiently to the
residents' needs, thereby increasing retention, the critical factor in these
larger entities' profitability. These same property owners and managers are
also increasingly looking for service providers that can service multiple
locations with a broader product mix.
The laundry services industry has historically been served by small,
independent owner-operators. Many of these independent business owners
commenced operations during the 1940s and 1950s and are facing generational
transfer issues as they reach retirement age. While many of these
entrepreneurs enjoy excellent reputations, they are confronted with
significant capital expenditures necessary to upgrade existing equipment and
implement newly available payment technologies. Faced with these factors, many
are choosing to sell their businesses.
Recent developments in cashless payment technology have also begun to change
the way in which the laundry services industry conducts business. Cashless
payment technology, the costs of which have historically outweighed the
benefits, has recently become more affordable which, Mac-Gray believes, will
lead to more cashless, card-based laundry rooms. The benefits of cashless
payment technology include enhanced user convenience, the potential for modest
incremental price increases, variable time pricing, reduced administrative
burden and improved cash controls. Cashless payment technology will also
provide property owners with the ability to integrate laundry room services
with previously unrelated amenities, such as door and area access,
photocopying, telephone, rent collection, vending machines and other ancillary
services.
The card and coin-operated laundry service industry is also influenced by
societal trends in multi-family housing, whether it be in the retirement,
assisted-living or low income rental markets or in the development of larger
and more full-service apartment and condominium communities. As the retirement
age population grows, retirement and full-service assisted living facilities
are being increasingly utilized by those who desire a communal, secure living
arrangement with access to a full range of on-premise services. Mac-Gray
believes that the trend towards multi-family housing will lead to increased
demand for on-premise, modern laundry rooms as well as other amenities.
Mac-Gray believes that the factors discussed above have created an
opportunity for those companies with strong financial and management resources
to grow their customer base and increase revenue and cash flow.
COMPANY STRATEGY
Mac-Gray's strategic objectives are to (i) grow its revenue and customer
base and increase profitability and cash flow by refining and expanding its
present operations and (ii) capitalize on the consolidation opportunities that
exist in the highly fragmented laundry services industry. In order to achieve
these objectives, Mac-Gray intends to:
EXPAND CUSTOMER BASE IN EXISTING MARKETS--Mac-Gray intends to use its
sales and marketing resources, which have significantly increased during
the past 21 months, to secure additional customers in its existing markets.
Mac-Gray's sales force is organized to focus on specific markets including
larger property owners, such as REITs and public housing authorities,
geographically diversified property managers and colleges and universities.
Mac-Gray relies substantially on referrals from existing customers and
intends to continue its historic, proactive attention to customer service
and satisfaction. This focus has resulted in a 99% machine retention rate
over the past five years.
IMPLEMENT NEWLY AVAILABLE TECHNOLOGY--Mac-Gray has installed smart card
readers in more than 5,100 laundry machines since April 1, 1997 and intends
to accelerate the use of cost-effective smart-card
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based payment and access systems. Smart-card based payment technology
permits Mac-Gray to make modest, periodic price increases, as well as to
establish variable time pricing, which will add incremental revenue. The
installation of smart card readers has increased revenue at existing
facilities and has also attracted additional customers as a result of Mac-
Gray providing a broader product offering.
Mac-Gray particularly believes that smart-card based payment systems are
making its laundry equipment more convenient by eliminating the need to
gather coins to use the equipment. Mac-Gray has experienced increased usage
in some of its laundry facilities following the recent installation of
smart card readers. In addition, as card-based technologies become more
prevalent, their use may also permit Mac-Gray to offer other smart-card
based services to its customers, including door and area access,
photocopying, vending machines, telephones, rent collection and other
ancillary services.
PURSUE STRATEGIC ACQUISITION OPPORTUNITIES--Mac-Gray intends to continue
to acquire and integrate businesses that both increase penetration in
existing markets and also strategically expand Mac-Gray's geographic
presence. Mac-Gray believes that in-market acquisitions will allow it to
capitalize on operating efficiencies and increase market penetration. In
addition, Mac-Gray intends to acquire laundry room operations in new
markets in order to increase its geographic diversity and broaden its
potential customer base. Mac-Gray will continue its disciplined approach to
evaluating expansion opportunities, including an analysis of each
acquisition candidate's projected cash flow as compared to Mac-Gray's
desired internal rate of return.
INCREASE LEADING POSITION IN COLLEGE AND UNIVERSITY MARKET--Mac-Gray
intends to strengthen its leading position in the college and university
market and to use it as a foundation for growth in both existing and new
geographic markets. Mac-Gray will continue to utilize a sales force which
focuses exclusively on this specialized market, which is often the first to
demand new products and services. In addition, Mac-Gray intends to broaden,
through acquisitions, the services offered to its existing college and
university customers, including ancillary services typically used by
college students, which may be outside Mac-Gray's current core business.
INTERNAL GROWTH
Mac-Gray's internal growth strategy is based upon its philosophy that to
experience real, sustainable long-term growth it must retain and build upon
its existing customer base. Mac-Gray has significantly increased its sales and
marketing resources during the past 21 months in order to take advantage of
opportunities which have arisen as a result of the consolidation in the real
estate industry. Nearly all of Mac-Gray's employees are eligible for incentive
bonuses based upon the net growth of Mac-Gray's customer base. Mac-Gray's
efforts have helped it to retain 99% of its existing machine base, while also
adding an average of 5.1% to its machine base, during each of the past five
years. Mac-Gray's internal growth strategy, which is intended to expand Mac-
Gray's customer base and to grow revenue, focuses on three distinct efforts:
(i) use cashless payment technology to generate increased incremental revenue,
(ii) convert owner-operated laundry rooms to Mac-Gray-operated laundry rooms
and (iii) secure new locations that were previously served by other
independent operators.
USE EMERGING PAYMENT TECHNOLOGY--Mac-Gray intends to use smart-card based
cashless payment systems to generate incremental revenue at existing
locations. For example, Mac-Gray's smart-card based payment systems, including
those available through Mac-Gray's arrangements with Schlumberger
Technologies, Inc. ("Schlumberger"), permit Mac-Gray or the property owner to
implement modest periodic price increases and to use variable time pricing to
increase Mac-Gray's revenue and to maximize machine usage. Prior to the
availability of smart-card based cashless payment systems, modest incremental
price increases could not be implemented because of the use of twenty-five
cent coins to operate the laundry machines and the risk of imposing larger
price increases than a particular user-base would accept without experiencing
a reduction in usage. Mac-Gray intends to accelerate its use of smart-card
based payment technology at existing locations by converting coin-operated
equipment in response to customer demand. Mac-Gray further intends to continue
to install smart card readers in machines at new locations as property owners
and managers request this new technology in their efforts to retain tenants.
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CONVERT SELF-OWNERS--Mac-Gray actively markets to property owners and
managers who own and operate on-premise laundry rooms ("Self-Owners"). By
outsourcing their laundry service operations to Mac-Gray, these Self-Owners
can achieve economic benefits through decreased capital expenditures and
increased cash flow. In addition, this outsourcing permits property owners and
managers to focus on their core business with the knowledge that a quality
service provider is delivering services that help to retain residents. Mac-
Gray further believes that its reputation for integrity in collection, a local
sales force and prompt, efficient service, provide Mac-Gray with a competitive
advantage in successfully converting Self-Owners to Mac-Gray customers. For
example, in December 1996, Mac-Gray acquired The Laundry Works, a division of
Boston Financial Group, L.P. ("BFG"), a large property management company
headquartered in Boston, Massachusetts, which resulted in the conversion of
more than 500 machines at 18 locations in seven states from self-owned and
operated laundry rooms to Mac-Gray-operated laundry rooms. Mac-Gray believes
that BFG will realize a reduction in capital and administrative expenditures
related to self-ownership, which should increase BFG's cash flows.
SECURE NEW LOCATIONS PREVIOUSLY SERVED BY COMPETITORS--Mac-Gray's sales and
marketing efforts focus significantly on properties where leases with
competitors are nearing expiration. Mac-Gray's marketing department maintains
an extensive database of prospective customers, including competitors'
customers, which includes detailed information that assists Mac-Gray in its
efforts to secure new customers. Mac-Gray has also historically achieved
significant growth in this area through referrals from existing customers.
STRATEGIC ACQUISITIONS
Mac-Gray intends to continue to take advantage of the opportunities created
by the changes in the card and coin-operated laundry services industry through
strategic acquisitions of local and regional laundry route businesses. Mac-
Gray has accelerated its acquisition efforts by adding to its senior
management team, increasing its sales and marketing departments and
substantially increasing the funds available under its Credit Facility. During
the last two years, Mac-Gray has acquired nine laundry route businesses,
contributing to the growth in its machine base. The following table summarizes
the locations of these laundry route acquisitions:
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DATE LOCATION
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May 1996....................................... Syracuse, New York
June 1996...................................... Buffalo, New York
August 1996.................................... St. Louis, Missouri
September 1996................................. Georgia and South Carolina
December 1996.................................. Madison, Wisconsin
December 1996.................................. Boston, Massachusetts
April 1997..................................... Tampa, Florida
October 1997................................... Largo, Florida
November 1997.................................. Tucker (Atlanta), Georgia
</TABLE>
Mac-Gray believes that its access to capital and its proven ability to
acquire and integrate smaller independent laundry route operators with its
operations provides it with a competitive advantage when pursuing some of the
numerous, private, family-owned businesses that, in many cases, are
experiencing generational ownership changes. Many of these independent owner-
operators have decided to sell their businesses because they either have
elected not to expend the financial resources necessary, or lack access to the
additional capital necessary to upgrade existing equipment and to implement
new technology in order to compete with larger operators, such as Mac-Gray.
Mac-Gray's acquisition strategy has historically included both in-market
acquisitions, which increase Mac-Gray's presence in its existing geographic
markets, as well as add-on acquisitions, which establish Mac-Gray in a
geographic market in which it does not have a significant presence. Mac-Gray's
acquisition efforts have historically focused on both small, local, as well as
regional, laundry route operators. Mac-Gray believes this focus on smaller to
mid-sized acquisitions has enabled it to experience significant, long-term
growth because it permits Mac-Gray to successfully integrate these acquired
businesses into existing operations without adversely affecting its overall
customer service.
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Local Laundry Route Operators. The purchase of small, local laundry route
operators and the integration of their assets into Mac-Gray's operations
results in a lower overall cost structure for the acquired business. Mac-Gray
expects to continue to evaluate additional opportunities to acquire laundry
route businesses from independent owner-operators to further increase
operating leverage within its markets. In many regions, Mac-Gray may be able
to acquire laundry routes contiguous with its existing areas of operation
without incurring significant incremental administrative costs.
Regional Laundry Route Operators. A regional laundry route acquisition is
typically larger in size and provides Mac-Gray with the opportunity to improve
its cash flow by significantly increasing total revenue, by eliminating
duplicative corporate and administrative functions and by reducing capital
expenditures through improved purchasing power. The acquisition of a regional
laundry route also provides a geographic footprint from which Mac-Gray's sales
staff can operate to increase market penetration.
In order to offer its customers a comprehensive set of products and services
to meet their residents' increasing demands, Mac-Gray may also choose to
pursue acquisitions of businesses that can provide additional services to Mac-
Gray's customer base and target markets. Mac-Gray believes that, although
certain of these ancillary services may be outside Mac-Gray's current core
business, certain operating characteristics, such as the similarity of sales
distribution networks, customer decision makers and payment and collection
procedures, may present Mac-Gray with attractive growth opportunities.
CARD AND COIN-OPERATED LAUNDRY ROUTE BUSINESS
Mac-Gray currently owns and operates more than 120,000 machines in over
17,000 laundry rooms located in multiple housing facilities, with no lessor
representing more than 1% of Mac-Gray's total machine base. The principal
aspects of Mac-Gray's laundry route operations include sales and marketing,
facility leasing, service, collections and security and equipment
refurbishment.
Sales and Marketing. Mac-Gray markets its products and services through a
sales and marketing staff of 46 people. Mac-Gray's sales staff is dispersed
geographically throughout Mac-Gray's principal markets in order to support
Mac-Gray's customer and prospective customer base. As discussed below, Mac-
Gray primarily focuses its sales efforts on two markets: real estate
(apartments and public housing complexes) and colleges and universities. Mac-
Gray's sales force is charged with two primary functions: maintaining existing
customer relationships and soliciting new relationships. Mac-Gray's marketing
staff is located at its corporate headquarters in Cambridge, Massachusetts.
Real Estate. Mac-Gray's regional real estate sales team works with multi-
housing accounts, such as apartments and public housing complexes, and is
focused on the needs of existing customers, as well as the needs of potential
customers. Each sales team relies heavily on referrals from existing accounts,
as well as the internal expansion of existing accounts.
In response to the consolidation of the multi-housing industry by the
largest REITs and property management companies, Mac-Gray has assigned primary
responsibility for the geographically dispersed property owners and managers
to one of its senior sales managers. This position is focused principally on
developing relationships at the executive level with many national REITs and
property management companies.
Colleges and Universities. Mac-Gray's college and university sales team is
focused on enhancing relationships with existing accounts, as well as
soliciting additional colleges and universities. The sales team relies heavily
on national and regional trade show participation in order to reach the
various decision makers of existing accounts and new prospects. Mac-Gray
believes that having a sales team focused solely on the college and university
market has helped it to achieve its status as North America's largest supplier
of card and coin-operated laundry services to that market.
Facility Leasing. Mac-Gray typically sets up a complete laundry room
facility in the leased space, including washers, dryers and debit or smart
card readers, tables for organizing and folding laundry and seating
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areas. In addition, Mac-Gray will frequently refurbish the premises by
painting the room and/or installing ventilation, lighting, plumbing and
drainage. These improvements are designed to create a laundry room which is
clean and convenient, thus encouraging maximum usage of the equipment by the
residents of the property. Mac-Gray generally enters into long-term leases
with property owners which provide, in most cases, for sharing of machine
revenue on a percentage basis. Under the terms of a standard long-term lease,
Mac-Gray leases a room or dedicated area within a multi-housing facility from
the property owner, public housing agency or college or university. Mac-Gray's
installed machine base is diversified across the various types of properties
that it serves as follows:
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Apartments, condominiums and co-operatives............................ 68%
Colleges, universities and schools.................................... 24%
Public housing........................................................ 4%
Other................................................................. 4%
</TABLE>
Based upon Mac-Gray's continual survey of colleges and universities, Mac-
Gray is the largest operator of card and coin-operated laundry rooms in the
North American college and university market with a customer base consisting
of approximately 350 of the more than 1,600 public and private residential
institutions. Mac-Gray's strategy has been to pursue additional college and
university accounts both through acquisitions and through entering into new
geographic markets.
A substantial portion of Mac-Gray's revenue is derived from the operations
of washers and dryers in laundry rooms pursuant to long-term leases with
property owners. The leases, which have an average remaining life of over
seven years and provide Mac-Gray with the exclusive right to operate the
laundry room on the premises, typically require Mac-Gray to pay a percentage
of the revenue collected to the lessor as a commission (or rent) and, in some
cases, require advance rental payments. The property owner or manager is
usually responsible for maintaining and cleaning the premises and for payment
of the utilities. Because of Mac-Gray's significant initial capital
investment, Mac-Gray's leases may only be terminated by the customer prior to
their stated expiration date for non-performance by Mac-Gray. Mac-Gray is
unaware of any laundry room lease that has ever been terminated by a customer
due to non-performance by Mac-Gray.
Service. Mac-Gray delivers, installs, services and collects revenue from the
laundry equipment used in Mac-Gray-operated laundry rooms. Mac-Gray's
maintenance program is intended to limit unnecessary capital expenditures and
extend the useful life of Mac-Gray's laundry equipment, thus realizing optimal
lifetime revenue per machine. Mac-Gray utilizes a three facet program, coupled
with a restoration and redeployment program, to ensure that down time for its
equipment is kept to a minimum, thus maximizing average revenue per machine.
Install High Quality Equipment. Mac-Gray primarily installs equipment
manufactured by Maytag. Mac-Gray believes that the installation of high
quality equipment at the outset, coupled with a proper maintenance program,
results in equipment that operates more efficiently, is used more often and
maximizes revenue per machine. Mac-Gray believes that its role as a
significant purchaser and user, as well as distributor, of Maytag equipment
affords it a competitive advantage both in terms of pricing and in terms of
its staff of highly qualified service technicians. Mac-Gray also purchases
equipment from other leading manufacturers, including Whirlpool Corporation
("Whirlpool") and General Electric Company, and believes that such
manufacturers are willing to increase their sales to Mac-Gray.
Periodic Preventive Maintenance. Mac-Gray performs scheduled, periodic,
preventive maintenance on Mac-Gray's equipment at its various leased laundry
rooms.
On-Call Service. Mac-Gray employs approximately 100 service technicians to
both maintain and repair its equipment. These service technicians have an
average of over seven years experience repairing and maintaining laundry
equipment. Mac-Gray's Director of Service Training is responsible for
evaluating and training the service force. Mac-Gray has won the prestigious
Maytag Red Carpet Service Award twice, both times within the past ten years.
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Collections and Security. Revenues from Mac-Gray's laundry rooms are
collected periodically based upon the historical use at each property. The
collection routes are altered frequently and Mac-Gray utilizes a computerized
coin counting system and various preventive and internal control measures,
including armored car services, to reduce the risks associated with its
business.
Equipment Refurbishment. Mac-Gray refurbishes some of its laundry equipment
at its Cambridge, Massachusetts headquarters. The refurbishment process
involves removing some machines from active service and restoring or replacing
some of the machine parts. The refurbished machines result in cost savings
which, when coupled with the installation of high quality machines and a
proper maintenance and service program, can result in reduced capital
expenditures and increased profitability for the property owner. Refurbished
machines are either used in locations where the lessor has requested them or
to replace older laundry equipment.
TECHNOLOGY
Mac-Gray maintains a significant information technology system to facilitate
its lease monitoring, commission paying and product purchasing activities.
Mac-Gray has recently implemented and/or expanded its use of technologies that
Mac-Gray believes will broaden its existing product and service offerings,
enhance its customer service, improve its financial and operational monitoring
of its lease locations, and facilitate its analysis of the operations of
potential acquisition candidates.
Cashless Transactions. Mac-Gray operates both smart-card and debit-card
based payment systems. Since 1991, Mac-Gray has installed more than 15,500
debit card operated laundry machines in response to customer demand in the
college and university market. The installation of these debit-card based
machines often provided Mac-Gray with access to colleges and universities that
demanded card-based payment systems as part of their procurement process.
Mac-Gray has installed smart card readers in more than 5,100 laundry
machines since April 1, 1997 and intends to accelerate the use of cost-
effective smart-card based payment and access systems. Smart cards are the
same size as credit or debit cards, but contain a small microprocessor chip
which is capable of computational operations, as well as storing data and
value for use in cashless transactions. The stored value feature of smart
cards is used with Mac-Gray's laundry equipment to provide laundry users the
convenience and security of cashless transactions. Mac-Gray, which has
experienced increased usage at existing facilities which have been equipped
with smart card readers, believes that these smart-card based payment
technologies may also be used to increase revenue by facilitating modest price
increases and the implementation of variable time pricing while also enhancing
the ability to expand its existing services and product offerings. The
additional benefits associated with smart-card based transactions include
reduced administrative burdens and expenditures, reduced vandalism, improved
security and more efficient revenue collections. Mac-Gray believes that the
availability of these technologies will also increase laundry room usage and
decrease the property owner's risk of loss of resident business to off-
premises operators which, Mac-Gray believes, will further enhance the
attractiveness of smart-card based payment systems to property owners and
managers.
Newly Available Technology. The introduction of a new, single unit smart
card reader for use with laundry equipment has made it cost-effective and
operationally feasible to convert existing coin-operated machines and to
install new smart card operated machines. Prior to the availability of this
technology, each piece of laundry equipment had to be hard-wired to an on-line
processing system in order to function as a cashless unit. The newly available
single unit smart card reader eliminates the on-line requirement and makes
conversions and new installations more cost-effective.
On April 1, 1997, Mac-Gray commenced a roll-out of smart-card based payment
systems. Mac-Gray has equipped more than 5,100 laundry machines with smart
card readers since the commencement of this roll-out. Mac-Gray believes that
its seven year experience with cashless payment systems provides it with a
competitive advantage as it further pursues the roll-out of card-operated
laundry equipment.
8
<PAGE>
Pricing Flexibility. By equipping its machines with cashless payment
technology, Mac-Gray believes that it can go beyond providing a more efficient
laundry facility. The use of smart card technology will enable Mac-Gray to
make modest incremental price adjustments over time rather than in twenty-five
cent increments. Mac-Gray believes that such modest price increases will lead
to more revenue per machine without significantly reducing the usage of the
machines. In addition, cashless technology will enable Mac-Gray to establish
variable time pricing schedules. For instance, the machines may be programmed
to have one set of prices during peak hours, one set during normal hours, and
another set of prices during "off" hours of operation to encourage maximum
usage, which Mac-Gray believes will lead to increased incremental revenue.
Information Services. Mac-Gray is employing an integrated approach to the
underlying technology required to support its sales and administrative
functions. Mac-Gray provides its sales personnel with laptop computers for use
in communicating with Mac-Gray, accessing Company pricing and related
information and preparing customer presentations and analyses. Mac-Gray also
operates a data warehousing software system to assist Mac-Gray in its
operational and financial data management. For example, the data warehousing
software system aids Mac-Gray's senior management in analyzing geographic and
product line trends, as well as individual property and regional performance.
Mac-Gray can also use this data warehousing system to seamlessly import
operational information of a laundry service provider that Mac-Gray may be
interested in acquiring.
Machine Technology. In January 1997, Maytag introduced new laundry machine
models which can only be activated by using a smart card. These new machines,
which are comparably priced to existing equipment, along with Mac-Gray's
access to the newly developed smart card readers, will permit Mac-Gray to more
economically install smart-card based equipment.
Additionally, in March 1997, Maytag introduced its new high-efficiency
Maytag Neptune(TM) line of laundry products. Mac-Gray believes that this new
line, which is significantly more efficient in its use of water and utilities
than previous Maytag machines, will enhance customer relations.
COMPETITION
The card and coin-operated laundry services industry is highly competitive,
capital intensive and requires reliable and prompt service. Mac-Gray believes
that customers consider different factors in selecting a laundry service
provider including customer service, reputation, commission rates (including
advance commissions) and range of products and services. Mac-Gray believes
that different types of customers assign varied weight to each of these
factors and that no one factor materially influences a customer's selection of
a laundry service provider. Within any given geographic area, Mac-Gray may
compete with local independent-operators, regional operators and multi-
regional operators. Although the industry is highly fragmented, Mac-Gray and
several other independent-operators have chosen to grow by acquisitions, as
well as through new machine placement. Mac-Gray believes that it is the third
largest card and coin-operated laundry services provider in North America.
Mac-Gray believes that only Coinmach Laundry Corporation ("Coinmach") and Web
Service Company, Inc. ("Web") maintain larger machine bases than Mac-Gray.
LAUNDRY EQUIPMENT SALES, LEASING AND SERVICE
Mac-Gray has been a Maytag distributor since 1927. Mac-Gray has, through
acquisitions of businesses and the cooperation of Maytag, grown its Maytag
distribution and service business to encompass Connecticut, Illinois, Maine,
Massachusetts, New Hampshire, New York (except metropolitan New York City),
western Pennsylvania, Rhode Island, South Carolina, Vermont and portions of
Arkansas, Indiana, Iowa, Mississippi and Missouri. To these, the acquisition
of Amerivend will add Alabama, Florida and Georgia. Mac-Gray is currently the
principal or sole distributor of Maytag commercial laundry equipment in each
of its areas. As a distributor, Mac-Gray sells laundry equipment to laundromat
owners, apartment and condominium owners and institutions such as hospitals,
restaurants and elder care facilities. Mac-Gray's retail coin laundromat sales
team is focused on selling replacement equipment to existing coin laundromat
owners, as well as soliciting new customers for its distribution business. The
sales efforts are supported by regional service training seminars held for the
benefit of
9
<PAGE>
existing and potential laundromat owners. Mac-Gray also sells equipment
manufactured by American Dryer Corporation ("American Dryer"), The Dexter
Company ("Dexter") and Whirlpool when such equipment better suits a customer's
needs. Mac-Gray believes that its role as a distributor, and not just a user,
of commercial laundry equipment provides it with a competitive advantage in
that it has access to numerous Self-Owners who may either choose to buy
equipment from Mac-Gray or choose to outsource this function by becoming a
lessor to Mac-Gray.
Mac-Gray has also established a leasing program for commercial laundry
customers who choose neither to purchase equipment nor to become a laundry
route customer. This program involves the leasing of commercial laundry
equipment to customers who maintain their own coin-operated laundry rooms, as
well as to customers (such as hotels) who operate their own on-premise laundry
equipment. Although this operation currently provides a small amount of
revenue to Mac-Gray, Mac-Gray anticipates that this market presents Mac-Gray
with growth opportunities as additional Self-Owners see these services as a
way to free up available capital for other business needs.
Mac-Gray also offers potential owner-operators of independent laundromats
complete design, construction, installation and set-up of turn-key
laundromats. Mac-Gray derives its revenue by selling the equipment to the
owner-operator and through ongoing service contracts with the owner-operator.
EMPLOYEES
Mac-Gray has approximately 350 employees. None of Mac-Gray's employees is
covered by a collective bargaining agreement. Mac-Gray believes its relations
with its employees are good.
ITEM 2. PROPERTIES
Mac-Gray owns its 40,000 square foot corporate headquarters in Cambridge,
Massachusetts which houses Mac-Gray's administrative and central services,
including a 20,000 square foot warehouse for equipment and parts. Mac-Gray
also leases the following regional facilities, which are largely operated as
sales and service facilities, though limited administrative functions are also
performed at many of them:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE
-------- --------------
<S> <C>
Buffalo, New York.......................................... 9,500
Charlotte, North Carolina.................................. 7,600
Fort Lauderdale, Florida................................... 6,000
Gainesville, Florida....................................... 750
Gurnee, Illinois........................................... 12,000
East Hartford, Connecticut................................. 14,900
Pittsburgh, Pennsylvania................................... 1,100
St. Louis, Missouri........................................ 2,400
Standish, Maine............................................ 7,500
Syracuse, New York......................................... 7,800
Tampa, Florida............................................. 6,200
Tucker (Atlanta), Georgia.................................. 8,000
</TABLE>
The Intirion Acquisition added approximately 12,000 square feet of leased
office space and 7,000 square feet of leased distribution and warehouse space
located in Walpole, Massachusetts, and approximately 25,000 square feet of
leased warehouse space located in Chula Vista, California.
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.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Mac-Gray is from time to time a party to litigation arising in the ordinary
course of business. There can be no assurance that Mac-Gray's insurance
coverage will be adequate to cover all liabilities resulting from such claims.
In the opinion of management, any liability that Mac-Gray might incur upon the
resolution of this litigation will not, in the aggregate, have a material
adverse effect on the financial condition or results of operations of Mac-
Gray.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Mac-Gray first issued its common stock ("Mac-Gray Common Stock") to the
public in October 1997. The Mac-Gray Common Stock is traded on the New York
Stock Exchange (the "NYSE") under the symbol "TUC." The following table sets
forth the high and low sales prices of Mac-Gray Common Stock on the NYSE
<TABLE>
<CAPTION>
SALE PRICES
----------------
HIGH LOW
------- --------
<S> <C> <C>
Fourth Quarter (from October 17, 1997).................. $15.875 $13.6875
</TABLE>
As of March 10, 1998, there were 39 holders of record of Mac-Gray Common
Stock.
Mac-Gray does not currently pay dividends on Mac-Gray Common Stock. Mac-
Gray's Board of Directors (the "Mac-Gray Board") currently intends to retain
future earnings, if any, for the development of Mac-Gray's businesses and does
not anticipate paying cash dividends on Mac-Gray Common Stock in the
foreseeable future. Future determinations by the Mac-Gray Board to pay
dividends on Mac-Gray Common Stock would be based primarily upon the financial
condition, results of operations and business requirements of Mac-Gray.
Dividends, if any, would be payable in the sole discretion of the Mac-Gray
Board out of the funds legally available therefor. In addition, the payment of
dividends is restricted under Mac-Gray's credit facility.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected historical financial data of Mac-Gray as of the
dates and for the periods indicated. The selected historical financial data of
Mac-Gray for the three years in the period ended December 31, 1997 were
derived from the historical consolidated financial statements of Mac-Gray that
were audited by Price Waterhouse LLP, whose report appears elsewhere in this
Report. The selected financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements of Mac-Gray and the notes thereto included
elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997(1)
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue....................... $44,942 $ 48,031 $ 50,710 $ 64,427 $ 81,370
Cost of revenue:
Commissions.................. 17,762 19,168 20,471 25,760 31,717
Laundry route expenditures... 7,458 7,889 8,251 10,955 12,232
Depreciation and
amortization................ 4,377 4,756 4,899 6,216 8,635
Cost of equipment sales...... 1,700 2,673 2,938 5,189 8,187
------- -------- -------- -------- --------
Total cost of revenue....... 31,297 34,486 36,559 48,120 60,771
Operating expenses:
General and administration... 3,383 3,085 3,901 3,952 4,699
Sales and marketing.......... 2,445 2,501 2,531 3,803 5,165
Depreciation................. 421 442 455 517 503
------- -------- -------- -------- --------
Total operating expenses.... 6,249 6,028 6,887 8,272 10,367
------- -------- -------- -------- --------
Income from operations........ 7,396 7,517 7,264 8,035 10,232
Interest expense............. (1,437) (1,217) (1,175) (1,956) (2,521)
Other income (expense), net.. 71 70 55 (87) 181
------- -------- -------- -------- --------
Income before provision for
income taxes................. 6,030 6,370 6,144 5,992 7,892
Provision for income
taxes(2).................... (330) (388) (374) (465) (5,206)
------- -------- -------- -------- --------
Net income.................... $ 5,700 $ 5,982 $ 5,770 $ 5,527 $ 2,686
======= ======== ======== ======== ========
Net income per common
share(4)..................... $ 0.90 $ 0.94 $ 0.91 $ 0.87 $ 0.37
======= ======== ======== ======== ========
Weighted average common shares
outstanding(4)............... 6,368 6,368 6,368 6,368 7,263
======= ======== ======== ======== ========
Net income per common share-
assuming dilution(4)......... $ 0.90 $ 0.94 $ 0.91 $ 0.87 $ 0.36
======= ======== ======== ======== ========
Weighted average common shares
outstanding-assuming
dilution(4).................. 6,368 6,368 6,368 6,368 7,391
======= ======== ======== ======== ========
TAX ADJUSTED EARNINGS PER
SHARE DATA(3):
Pro forma net income.......... $ 3,595 $ 4,735
======== ========
Pro forma net income per
common share(4).............. $ 0.56 $ 0.65
======== ========
Pro forma net income per
common share-assuming
dilution(4).................. $ 0.56 $ 0.64
======== ========
OTHER FINANCIAL DATA:
EBITDA(5).................... $12,265 $ 12,785 $ 12,673 $ 14,681 $ 19,551
Depreciation and
amortization................ 4,798 5,198 5,354 6,733 9,138
Capital expenditures......... 5,407 5,679 4,421 7,635 8,681
Cash flows from operating
activities.................. 9,405 10,650 10,417 13,650 10,942
Cash flows used in investing
activities.................. (5,689) (5,613) (5,105) (22,070) (20,544)
Cash flows provided by (used
in) financing activities.... (3,744) (6,128) (3,549) 7,382 10,532
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital.............. $(3,437) $ (4,181) $ (2,237) $ (6,069) $ (885)
Total assets................. 32,713 33,292 36,754 54,108 84,374
Long-term debt, net of
current portion............. 15,718 13,544 11,843 23,325 5,395
Redeemable common stock(6)... -- -- -- -- 7,797
Stockholders' equity......... 6,783 9,439 12,850 14,683 49,161
</TABLE>
12
<PAGE>
- --------
(1) The financial data for the year ended December 31, 1997 include the
results of Sun Services subsequent to the acquisition date of April 17,
1997.
(2) The 1997 provision for income taxes includes a non-recurring charge of
$4,037 as a result of the termination of Mac-Gray's S corporation status.
(3) Tax adjusted earnings per share data have been adjusted to give effect to
Mac-Gray's operations as if Mac-Gray were subject to federal and state
income taxes on a corporate level (at an estimated income tax of 40%)
during the periods presented.
(4) Mac-Gray adopted Statement of Financial Accounting Standards No. 128 (SFAS
128) in 1997. In conjunction with the adoption of this standard, Mac-Gray
has complied with Staff Accounting Bulletin No. 98 (SAB 98) recently
issued by the SEC. Accordingly, earnings per share data have been restated
for all periods presented. Earnings per share data are reflective of the
Mac-Gray Combination for all periods presented.
(5) "EBITDA" is defined herein as income before provision for income taxes,
plus depreciation and amortization expense 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.
(6) Shares of Mac-Gray Common Stock issued in connection with the Sun Services
Acquisition are redeemable pursuant to a contractual arrangement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Report contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Mac-Gray's actual results
could differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences
include: implementation of acquisition strategy; integration of acquired
businesses; ability to meet future capital requirements; dependence upon
certain suppliers, lease renewals and senior executives; market acceptance of
new products and services; and those factors discussed in Mac-Gray's filings
with the Securities and Exchange Commission. The historical financial
information presented herein represents (i) consolidated results of Mac-Gray,
(ii) the combined results of Mac-Gray Co. and the Limited Partnership and
(iii) the combined results of Sun Services for the period subsequent to the
acquisition. The following discussion and analysis should be read in
conjunction with the combined financial statements and related notes thereto
presented elsewhere in this Report.
OVERVIEW
Mac-Gray derives its revenue principally through the operation and
maintenance of card and coin-operated laundry rooms in multiple housing
facilities, such as apartment buildings, colleges and universities,
condominiums and public housing complexes. Mac-Gray operates its laundry rooms
under long-term leases with property owners, colleges and universities and
governmental agencies. The leases typically grant Mac-Gray the exclusive right
to operate laundry rooms on the lessor's premises for a fixed term, which is
generally seven to ten years, in exchange for a percentage of the revenue
collected. Mac-Gray's laundry route business consists of approximately 120,000
laundry machines, operated in over 17,000 multiple housing laundry rooms
located in 26 states east of the Rocky Mountains.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag. Mac-Gray has Maytag distributor
agreements for Connecticut, Illinois, Maine, Massachusetts, New Hampshire, New
York (except metropolitan New York City), western Pennsylvania, Rhode Island,
South
13
<PAGE>
Carolina, Vermont and portions of Arkansas, Indiana, Iowa, Mississippi and
Missouri. Mac-Gray also sells or rents laundry equipment manufactured by
American Dryer, Dexter and Whirlpool to provide several alternatives in
machine type, cost and capacity. Additionally, Mac-Gray sells or rents laundry
equipment to restaurants, hotels, health clubs and similar institutional users
that operate their own on-premise laundry facilities.
On October 22, 1997, Mac-Gray completed the IPO. Upon consummation of the
IPO, Mac-Gray's status as an S corporation automatically terminated and Mac-
Gray became subject to taxation as a C corporation for federal and state
income tax purposes.
RECENT DEVELOPMENTS
On March 12, 1998, Mac-Gray completed the Intirion Acquisition for
approximately 1.6 million shares of Mac-Gray Common Stock and approximately $1
million in cash. Intirion is a supplier of combination
refrigerator/freezer/microwave ovens to multiple housing facilities such as
colleges and universities, military bases, economy hotels and motels and
assisted living facilities. For the twelve month period ended June 30, 1997,
Intirion had total revenues of approximately $23.5 million. The transaction is
being accounted for as a pooling of interests.
On March 4, 1998, Mac-Gray entered into a Stock and Asset Purchase
Agreement, pursuant to which Mac-Gray will acquire Amerivend. In addition to
being the largest provider of card and coin-operated laundry equipment in
Florida, Amerivend adds to Mac-Gray's route business in the Atlanta market.
Amerivend is also the principal distributor of Maytag commercial laundry
products in Alabama, Georgia and Florida. Founded in 1959, Amerivend had 1997
revenues of $18.6 million and has offices in Miami, Orlando, Tampa and
Atlanta. The purchase price, which is subject to certain adjustments, will be
approximately $33.5 million in cash, including the payment of certain debt.
The purchase price will be funded by Mac-Gray by drawing on its existing
credit facility. The transaction is subject to customary closing conditions,
including regulatory filings, and is expected to close by early in the second
quarter.
RESULTS OF OPERATIONS
Fiscal year ended December 31, 1997 compared to fiscal year ended December
31, 1996
Revenue. Revenue increased by $16,943,000, or 26%, to $81,370,000 in 1997
from $64,427,000 in 1996. This increase was primarily attributable to growth
in existing laundry route revenue, the Sun Services Acquisition and the impact
of a full year's operation of businesses acquired in 1996. Laundry route
revenue increased $12,826,000, due to the expansion of existing operations and
to an increase in the number of machines operated as a result of the nine
acquisitions of laundry route businesses subsequent to March 31, 1996. Sales
of equipment increased by $4,117,000, due to growth of revenue from existing
distributorships and the distributorships acquired during 1996 and 1997. Mac-
Gray believes that its increased focus on sales and marketing efforts since
mid-1996 has had a significant impact on the growth of revenue from existing
laundry routes and distributorships.
Commissions. Commissions increased by $5,957,000, or 23%, to $31,717,000 in
1997 from $25,760,000 in 1996. This increase was primarily attributable to an
increase in laundry route revenue, since commissions are generally paid based
upon a percentage of laundry route revenue.
Laundry Route Expenditures. Laundry route expenditures, which are primarily
variable expenses which change with the increases and decreases in revenue and
include costs associated with installing and servicing machines, as well as
the costs of collecting, counting and depositing the revenue, increased by
$1,277,000, or 12%, to $12,232,000 in 1997 from $10,955,000 in 1996. This
increase was due to the general increase in revenue, which resulted in
increased servicing, collecting, counting and depositing activity, increased
levels of expenses associated with improving service in some of the acquired
businesses, and other associated costs.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization included as a component of cost of revenue, as
well as depreciation which is included as an operating expense.
14
<PAGE>
Aggregate depreciation and amortization increased by $2,405,000, or 36%, to
$9,138,000 in 1997 from $6,733,000 in 1996. This increase was primarily
attributable to the acquisition of nine laundry route businesses in 1996 and
1997, which resulted in additional machines to depreciate, as well as an
increase in intangible assets to amortize, and the placement of additional
machines on Mac-Gray's existing laundry routes.
Cost of Equipment Sales. Cost of equipment sales increased by $2,998,000, or
58%, to $8,187,000 in 1997 from $5,189,000 in 1996. This increase was a direct
result of increased equipment sales.
General and Administration. General and administration expenses increased by
$747,000, or 19%, to $4,699,000 in 1997 from $3,952,000 in 1996. This increase
was attributable to an increase in professional fees and to the hiring of
additional clerical and administrative staff to support the growth in Mac-
Gray's business.
Sales and Marketing. Sales and marketing expense increased by $1,362,000, or
36%, to $5,165,000 in 1997 from $3,803,000 in 1996. This increase was
attributable to the expansion of the marketing department, led by the hiring
of an experienced national marketing executive in the third quarter of 1996,
and an increase in the number of field sales representatives.
Interest Expense. Interest expense, net of interest income, increased by
$565,000, or 29%, to $2,521,000 in 1997 from $1,956,000 in 1996. This increase
was primarily attributable to the increased borrowings incurred to finance the
acquisitions made during 1996 and 1997. Interest expense was minimal
subsequent to the IPO because a portion of the net proceeds from that offering
was used to repay the existing indebtedness under the Credit Facility, as
further described below.
Income Tax Expense. Income tax expense increased by $4,741,000 to $5,206,000
in 1997 from $465,000 in 1996 due to the termination of Mac-Gray's S
corporation status concurrent with the IPO. Upon termination of the S
corporation status, Mac-Gray became subject to federal and state income taxes,
with a statutory rate of approximately 40%. As a result, Mac-Gray recognized a
non-recurring charge to income tax expense of approximately $4,037,000 in
October 1997, representing additional net deferred tax liabilities as of the
date the S corporation election was terminated. As the historical income tax
provision prior to the termination of the S corporation status was established
only to provide for income taxes in states that do not recognize Subchapter S
corporations, the income tax provision recorded in 1997 was significantly
higher than the amount recorded in 1996.
Fiscal year ended December 31, 1996 compared to fiscal year ended December
31, 1995.
Revenue. Revenue increased by $13,717,000, or 27%, to $64,427,000 in 1996
from $50,710,000 in 1995. This increase was primarily attributable to the
acquisition of six laundry route businesses, two of which also maintained
Maytag distributorships, as well as internal growth of both card and coin
laundry route revenue and revenue from sales of equipment under various
distribution arrangements. Laundry route revenue increased $9,506,000, of
which $3,596,000 was attributable to the expansion of existing operations and
$5,910,000 was attributable to an increase in the number of machines operated
as a result of the six acquisitions of laundry route businesses. Sales of
equipment increased by $4,211,000, of which $3,111,000 was attributable to the
growth of revenue from existing distributorships and $1,100,000 was
attributable to revenue from two newly acquired distributorships. Mac-Gray
believes that a substantial portion of the growth of revenue from existing
laundry routes and from existing distributorships was attributable to Mac-
Gray's increased expenditures on sales and marketing efforts, which are
described below.
Commissions. Commissions increased by $5,289,000, or 26%, to $25,760,000 in
1996 from $20,471,000 in 1995. This increase was primarily attributable to an
increase in laundry route revenue, which resulted in an increase in variable
expenses, including commissions, related thereto, as well as slightly higher
commission rates applicable to the new leases that Mac-Gray acquired or
entered into during 1995 and 1996.
Laundry Route Expenditures. Laundry route expenditures, which include costs
associated with installing and servicing machines and cost of equipment sales,
as well as the cost of collecting, counting and depositing
15
<PAGE>
the revenue, increased by $2,704,000, or 33%, to $10,955,000 in 1996 from
$8,251,000 in 1995. This increase was primarily attributable to the increase
in laundry route business, which resulted in increased servicing and
collecting activity.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization which is included as a component of cost of
revenue, as well as depreciation which is included as an operating expense.
Aggregate depreciation and amortization increased by $1,379,000, or 26%, to
$6,733,000 in 1996 from $5,354,000 in 1995. The increase was primarily
attributable to the acquisition of six laundry route businesses, which
resulted in additional machines to depreciate, as well as an increase in
intangible assets to amortize, and the placement of 5,143 new machines on Mac-
Gray's existing laundry routes.
Cost of Equipment Sales. Cost of equipment sales increased by $2,251,000, or
77%, to $5,189,000 in 1996 from $2,938,000 in 1995. This increase was
attributable to increased equipment sales.
General and Administration. General and administration expenses increased by
$51,000, or 1%, to $3,952,000 in 1996 from $ 3,901,000 in 1995. This increase
was attributable to the hiring of additional clerical and administrative staff
to help support the increase in the laundry route business, as well as the
increase in distributorship business. General and administration expenses for
1995 were unusually high as a result of certain expenses related to the
hiring, relocation and subsequent termination of a senior executive.
Sales and Marketing. Sales and marketing expenses increased by $1,272,000,
or 50%, to $3,803,000 in 1996 from $2,531,000 in 1995. This increase was
attributable to the hiring of a significant number of additional field sales
representatives, the expansion of the marketing department and the hiring of
an experienced national marketing executive in the third quarter of 1996.
Interest Expense. Interest expense increased by $781,000, or 66%, to
$1,956,000 in 1996 from $1,175,000 in 1995. This increase was primarily
attributable to increased borrowings incurred to finance the six acquisitions
completed during 1996.
Income Tax Expense. Income tax expenses increased by $91,000, or 24%, to
$465,000 in 1996 from $374,000 in 1995. The effective income tax rate for 1995
was approximately 6.1% compared to 7.8% for 1996. As the historical income tax
provision was established only to provide for income taxes in states that do
not recognize Subchapter S corporations, the statutory income tax rate for
1995 and 1996 was 6%. The effective income tax rate differed from the
statutory rate in 1995 and 1996 due to expenses recorded for book purposes
that are not deductible for income tax purposes.
The statutory income tax rate utilized by Mac-Gray during 1995 and 1996 is
not indicative of the statutory income tax rate of approximately 40% that has
been utilized since termination of Mac-Gray's S corporation status on October
16, 1997.
SEASONALITY
Mac-Gray experiences moderate seasonality as a result of its significant
operations in the college and university market. Revenues derived from the
college and university market represent approximately thirty percent of Mac-
Gray's total revenue. These revenues are derived substantially during the
school year which includes the first, second and fourth quarters. Conversely,
Mac-Gray increases its operating expenditures during the third quarter when
colleges and universities are not in session as a result of Mac-Gray's
increased machine installation activities.
LIQUIDITY AND CAPITAL RESOURCES
Mac-Gray's primary sources of cash have been operating activities, bank
borrowings, and the proceeds of the IPO. Mac-Gray's primary uses of cash have
been the nine acquisitions consummated between May 1996 and
16
<PAGE>
the end of the period covered by this report, capital expenses, including the
purchase of new laundry machines and smart-card based payment systems, the
payment of a dividend of $9,000,000 to shareholders in October 1997 and the
repayment of Mac-Gray's credit facility with State Street Bank and Trust
Company and CoreStates Bank (the "Credit Facility"). Mac-Gray anticipates that
it will continue to use cash flow from its operating activities to finance
working capital needs, including interest payments on any outstanding
indebtedness, as well as capital expenditures. Mac-Gray also anticipates that
it will use additional funds available to it under the Credit Facility to
finance future potential acquisitions, larger capital expenditures and, as
needed, working capital.
Cash flow from operations was $10,942,000, $13,650,000 and $10,417,000 for
the years ended December 31, 1997, 1996, 1995, respectively. Cash flow from
operations consists primarily of laundry route revenue, distributorship and
laundry equipment service revenue, commissions, laundry route expenditures,
cost of equipment sales, general and administration expenses and sales and
marketing expenses.
Cash used in investing activities was $20,544,000, $22,070,000 and
$5,105,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. Mac-Gray invested $12,196,000, $14,487,000 and $821,000 for the
fiscal years ended December 31, 1997, 1996 and 1995 in connection with the
acquisitions consummated during those years. Capital expenditures were
$8,681,000, $7,635,000 and $4,421,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
Net cash flows provided by (used in) financing activities were $10,532,000,
$7,382,000, and $(3,549,000) for the years ended December 31, 1997, 1996, and
1995, respectively. Financing activities consist primarily of proceeds from
the IPO, proceeds from and repayments of bank borrowings, and payments of
dividends. Mac-Gray also utilized $125,000 as a portion of the consideration
paid in connection with the redemption of 2,275 shares of Mac-Gray Common
Stock as of January 1, 1996.
Mac-Gray maintains a $50 million revolving line of credit under the Credit
Facility. All borrowings under the Credit Facility were repaid in October 1997
using proceeds from the IPO. Borrowings under the Credit Facility bear
interest, at Mac-Gray's option, at a rate equal to the prime rate minus 0.5%
or LIBOR plus 2.0%. There were no borrowings under the Credit Facility as of
December 31, 1997. The Credit Facility imposes certain financial covenants on
Mac-Gray, including (i) a limit on Mac-Gray's senior liabilities of 3.5 times
and 2.5 times EBITDA for the prior four quarters ending as of the end of each
quarter of 1997 and for the prior four quarters ending as of the end of each
quarter after 1997, respectively; (ii) a requirement to maintain minimum
shareholders equity (as specifically defined in the Credit Facility), as
measured at the end of each quarter, of $23,000,000 as of December 31, 1996,
increasing by $4,000,000 per year thereafter; (iii) a limit on aggregate
capital expenditures of $7,000,000, $8,000,000 and $9,000,000 for the years
ending December 31, 1996, 1997, and 1998 and thereafter, respectively; (iv)
minimum EBITDA, measured on a quarterly basis for the immediately preceding
four quarters, of $4,000,000; (v) a minimum fixed charge coverage ratio
(EBITDA to scheduled principal and interest payments) of 1.3:1, 1.1:1 and
1.3:1 for the quarters during 1996, 1997 and 1998 and thereafter,
respectively; and (vi) a requirement that Mac-Gray have minimum annual net
income of $4,000,000. Mac-Gray was in compliance with all such covenants, or
received a written waiver with respect to any non-compliance therewith, as of
the year ended December 31, 1997. The Credit Facility under certain limited
circumstances, also restricts the payment of dividends and other distributions
as well as certain acquisitions and investments. The Credit Facility is
secured by a blanket lien on Mac-Gray's assets and the assets of each of its
subsidiaries, as well as a pledge by Mac-Gray of all of the capital stock of
its subsidiaries.
In connection with the Sun Services Acquisition on April 17, 1997, Mac-Gray
issued 612,026 shares of Mac-Gray Common Stock to Jeffrey C. Huenink, the
owner of Sun Services. The offering and sale of these shares to Mr. Huenink,
an accredited investor, was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933 and Rule 506 thereunder. As a privately owned
company issuing shares of its common stock, which, at that point, were
substantially illiquid, Mac-Gray provided the Sun Services owner with the
right to require Mac-Gray to repurchase the shares of Mac-Gray Common Stock
issued by Mac-Gray as consideration in the acquisition. Mac-Gray also received
certain rights ( the "Call Rights") to repurchase such shares of Mac-Gray
Common Stock. Upon consummation of the IPO, the Call Rights terminated. Mac-
Gray remains obligated
17
<PAGE>
to repurchase the 612,026 shares of Mac-Gray Common Stock at a price of $12.74
per share in the event the holder or holders of such shares elect to exercise
the Put Rights, representing an aggregate purchase price of approximately $7.8
million. Such remaining Put Rights expire on October 22, 2000. In the event
such Put Rights are exercised, Mac-Gray would likely fund the purchase price
for such shares of Mac-Gray Common Stock by incurring additional indebtedness
under its Credit Facility.
Mac-Gray has used all of the net proceeds from the IPO to repay existing
outstanding indebtedness under the Credit Facility, to fund a $9,000,000
dividend paid to shareholders in October 1997 and to provide partial funding
for two laundry route acquisitions. The cash paid in connection with the
Intirion Acquisition and the acquisition of Amerivend, including expenses
related thereto, has or will be paid from amounts available under the Credit
Facility and cash flow generated from operating activities. Mac-Gray believes
that amounts available under the Credit Facility and cash flow generated by
operations will be sufficient to fund Mac-Gray's normal working capital needs
and capital expenditures for the foreseeable future, including Mac-Gray's
current purchase commitment with Schlumberger to purchase smart-card based
equipment. Based upon the purchase commitment with Schlumberger, such
purchases, in the aggregate, could represent a material portion of Mac-Gray's
capital expenditures for fiscal year 1998. In addition, if Mac-Gray were to
borrow all amounts then available to it under the Credit Facility in
connection with one or more acquisitions, or in connection with significant
capital expenditures, either in the short-term or in the long-term, management
believes that cash generated from operating activities would be sufficient to
fund Mac-Gray's operating expenses and debt service needs for the foreseeable
future. Additional financing under the Credit Facility or otherwise may,
however, be required in connection with an acquisition or acquisitions which
Mac-Gray may consummate in the future. If any such additional financing were
needed, and could not be obtained on terms favorable to Mac-Gray, if at all,
Mac-Gray's ongoing capital improvement efforts and acquisition activity would
likely be reduced or delayed as cash generated from operating activities was
used for operating expenses and debt service.
INFLATION
Mac-Gray does not believe that its financial performance has been materially
affected by inflation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130) and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131) which are
required to be adopted by Mac-Gray in its fiscal 1998 financial statements.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS 131 establishes
standards for reporting information on operating segments in financial
statements. Mac-Gray is currently reviewing the impact of SFAS 130 and SFAS
131 on its financial statements.
IMPORTANT FACTORS REGARDING FUTURE RESULTS
Information provided by Mac-Gray, including information contained in this
Form 10-K, or by its spokespersons from time to time may contain forward-
looking statements concerning projected financial performance, market and
industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe
harbor established by recent securities legislation, will be based on the
assumptions and expectations of Mac-Gray's management at the time such
statements are made. Mac-Gray cautions investors that its performance and,
therefore, any forward-looking statement is subject to risks and
uncertainties. Various important factors, including, but not limited to the
following, may cause Mac-Gray's future results to differ materially from those
projected in any forward-looking statement.
Implementation of Acquisition Strategy; Integration of Acquired
Businesses. Mac-Gray's growth strategy depends, in part, on its ability to
acquire and successfully integrate and operate additional businesses. In order
to
18
<PAGE>
pursue this strategy, Mac-Gray continually evaluates potential acquisition
candidates that provide services to the multi-housing market, including
laundry route businesses as well as businesses that could provide ancillary
services to Mac-Gray's customer base and target markets. In connection with
such evaluations, Mac-Gray may, from time to time, enter into non-binding
letters of intent with, and conduct due diligence with respect to, potential
acquisition candidates. The success of any completed acquisition will depend
in large measure on Mac-Gray's ability to integrate the assets, maintain and
improve the results of operations and increase the revenue of the acquired
business. The process of integrating acquired businesses, and in particular,
geographically diverse operations or operations outside Mac-Gray's core
business, with Mac-Gray's business may involve unforeseen difficulties and may
require a disproportionate amount of Mac-Gray's financial and other resources,
including management time. While Mac-Gray generally believes that its
management team and business structure enable it to operate a significantly
larger and more diverse operation, there is no assurance that Mac-Gray will be
able to successfully integrate acquired businesses into its existing
operations and to implement effective cost savings programs.
Mac-Gray has experienced increased competition in its acquisition
activities. Growing competition may increase purchase prices for future
acquisitions to levels that make the acquisitions less attractive or
uneconomical. In addition, future acquisitions accounted for under the
purchase method of accounting may result in the recording of goodwill, the
amortization of which may reduce Mac-Gray's net income. If further
acquisitions are made, Mac-Gray expects to continue to use cash and
securities, including shares of Mac-Gray Common Stock, as consideration for
such acquisitions. Use of Mac-Gray Common Stock as acquisition consideration
may result in dilution to Mac-Gray's stockholders. In the event that Mac-Gray
Common Stock does not maintain a sufficient valuation or if potential
acquisition candidates are unwilling to accept shares of Mac-Gray Common Stock
as consideration, Mac-Gray will be required to use more cash resources or
other consideration to continue its acquisition program. In addition, if Mac-
Gray is unable to generate sufficient cash for further acquisitions from
existing operations, Mac-Gray's acquisition program could be adversely
affected unless Mac-Gray is able to obtain additional capital through external
financings or can borrow sufficient amounts. Any such debt financing will
result in additional leverage and any further equity financing may result in
dilution to Mac-Gray's stockholders. There can be no assurance that suitable
additional acquisitions can be identified, financed, consummated on acceptable
terms and integrated into Mac-Gray's operations or that future acquisitions
will be financially and operationally successful. Failure to identify, finance
and consummate acquisitions on acceptable terms, or to integrate acquired
operations into Mac-Gray's operations could have a material adverse effect on
Mac-Gray's business, results of operations, financial condition and prospects.
Competition. The card and coin-operated laundry services industry is highly
competitive. In most of Mac-Gray's markets, laundry services may be available
through Self-Owners, private, family-owned businesses or large regional and
national laundry services companies. In the competition to supply services to
property owners, local private businesses tend to have long-standing
relationships with customers in their specific geographic market, and the
larger companies participating in the industry consolidation, two of which
have significantly larger installed machine bases than Mac-Gray's, tend to
have significant operational and managerial resources to devote to expansion
and to capture additional market share. Accordingly, there can be no assurance
that Mac-Gray 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.
Dependence Upon Senior Executives. Mac-Gray is currently dependent to a
significant degree upon the ability and experience of its senior executives.
Mac-Gray has elected not to enter into employment agreements with any of these
executives. Mac-Gray's preference to not utilize employment agreements for its
senior executives may affect Mac-Gray's ability to attract and retain senior
executives in the future. The loss of any of Mac-Gray's senior executives
could adversely affect Mac-Gray's ability to maintain its current operating
performance or to achieve growth through acquisitions.
Significant Capital Expenditures; Additional Financings. The industry in
which Mac-Gray operates is capital intensive. Accordingly, Mac-Gray must
continue to make capital expenditures in order to periodically
19
<PAGE>
replace its existing equipment. In addition, Mac-Gray's plan to utilize smart-
card based technologies with its equipment will also result in significant
capital expenditures. While Mac-Gray anticipates that its existing capital
resources, as well as cash from operations, will be adequate to finance
anticipated capital expenditures, there can be no assurance that such
resources or cash flows will be sufficient or that the incremental revenue and
cost efficiencies associated with technological enhancements, such as the
smart card, will justify the significant capital expenditures. To the extent
that its available resources are insufficient to fund capital requirements,
Mac-Gray may need to raise additional funds through public or private
financings that may or may not be on terms favorable to Mac-Gray and, in the
case of equity financings, could result in dilution to Mac-Gray's
stockholders.
Uncertainty of Market Acceptance of New Products and Services. Mac-Gray is
currently introducing, and intends to introduce in the future, new products
and services utilizing smart-card based technologies. While Mac-Gray believes
that cashless transactions will be attractive to its customers and will
provide Mac-Gray with certain benefits, there can be no assurance that there
will be widespread acceptance of these products by property owners, managers,
colleges and universities and residents, or that technical or operational
problems will not arise from their implementation. A lack of market acceptance
of these new products and services could have a material adverse effect on
Mac-Gray's business, results of operations, financial condition and prospects.
Dependence Upon Lease Renewals. Mac-Gray's business is highly dependent upon
the renewal of its leases with property owners, colleges and universities and
public housing authorities. Mac-Gray has traditionally relied upon exclusive,
long-term leases with its customers, as well as frequent customer interaction
and an historical emphasis on customer service, to assure continuity of
financial and operating results. There can be no assurance that Mac-Gray will
be able to continue to secure long-term exclusive leases with its customers or
that it will continue to successfully renew expiring leases. Any failure by
Mac-Gray to continue to obtain long-term exclusive leases with a substantial
number of its customers, or to successfully renew its existing leases as they
expire, could have a material adverse effect on Mac-Gray's business, results
of operations, financial condition and prospects. In addition, Mac-Gray has
occasionally experienced loss of business when property owners or management
companies choose to vacate properties as a result of economic downturns that
impact occupancy levels. There can be no assurance that future economic
downturns will not result in similar losses of business.
Dependence Upon Certain Suppliers. Mac-Gray currently purchases more than
90% of the equipment that it utilizes in its laundry route business from
Maytag. In addition, Mac-Gray derives a significant amount of its non-laundry
route 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 Mac-Gray and Maytag are terminable by either
party upon written notice, Mac-Gray has never had such an agreement terminated
by Maytag. Mac-Gray also currently purchases substantially all of its smart-
card based equipment from Schlumberger, a manufacturer of card-based
electronic transaction systems. A termination of, or substantial revision of
the terms of, the contractual arrangements or business relationships with
Maytag or Schlumberger could have a material adverse effect on Mac-Gray's
business, results of operations, financial condition and prospects.
Restrictions Imposed by Mac-Gray's Indebtedness. In the event Mac-Gray
borrows significant amounts under the Credit Facility, such level of
indebtedness could have important consequences to Mac-Gray and its
stockholders, including the following: (i) a substantial portion of Mac-Gray's
cash flow from operations would need to be dedicated to the payment of the
principal of and interest on such indebtedness and would not be available for
other purposes; (ii) the ability of Mac-Gray to obtain financing in the future
for working capital needs, capital expenditures, acquisitions, investments,
general corporate purposes or other purposes could be materially limited or
impaired; and (iii) Mac-Gray's level of indebtedness could reduce Mac-Gray's
flexibility to respond to changing business and economic conditions. The
Credit Facility contains various covenants limiting the discretion of Mac-
Gray's management with respect to certain business matters, including
financial and other operating covenants. Failure to comply with any such
covenants, which failure is not waived by the lender, would permit the lender
to accelerate the maturity of the loan, which could have a material adverse
effect on Mac-Gray's business, results of operations, financial condition and
prospects.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are contained in pages F-1
through F-28 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information required by this Item appears under the captions
"Election of Directors" and "Information Regarding Directors" in Mac-Gray's
Proxy Statement for its Annual Meeting of Stockholders to be held on June 2,
1998 (the "Proxy Statement") and is incorporated herein by reference.
EXECUTIVE OFFICERS. The information required by this Item appears under the
caption "Information Regarding Executive Officers" in the Proxy Statement and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Principal
and Management Stockholders" in the Proxy Statement and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item appears under the caption "Executive
Compensation--Certain Relationships and Related Transactions" in the Proxy
Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The financial statements filed as part of the Report are listed on the Index
to Financial Statements on page F-1.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All 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.
21
<PAGE>
(a)(3) EXHIBITS:
Certain exhibits indicated below are incorporated by reference to documents
of Mac-Gray on file with the Commission. Each exhibit marked by a cross (+)
was previously filed as an exhibit to Mac-Gray's Registration Statement on
Form S-1 (No. 333-33669) and the number in parentheses following the
description of the exhibit refers to the exhibit number in the Form S-1. Each
exhibit marked by an asterisk (*) was previously filed as an exhibit to Mac-
Gray's Registration Statement on Form S-4 (No. 333-45899) and the number in
parentheses following the description of the exhibit refers to the exhibit
number in the Form S-4. The following is a complete list of exhibits filed or
incorporated by reference as part of this Annual Report on Form 10-K.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger, dated as of December 22, 1997, by and
among Mac-Gray Corporation, MI Acquisition Corp., Intirion Corporation
and Robert P. Bennett (2.1).*
2.2 Stock 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. Pursuant to Item 601(b)(2) of Regulation S-K,
the Schedules referred to in the Stock and Asset Purchase Agreement
are omitted (10.24).*
3.1 Amended and Restated Certificate of Incorporation (3.1).+
3.2 By-laws (3.2).+
4.1 Specimen certificate for shares of Common Stock, $.01 par value, of
the Registrant (4.1).+
10.1 Stockholders' Agreement dated as of April 17, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.1).+
10.2 Stockholders' Agreement dated as of June 26, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.2).+
10.3 Agreement and Plan of Merger dated as of April 17, 1997 by and among
the Registrant and the other parties named therein (10.3).+
10.4 Credit Agreement dated April 17, 1997, by and among the Registrant,
the other Borrowers (as defined therein), the lenders named therein
and State Street Bank and Trust Company, as agent (10.4).+
10.5 Security Agreement dated as of April 17, 1997 by and among the
Registrant, the other Borrowers (as defined therein) and the Banks (as
defined therein) (10.5).+
10.6 Revolving Line of Credit Note dated April 17, 1997 issued by the
Registrant in favor of the Banks (as defined therein) (10.6).+
10.7 Pledge Agreement dated as of April 17, 1997 by and among the
Registrant and the Banks (as defined therein) (10.7).+
10.8 Confidentiality and Noncompetition Agreement dated as of September 4,
1990, as amended on March 25, 1993, by and between the Registrant and
Caldwell and Gregory, Inc. (10.8).+
10.9 Consulting Agreement dated as of April 17, 1997 by and among the
Registrant and Jeffrey C. Huenink (10.9).+
10.10 Noncompetition Agreement dated as of April 17, 1997 by and among
Registrant and Jeffrey C. Huenink (10.10).+
10.11 Form of Noncompetition Agreement between the Registrant and its
executive officers (10.11).+
10.12 Form of Maytag Licensing Agreement for "Red Carpet Service" (10.12).+
10.13 Form of Maytag Distributorship Agreements (10.13).+
10.14 Promissory Note dated December 31, 1992 issued by the Registrant in
favor of Donald M. Shaw (10.14).+
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
10.15 Consulting and Noncompete Agreement dated December 31, 1992 by and
between Donald M. Shaw and the Registrant (10.15).+
10.16 The Registrant's 1997 Stock Option and Incentive Plan (with form of
option agreements attached as exhibits) (10.16).+
10.17 Form of Director Indemnification Agreement between the Registrant and
each of its Directors (10.17).+
10.18 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).*
10.19 Form of Escrow Agreement by and among the Registrant, Gelco
Corporation, Michael Shanahan, the former securityholders of Intirion
Corporation and State Street Bank and Trust Company, as escrow agent
(10.19).*
10.20 Voting Agreement by and between the Registrant and each of Robert P.
Bennett, Eastech II Limited Partnership and Eastech III Limited
Partnership (10.20).*
10.21 Voting Agreement by and between the Registrant and Gelco Corporation
(10.21).*
10.22 Form of Noncompetition Agreement by and between the Registrant and
Robert P. Bennett (10.22).*
10.23 Distribution Agreement by and between Schlumberger Technologies, Inc.
and Mac-Gray Services, Inc., dated as of October 27, 1997 (certain
portions of this exhibit were omitted pursuant to the grant of a
request for confidential treatment) (10.23).*
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedules.
</TABLE>
(b) REPORTS ON FORM 8-K
On December 24, 1997, Mac-Gray filed a Form 8-K reporting under Item 5--
Other Events the signing of the definitive Agreement and Plan of Merger with
Intirion. No other reports on Form 8-K were filed by Mac-Gray during the
fourth quarter of fiscal year 1997.
23
<PAGE>
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 26TH DAY OF
MARCH, 1998.
Mac-Gray Corporation
/s/ Stewart Gray MacDonald, Jr.
By: _________________________________
Stewart Gray MacDonald, Jr.
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: March 26, 1998
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.
<TABLE>
<S> <C>
SIGNATURE TITLE DATE
/s/ Patrick A. Flanagan Executive Vice March 26, 1998
- ------------------------------------- President, Mergers
PATRICK A. FLANAGAN and Acquisitions,
Secretary and
Director
/s/ John S. Olbrych Chief Financial March 26, 1998
- ------------------------------------- Officer and
JOHN S. OLBRYCH Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Jeffrey C. Huenink Director March 26, 1998
- -------------------------------------
JEFFREY C. HUENINK
/s/ Jerry A. Schiller Director March 26, 1998
- -------------------------------------
JERRY A. SCHILLER
/s/ John P. Leydon Director March 26, 1998
- -------------------------------------
JOHN P. LEYDON
/s/ Eugene B. Doggett Director March 26, 1998
- -------------------------------------
EUGENE B. DOGGETT
</TABLE>
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MAC-GRAY CORPORATION
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheet as of December 31, 1996 and 1997............. F-3
Consolidated Statement of Income for the Years Ended December 31, 1995,
1996 and 1997.......................................................... F-4
Consolidated Statement of Stockholders' Equity for the Years Ended De-
cember 31, 1995, 1996 and 1997......................................... F-5
Consolidated Statement of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
SUN SERVICES OF AMERICA, INC. AND R. BODDEN COIN-OP -LAUNDRY, INC.
Report of Independent Accountants....................................... F-19
Combined Balance Sheet as of December 31, 1996 and March 31, 1997 (unau-
dited)................................................................. F-20
Combined Statement of Income for the Year Ended December 31, 1996 and
for the Three Months Ended March 31, 1996 and 1997 (unaudited)......... F-21
Combined Statement of Stockholder's Equity for the Year Ended December
31, 1996 and the Three Months Ended March 31, 1997 (unaudited)......... F-22
Combined Statement of Cash Flows for the Year Ended December 31, 1996
and for the Three Months Ended March 31, 1996 and 1997 (unaudited)..... F-23
Notes to Combined Financial Statements.................................. F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Mac-Gray Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Mac-Gray Corporation (the "Company"), at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 30, 1998
F-2
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,844 $ 3,774
Trade receivables, net of allowance for doubtful accounts.. 1,640 4,256
Available-for-sale security................................ 343 --
Inventory.................................................. 1,509 2,886
Deferred income taxes...................................... -- 548
Prepaid commissions and other current assets............... 1,699 2,270
------- -------
Total current assets..................................... 8,035 13,734
Property, plant and equipment, net......................... 31,912 37,699
Intangible assets, net..................................... 11,491 27,926
Prepaid commissions and other assets....................... 2,670 5,015
------- -------
Total assets............................................. $54,108 $84,374
======= =======
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long term debt.......................... $ 4,042 $ 1,550
Current portion of capital lease obligations............... 251 476
Accounts payable........................................... 3,876 5,002
Accrued commissions........................................ 4,940 5,585
Accrued expenses........................................... 995 2,006
------- -------
Total current liabilities................................ 14,104 14,619
Long-term debt............................................... 23,325 5,395
Long-term capital lease obligations.......................... 193 491
Deferred income taxes........................................ 647 5,430
Deferred retirement obligation............................... 1,156 1,052
Other liabilities............................................ -- 429
Commitments and contingencies (Note 12)...................... -- --
Redeemable common stock, 612,026 shares...................... -- 7,797
Stockholder's equity:
Preferred stock of Mac-Gray Corporation ($.01 par value,
5,000,000 shares authorized, no shares issued and
outstanding).............................................. -- --
Common stock of Mac-Gray Co., Inc. ($1 par value; 200,000
shares authorized, 154,275 shares issued and outstanding
at December 31, 1996)..................................... 154 --
Common stock of Mac-Gray Corporation ($.01 par value;
30,000,000 shares authorized, 10,967,800 shares issued and
outstanding at December 31, 1997)......................... -- 110
Additional capital......................................... 2,413 51,035
Retained earnings (deficit)................................ 20,788 (1,984)
Net unrealized gain on available-for-sale security, net of
tax....................................................... 258 --
Less: 54,275 shares held in treasury at cost............... (8,930) --
------- -------
Total stockholders' equity................................. 14,683 49,161
------- -------
Total liabilities, redeemable common stock and stockhold-
ers' equity............................................. $54,108 $84,374
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenue............................................. $50,710 $64,427 $81,370
Cost of revenue:
Commissions....................................... 20,471 25,760 31,717
Laundry route expenditures........................ 8,251 10,955 12,232
Depreciation and amortization..................... 4,899 6,216 8,635
Cost of equipment sales........................... 2,938 5,189 8,187
------- ------- -------
Total cost of revenue........................... 36,559 48,120 60,771
------- ------- -------
Operating expenses:
General and administration........................ 3,901 3,952 4,699
Sales and marketing............................... 2,531 3,803 5,165
Depreciation...................................... 455 517 503
------- ------- -------
Total operating expenses........................ 6,887 8,272 10,367
------- ------- -------
Income from operations.............................. 7,264 8,035 10,232
Interest expense, net............................. (1,175) (1,956) (2,521)
Other income (expense), net....................... 55 (87) 181
------- ------- -------
Income before provision for income taxes.......... 6,144 5,992 7,892
Provision for income taxes........................ (374) (465) (5,206)
------- ------- -------
Net income...................................... $ 5,770 $ 5,527 $ 2,686
======= ======= =======
Net income per common share......................... $ 0.91 $ 0.87 $ 0.37
======= ======= =======
Weighted average common shares outstanding.......... 6,368 6,368 7,263
======= ======= =======
Net income per common share--assuming dilution...... $ 0.91 $ 0.87 $ 0.36
======= ======= =======
Weighted average common shares outstanding--assuming
dilution........................................... 6,368 6,368 7,391
======= ======= =======
UNAUDITED PRO FORMA TAX ADJUSTED DATA (NOTE 15):
Income before provision for income taxes.......... $ 6,144 $ 5,992 $ 7,892
Provision for income taxes........................ (2,458) (2,397) (3,157)
------- ------- -------
Pro forma tax adjusted net income................. $ 3,686 $ 3,595 $ 4,735
======= ======= =======
Pro forma tax adjusted net income per common
share............................................ $ 0.58 $ 0.56 $ 0.65
======= ======= =======
Pro forma tax adjusted net income per common
share-assuming dilution.......................... $ 0.58 $ 0.56 $ 0.64
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK NET UNREALIZED TREASURY STOCK
----------------- GAINS (LOSSES) ------------------
NUMBER OF ADDITIONAL RETAINED ON SECURITY, NUMBER OF
SHARES VALUE CAPITAL EARNINGS NET OF TAX SHARES VALUE TOTAL
---------- ----- ---------- -------- -------------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 154,275 $ 154 $ -- $ 17,406 $ 262 52,000 $(8,384) $ 9,438
Net income............. -- -- -- 5,770 -- -- -- 5,770
Net change in
unrealized gains
(losses) on available-
for-sale security, net
of tax................ -- -- -- -- 28 -- -- 28
Dividends.............. -- -- -- (3,395) -- -- -- (3,395)
Contribution of capi-
tal................... -- -- 1,009 -- -- -- -- 1,009
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1995................... 154,275 154 1,009 19,781 290 52,000 (8,384) 12,850
Net income............. -- -- -- 5,527 -- -- -- 5,527
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (32) -- -- (32)
Dividends.............. -- -- -- (4,520) -- -- -- (4,520)
Common stock redemp-
tion.................. -- -- -- -- -- 2,275 (546) (546)
Contribution of capi-
tal................... -- -- 1,404 -- -- -- -- 1,404
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1996................... 154,275 154 2,413 20,788 258 54,275 (8,930) 14,683
Net income............. -- -- -- 2,686 -- -- -- 2,686
Elimination of capital
structure (Note 1).... (154,275) (154) (2,413) (6,363) -- (54,275) 8,930 --
Reorganization of the
Company (Note 1)...... 6,367,800 64 -- (64) -- -- -- --
Sale of common stock... 4,600,000 46 45,128 -- -- -- -- 45,174
Contribution of capital
(Note 3).............. -- -- 5,907 (5,907) -- -- -- --
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (258) -- -- (258)
Dividends.............. -- -- -- (13,124) -- -- -- (13,124)
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1997................... 10,967,800 $ 110 $51,035 $ (1,984) $ -- -- $ -- $ 49,161
========== ===== ======= ======== ===== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 5,770 $ 5,527 $ 2,686
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 5,354 6,733 9,138
(Gain) loss on sale of assets................... (11) 43 (246)
Deferred income taxes........................... 71 60 4,235
Decrease (increase) in accounts receivable........ 69 (577) (2,572)
(Increase) decrease in inventory.................. (137) 224 (1,067)
(Increase) in prepaid expenses and other assets... (1,386) (1,299) (2,900)
Increase in accounts payable, accrued commissions
and accrued expenses............................. 687 2,939 1,668
------- ------- -------
Net cash flows provided by operating activi-
ties........................................... 10,417 13,650 10,942
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (4,421) (7,635) (8,681)
Acquisition of businesses (Note 2)................ (821) (14,487) (12,196)
Proceeds from sale of property and equipment...... 137 52 --
Proceeds from sale of securities.................. -- -- 333
------- ------- -------
Net cash flows used in investing activities..... (5,105) (22,070) (20,544)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital
lease obligations................................ (2,490) (2,171) (3,529)
Retirement of line of credit and term loan........ -- (5,378) (19,512)
Advances on line-of-credit, net................... 1,327 18,247 1,823
Contribution of capital and proceeds from sale of
common stock..................................... 1,009 1,404 45,174
Cash dividends paid............................... (3,395) (4,520) (13,124)
Cash paid to repurchase shares of common stock.... -- (125) --
Cash paid for refinancing of long term debt....... -- (75) (300)
------- ------- -------
Net cash flows provided by (used in) financing
activities..................................... (3,549) 7,382 10,532
------- ------- -------
Increase (decrease) in cash and cash equivalents.... 1,763 (1,038) 930
Cash and cash equivalents, beginning of year........ 2,119 3,882 2,844
------- ------- -------
Cash and cash equivalents, end of year.............. $ 3,882 $ 2,844 $ 3,774
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid..................................... $ 1,161 $ 1,944 $ 2,884
Income taxes paid................................. 242 384 1,036
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
During the year ended December 31, 1997, common stock with an approximate
value of $7,797 was issued in connection with the Sun Services Acquisition.
Such common stock is redeemable at a negotiated price pursuant to a
contractual arrangement.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
Basis of Presentation--The historical financial statements include the
combined accounts of Mac-Gray Co., Inc. and Mac-Gray, L.P. On April 17, 1997,
Mac-Gray Co., Inc. and Mac-Gray, L.P. were reorganized to create Mac-Gray
Corporation (the "Parent"). The Parent acquired all of the outstanding common
stock of Mac-Gray Co., Inc. and all of the outstanding limited partnership
interest of Mac-Gray, L.P. in exchange for 6,367,800 shares of the Parent's
common stock. Concurrently, Mac-Gray, L.P. was merged with and into Mac-Gray
Co., Inc. which continued to operate as a wholly owned subsidiary of the
Parent (collectively, the "Company"). The consolidated financial statements
for the current fiscal year include the accounts of Mac-Gray Corporation and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in the consolidation.
Description of the Business--The Company generates the majority of its
revenue from card and coin route laundry rooms located in the Northeastern,
Midwestern and Southeastern United States. The Company's principal customer
base is the multi-housing market, which consists of apartments, condominium
units, colleges and universities. The Company also sells, services and leases
commercial laundry equipment to commercial laundromats and institutions. The
majority of the Company's purchases of coin route laundry equipment is from
one supplier.
2. ACQUISITIONS
In 1995, the Company acquired certain assets of Commercial Appliance, Inc.
for $821 and recorded goodwill of approximately $564. During 1996, the Company
acquired certain assets of six coin-operated laundry businesses or divisions
for an aggregate purchase price of $15,561 and recorded goodwill of $10,184.
Non-compete agreements valued at $1,250 were also recorded in 1996 in
connection with these acquisitions. These acquisitions were accounted for
using the purchase method of accounting. Pro forma financial information has
not been provided for these acquisitions due to lack of historical financial
data of the acquired entities.
On April 17, 1997, the Company acquired in exchange for 612,026 shares of
its common stock, (approximate value of $7,797), approximately $2,170 in cash,
$850 of a deferred payment obligation, and assumption of approximately $2,787
in debt, each of Sun Services of America, Inc. and R. Bodden Coin-Op Laundry,
Inc. (collectively, "Sun Services"). The shares of the Company's common stock
are redeemable at the election of the shareholder. The redeemable common stock
has been valued at a contractual put price of $12.74 per common share (which
was in excess of market as of that date). The redemption feature of these
shares expires on October 22, 2000. Sun Services of America, Inc. and R.
Bodden Coin-Op Laundry were 100% owned by the same shareholder. The Parent
acquired all of the outstanding capital stock of Sun Services, which was
accounted for pursuant to the purchase method of accounting, and resulted in
goodwill of approximately $11,600.
The following pro forma financial information reflects the Sun Services
Acquisition as if it occurred on January 1, 1996. For the year ended December
31, 1997, the historical results of Sun Services for the period from April 1,
1997 through April 16, 1997 have not been included and are not material to the
Company.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA RESULTS FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997
----------------- -----------------
<S> <C> <C>
Revenue................................ $ 71,091 $ 83,402
Net Income............................. 5,680 2,839
Pro Forma tax adjusted net income (Note
15)................................... 3,687 4,827
Pro Forma tax adjusted net income Per
Share................................. $ 0.58 $ 0.66
Pro Forma tax adjusted net income Per
Share--assuming dilution.............. $ 0.58 $ 0.65
</TABLE>
F-7
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In October and November, 1997, the Company acquired certain assets of two
additional coin-operated laundry businesses for approximately $7,150. These
acquisitions were also accounted for using the purchase method of accounting.
Accordingly, the purchase price assigned to the assets acquired was the fair
market value on the respective acquisition dates. Purchase price in excess of
the fair value of assets acquired was allocated to goodwill and amounted to
approximately $6,228. Pro forma financial information for the October and
November 1997 acquisitions has not been presented due to their insignificance
in relation to the Company as a whole. The Company's consolidated financial
statements include the results of the 1995, 1996, and 1997 acquisitions from
their respective acquisition dates.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
Mac-Gray Corporation completed its initial public offering of 4,600,000
shares of common stock at $11 per share on October 22, 1997. The net proceeds
from the sale of the common stock of $45,174 were used primarily to repay
existing indebtedness outstanding under the Credit Facility (Note 9) and to
fund a distribution of $9,000 of previously taxed but undistributed earnings
to the Company's shareholders of record as of October 16, 1997. As a result of
the initial public offering, the Company's S corporation status was
terminated. Retained earnings of $5,907 as of that date were reclassified to
additional paid-in capital to reflect additional contributions of capital by
the S-corporation shareholders.
4. SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Available-For-Sale Security--The Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company invests excess cash in repurchase agreements and other highly
liquid short term investments. Accordingly, the investments are subject to
minimal credit and market risk. All of the Company's investments are
classified as available-for-sale. As such, unrealized gains and losses are
excluded from earnings and reported as a separate component of stockholders'
equity, net of tax.
Revenue Recognition--The Company recognizes coin route laundry revenue on
the accrual basis. Sales revenue from the Company's commercial sale of
equipment and parts is recognized upon shipment of the orders.
Allowance for Doubtful Accounts--The Company maintains an allowance for
doubtful accounts of $330 at December 31, 1996 and $490 at December 31, 1997.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk include trade receivables,
generated by the Company as a result of the selling and leasing of laundry
machines. To minimize this risk, ongoing credit evaluations of customers'
financial condition are performed and reserves are maintained. The Company
typically does not require collateral.
Fair Value of Financial Instruments--For purposes of financial reporting,
the Company has determined that the fair value of financial instruments
approximates book value at December 31, 1996 and 1997, based upon terms
currently available to the Company in financial markets.
Inventories--Inventories consist of laundry machines and parts purchased for
commercial sale. Inventories are stated at the lower of cost (as determined
using the first-in, first-out method) or market.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost and depreciated using the straight-line method over the estimated useful
lives of the respective assets. Expenditures for maintenance and repairs are
charged to operations as incurred; acquisitions, major renewals, and
betterments are capitalized.
Coin route equipment-not yet placed in service--These assets represent
laundry machines that management estimates will be installed in coin route
laundry rooms and have not been purchased for commercial sale.
F-8
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the acquisitions
(Note 2). The non-compete agreements are amortized using the straight-line
method over the life of the agreements, which ranges from two to five years.
Goodwill is amortized using the straight-line method over fifteen or twenty
years from the acquired companies respective dates of acquisitions.
Impairment of Long-Lived Assets--Impairment losses are recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.
Income Taxes--Mac-Gray Co., Inc. which elected S corporation status, and
Mac-Gray, L.P. were "pass through" entities for income tax purposes prior to
the reorganization on April 17, 1997. From April 17, 1997 through October 16,
1997, Mac-Gray Corporation also elected S corporation status. Accordingly,
earnings and losses were included on the income tax returns of the respective
equity owners through October 16, 1997. On October 16, 1997, the Company's S
corporation status was terminated as a result of the initial public offering.
The Company accounts for income taxes utilizing the asset and liability
method as prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the provisions of SFAS 109,
the current or deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determined the amount of taxes
payable currently or in future years. The classification of net current and
non-current deferred tax assets or liabilities depend upon the nature of the
related asset or liability. Deferred income taxes are provided for temporary
differences between the income tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes.
Stock Compensation--The Company's stock option plans are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". In fiscal 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation".
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share--The Company accounts for earnings per share in
accordance with Statement of Financial Accounting Standard No. 128, "Earnings
Per Share" (SFAS 128). SFAS 128 replaces APB Opinion No. 15 "Earnings Per
Share" and requires the presentation of basic earnings per share and diluted
earnings per share (EPS). Basic EPS includes no dilution and is computed by
dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted EPS under APB 15. Diluted earnings per share has been calculated using
the treasury stock method and prior period earnings per share have been
restated in accordance with SFAS 128. Net income per share gives effect to the
exchange of shares between the Parent and the Company (Note 1).
New Accounting Pronouncements--The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) and No. 131, "Disclosures About Segments of
an Enterprise and Related Information" (SFAS 131). In accordance with these
F-9
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
statements, the Company plans to implement SFAS 130 which requires
presentation of certain information related to comprehensive income and SFAS
131 which requires that certain additional information related to operating
segments be reported during fiscal year 1998. The Company is currently
reviewing the impact of these statements on its financial statements.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ---------------
(YEARS) 1996 1997
----------- ------- -------
<S> <C> <C> <C>
Coin route equipment........................... 10 $58,610 $68,179
Buildings and improvements..................... 15-32 6,531 7,388
Furniture, fixtures and computer equipment..... 5-7 4,062 5,092
Trucks and autos............................... 3-5 1,776 2,600
Land and improvements.......................... -- 309 309
------- -------
71,288 83,568
Less: accumulated depreciation................. 40,428 46,869
------- -------
30,860 36,699
Coin route equipment, not yet placed in serv-
ice........................................... 1,052 1,000
------- -------
Property, plant and equipment, net............. $31,912 $37,699
======= =======
</TABLE>
Depreciation and amortization of property, plant and equipment totaled
$4,477, $5,176 and $6,441 for the years ended December 31, 1995, 1996 and
1997, respectively.
During 1995, 1996 and 1997, the Company acquired vehicles under capital
leases with a cost of $356, $328 and $892, respectively.
At December 31, 1996 and 1997, trucks and autos includes $1,449 and $2,284,
respectively, of capital leased equipment with an accumulated amortization
balance of $1,052 and $1,307, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Goodwill.................................................... $10,348 $28,208
Covenants-not-to-compete.................................... 2,549 2,869
Other....................................................... 153 451
------- -------
13,050 31,528
Less: accumulated amortization.............................. 1,559 3,602
------- -------
Intangible assets, net...................................... $11,491 $27,926
======= =======
</TABLE>
Amortization expense associated with the above intangible assets amounted to
$650, $841 and $1,811 for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-10
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
-------------
<S> <C> <C>
Accrued interest.............................................. $134 $ 101
Accrued salaries.............................................. 78 233
Current portion of deferred retirement obligation............. 104 104
Current portion of deferred payment obligation................ -- 392
Other......................................................... 679 1,176
----- -------
$ 995 $ 2,006
===== =======
</TABLE>
8. DEFERRED RETIREMENT OBLIGATION
The deferred retirement obligation at December 31, 1996 and 1997 relates to
payments due to a shareholder of the Company in connection with a retirement
agreement which provides for annual payments of $104 until the death of the
shareholder. The liability at December 31, 1996 and 1997 has been estimated
based upon the life expectancy of the shareholder utilizing actuarial tables.
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------- ------
<S> <C> <C>
Credit agreement and revolving credit facility.............. $17,668 $ --
Unsecured notes payable to former shareholders:
Variable rate note, lesser of prime rate plus 2% or 9%,
quarterly principal payments beginning January 1, 1996
(9% at December 31, 1997)................................ 3,360 2,560
Fixed rate notes, 8.4% interest rate, due September 1, 1997
and June 1, 2000........................................... 2,046 746
Discount note, 6% imputed interest rate (estimated fair
market rate), quarterly installments, due December 31,
2003....................................................... 2,613 2,239
Fixed note, 8.75% interest rate, due January 1, 2001........ 421 317
Note payable, 11.5% fixed interest rate, monthly principal
payments, due September 1, 1999............................ 249 172
Acquisition note payable, 8% imputed interest rate
(estimated fair market rate), monthly payments, due
May 31, 2006............................................... 1,010 911
------- ------
Total long-term debt.................................... 27,367 6,945
Less: current portion....................................... 4,042 1,550
------- ------
$23,325 $5,395
======= ======
</TABLE>
Credit Agreement and Revolving Credit Facility
On April 17, 1997, the outstanding debt under the 1996 Credit Agreement and
Revolving Credit Facility was refinanced under terms of an amended and
restated agreement (the Senior Secured Credit Facility). The
F-11
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Senior Secured Credit Facility provides for borrowings under (i) a revolving
line of credit and term loan facility and (ii) a revolving working capital
line of credit facility of up to $45,000 and $5,000, respectively. Outstanding
indebtedness under the Senior Secured Credit Facility bears interest at the
Company's option, at a rate equal to the prime rate plus .5% or LIBOR plus
2.5% with the margin over the prime rate and LIBOR decreasing after October
22, 1997 due to the initial public offering of the Company's common stock
(Note 3) to the prime rate less .5% or LIBOR plus 2.0%. The Senior Secured
Credit Facility restricts payments of dividends and other distributions,
restricts the Company from making certain acquisitions and incurring
indebtedness, and requires it to maintain certain financial ratios. The Senior
Secured Credit Facility is secured by pledges of assets of the Parent and its
subsidiaries. The Senior Secured Credit Facility provides for the issuance of
standby letters of credit of up to $15,000 in the aggregate. At December 31,
1997, outstanding letters of credit amounted to $1,302. There is no
outstanding balance on the Senior Secured Credit Facility at December 31,
1997. The interest rate for the Senior Secured Credit Facility at December 31,
1997 was 8.0%.
In connection with the financing of the 1996 Acquisitions (Note 2), the
Company entered into a Credit Agreement with a bank which provided for
borrowings under a Revolving Line of Credit, Working Capital Line of Credit
and Acquisition Line of Credit of up to $14,000, $1,500 and $4,000,
respectively. Borrowings under the Credit Agreement were restricted to
providing working capital requirements of the Company and funding future
acquisitions.
During June 1996, the Company entered into an agreement with a bank which
provided a Revolving Credit Facility with aggregate borrowings of up to
$4,500. As of December 31, 1996, $2,893 was available to be borrowed under the
Revolving Credit Facility. A portion of the proceeds from the Credit Agreement
and the Revolving Credit Facility were used to pay the balance of the Bank
Note and Line of Credit outstanding prior to the refinancing of the Company.
The Credit Agreement and the Revolving Credit Facility provided for the
issuance of standby letters of credit up to $2,200 in the aggregate. At
December 31, 1996, outstanding letters of credit amounted to $1,526.
Borrowings under the 1996 Credit Agreement and the Revolving Credit Facility
bore interest, at the Company's option, at either (1) the banks' prime
interest rate (the "Prime Rate") or (2) 2.5% plus the rate at which certain
Eurodollar deposits were offered in the interbank Eurodollar market (the
"LIBOR Rate") or (3) 2.5% plus the rate at which funds were offered in the
secondary markets (the "Cost of Funds Rate").
Future Payments
As of December 31, 1997, the scheduled future principal payments of long-
term debt are as follows:
<TABLE>
<S> <C>
1998................................................................. $ 1,550
1999................................................................. 1,401
2000................................................................. 2,088
2001................................................................. 887
2002................................................................. 602
Thereafter........................................................... 417
-------
$ 6,945
=======
</TABLE>
10. INCOME TAXES
On October 16, 1997, the Company's S corporation status was automatically
terminated due to the initial public offering (Note 3). As a result, the
current year provision includes a charge of $4,037 to provide for net deferred
tax liabilities resulting from the change in income tax status from an S
corporation to a C corporation,
F-12
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The following information relates to the
temporary differences at October 16, 1997.
<TABLE>
<S> <C>
Accounts receivable................................................ (627)
Fixed assets....................................................... 16,051
Deferred compensation.............................................. (3,415)
Other.............................................................. (147)
--------
Total............................................................ $ 11,862
========
</TABLE>
Prior to October 16, 1997, the historical income tax provision was
established only to provide for income taxes in states that do not recognize
Subchapter S corporations, using a statutory income tax rate of 6%. The
effective rate differed from the statutory rate in 1996 and 1997 (prior to
October 16, 1997) due to meals and entertainment expenses and goodwill
amortization recorded for book purposes that are not deductible for income tax
purposes. In addition to the aforementioned items, the Company's 1996
effective tax rate differs from the statutory tax rate due to taxable losses
generated by Mac-Gray, L.P. for which only a 10% tax benefit (equivalent to
Mac-Gray Co., Inc.'s general partnership interest in Mac-Gray, L.P.) was
recognized by the Company.
The provision for state and federal income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Current state income tax................................... $305 $405 $ 454
Deferred state income tax.................................. 69 60 505
Current federal income tax................................. -- -- 517
Deferred federal income tax................................ -- -- 3,730
---- ---- ------
Total income taxes....................................... $374 $465 $5,206
==== ==== ======
</TABLE>
The net deferred tax liability in the accompanying balance sheets includes
the following amounts of deferred tax assets and liabilities at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Deferred tax assets:
Accounts receivable........................................... $ 40 $ 369
Deferred compensation......................................... 202 1,366
Other......................................................... 33 49
---- ------
275 1,784
---- ------
Deferred tax liabilities:
Fixed assets.................................................. 915 6,619
Other......................................................... 7 47
---- ------
922 6,666
---- ------
Net deferred tax liabilities.................................... $647 $4,882
==== ======
</TABLE>
It is not expected that a valuation allowance will be needed for the
deductible differences at December 31, 1997.
As the Company maintained its S corporation election through October 16,
1997, the provision for income taxes recorded for the year ended December 31,
1997 differs significantly from the amount of income taxes
F-13
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income. For the period subsequent to the termination of the S
corporation, the statutory income tax rate differed from the effective rate
primarily as a result of the following differences:
<TABLE>
<CAPTION>
%
----
<S> <C>
Taxes computed at federal statutory rate............................... 34.0%
State income taxes, net of federal benefit............................. 2.3
Other.................................................................. (1.0)
----
Income tax provision................................................. 35.3%
====
</TABLE>
The current provision for income taxes recorded for fiscal 1997 includes
$314 in tax while the Company was an S corporation and $657 in tax for the
period subsequent to the termination of the S corporation election.
11. COMMON STOCK REDEMPTION
On January 1, 1996, the Company redeemed 2,275 shares of its common stock at
$240 per share from minority shareholders. The aggregate redemption price was
$546, consisting of cash in the amount of $125 and the issuance of five-year
promissory notes in the amount of $421, bearing interest at 8.75% per year.
12. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases certain equipment and facilities under non-
cancelable operating leases. The Company also leases certain vehicles under
capital leases.
Future minimum lease payments under non-cancelable operating and capital
leases consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1998................................................... $ 538 $ 379
1999................................................... 389 302
2000................................................... 133 218
2001................................................... -- 66
------ -----
Future lease payments.................................. 1,060 $ 965
=====
Less: amount representing interest (8.5% at December
31, 1997)............................................. 93
------
967
Present value future minimum lease payments less
amounts due within one year........................... 476
------
Amounts due after one year............................. $ 491
======
</TABLE>
Rent expense incurred by the Company under non-cancelable operating leases
totaled $123, $256 and $520 for the years ended December 31, 1995, 1996 and
1997, respectively.
Guaranteed Commission Payments--The Company operates coin laundry routes
under various lease agreements in which the Company is required to make
minimum guaranteed commission payments to the respective property owners. The
following is a schedule by years of future minimum guaranteed commission
F-14
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
payments required under these lease agreements that have initial or remaining
non-cancelable contract terms in excess of one year as of December 31, 1997:
<TABLE>
<S> <C>
1998.................................................................. $1,633
1999.................................................................. 1,395
2000.................................................................. 1,375
2001.................................................................. 826
2002.................................................................. 735
Thereafter............................................................ 1,876
------
$7,840
======
</TABLE>
Guarantee of Indebtedness--At December 31, 1997, Mac-Gray Co., Inc. is a
guarantor on a line-of-credit for a customer in the amount of $706. The
customer has incurred substantial losses. While the guarantee is secured by a
pledge of the borrowing company's assets, it is uncertain if those assets and
profits from continuing operations will be adequate to retire the line-of-
credit. The Company has recorded a reserve of $250 at December 31, 1997 for
estimated losses on this guarantee. In management's opinion, the range of the
estimated loss to be incurred in connection with the Company's guarantee of
the customer's line-of-credit in excess of the amount recorded at December 31,
1997 will not have a material adverse impact on the results of operations or
the financial position of the Company.
Litigation--The Company is involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Company's ultimate liability, if any, under pending litigation would not
materially affect its financial condition or the results of its operations.
13. EMPLOYEE BENEFIT AND STOCK PLANS
Retirement Plans--The Company maintains a qualified profit-sharing/401(k)
plan (the Plan) covering substantially all employees. The Company's
contributions to the Plan are at the discretion of the Board of Directors.
Costs under the Plan amounted to $535, $532 and $285 for the years ended
December 31, 1995, 1996 and 1997, respectively.
1997 Stock Option and Incentive Plans--In December, 1996, the Board of
Directors of Mac-Gray Co. adopted, and the stockholders approved, the Mac-Gray
Co., Inc. 1996 Stock Option and Incentive Plan (the Predecessor Plan). On
April 7, 1997, the Board of Directors adopted and the Company's stockholders
approved the 1997 Stock Option and Incentive Plan for the Company (the 1997
Stock Plan). The 1997 Stock Plan is designed and intended as a performance
incentive for officers, employees, consultants and directors to promote the
financial success and progress of the Company. All officers, employees and
independent directors are eligible to participate in the 1997 Stock Plan.
Awards, when made, may be in the form of stock options, restricted stock,
unrestricted stock options, and dividend equivalent rights.
On December 30, 1996, Mac-Gray Co. granted 556,350 options to purchase
shares of common stock with an exercise price of $9.99 per share pursuant to
the Predecessor Plan. Concurrent with the reorganization of the Company, the
options issued pursuant to the Predecessory Plan were assumed by the Company
under the 1997 Stock Plan, and the Predecessory Plan was terminated. The
options assumed by the Company under the 1997 Plan were reflective of the
exchange of common stock between the Parent and Mac-Gray Co., Inc. The
exercise price of the options was adjusted to $8.80 in August 1997, in order
to restore the economic position of the option holders as a result of the
$9,000 distribution (Note 3). The change in the exercise price of these
options has been
F-15
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
reflected as a cancellation of the $9.99 options and a grant of the $8.80
options on the following option rollforward. Employee options vest so that
twenty percent (20%) of the options will become exercisable on each of the
first through fifth anniversaries of the date of grant of the options. In the
event of termination of the optionees' relationship with the Company, options
not yet exercised terminate within 90 days. The 1997 Stock Plan also provided
for the automatic grant to each of the four independent directors to purchase
1,000 shares of common stock. The non-qualified options granted to independent
directors were exercisable immediately and will terminate on the tenth
anniversary of the grant. The exercise prices were determined by the Board of
Directors to be the fair market value of the shares underlying the options on
the respective dates of the grants. Other than the stock option grants, there
were no other grants of equity-based compensation awards during 1996 and 1997.
The 1997 Stock Plan provides for the issuance of up to the greater of
750,000 shares of common stock or ten percent of the then outstanding shares
of common stock. Subsequent to the initial public offering (Note 3), a total
of 1,157,982 shares of common stock are reserved for issuance under the 1997
Stock Plan, of which 638,590 shares are subject to outstanding options and
519,392 remain available for issuance.
The following is a summary of stock option plan activity.
<TABLE>
<CAPTION>
1996 1997
---------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year........... -- $ -- 556,350 $ 9.99
Granted.................................. 556,350 $ 9.99 649,840 $ 8.88
Exercised................................ -- $ -- -- $ --
Canceled................................. -- $ -- (556,350) $ 9.99
Forfeited................................ -- $ -- (11,250) $ 8.89
------- ------ -------- ------
Outstanding, end of year................. 556,350 $ 9.99 638,590 $ 8.88
======= ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$8.80--$9.25..... 634,590 9 $ 8.86 109,470 $ 8.80
$11.00--$16.06... 4,000 10 $12.27 4,000 $12.27
------- --- ------ ------- ------
638,590 9 $ 8.88 113,470 $ 8.92
======= === ====== ======= ======
</TABLE>
F-16
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." The Company continues to measure compensation cost using the
intrinsic value based method of accounting prescribed by APB Opinion 25. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net income
and pro forma net income per share would have been reduced to $2,314 in 1997,
or $0.32 per share compared to reported net income of $2,686, or $0.37 per
share and $0.36 per share-assuming dilution.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Fair value of options granted at grant date................ $ 3.10 $ 3.61
Risk free interest rate.................................... 6% 6%
Expected option term--Employees............................ 7 years 7 years
Expected option term--independent directors................ -- 3 years
Expected volatility........................................ -- 50%
Option valuation method.................................... Black-Scholes
option-pricing
model
</TABLE>
In accordance with the provisions of SFAS 123, a volatility assumption was
not used to calculate the fair value of options granted prior to the Company's
initial public offering.
Because the determination of the fair value of all options granted includes
vesting periods over several years and additional option grants are expected
to be made each year, the above pro forma disclosures are not representative
of pro forma effects of reported net income for future periods.
14. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Pro forma net income per common share:
Net income................................. $2,686 7,263 $0.37
====== ===== =====
Effect of dilutive securities:
Stock options.............................. 128
-----
Pro forma net income per common share-assum-
ing dilution:
Net income................................. $2,686 7,391 $0.36
====== ===== =====
</TABLE>
F-17
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1996
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net income per common share:
Net income................................. $3,595 6,368 $0.56
====== ===== =====
Effect of dilutive securities:
Stock options.............................. --
-----
Net income per common share--assuming dilu-
tion:
Pro forma as adjusted net income........... $3,595 6,368 $0.56
====== ===== =====
</TABLE>
15. UNAUDITED PRO FORMA TAX ADJUSTED DATA
Statement of Income--Unaudited pro forma tax adjusted data reflects
adjustments to the consolidated statement of income for year ended December
31, 1997. Such adjustments consider the effect of the Company's operations as
if the Company was subject to federal and state income taxes on a corporate
level. Accordingly, the pro forma income tax provision and pro forma net
income have been calculated, using an estimated income tax rate of 40%, as if
the Company was subject to income taxation as a C corporation during the
entire year.
16. SUBSEQUENT EVENTS--UNAUDITED
On December 22, 1997, the Company entered into a merger agreement with
Intirion Corporation ("Intirion"), pursuant to which Intirion equity
securities are expected to be exchanged for approximately 1.6 million shares
of the Company's common stock and approximately $1 million in cash. The merger
is expected to be accounted for as a pooling of interests and is expected to
close in early 1998. A prospectus/proxy statement describing the terms of the
proposed merger and containing financial statements of both companies was
prepared subsequent to year end.
On March 4, 1998, the Company entered into a Stock and Asset Purchase
Agreement pursuant to which Mac-Gray will acquire one hundred percent of the
outstanding capital stock of Amerivend Corporation and the assets of Amerivend
Southeast Corporation. The purchase price, which is subject to certain
adjustments, will be approximately $33.5 million. The acquisition is expected
to be accounted for as a purchase transaction and is expected to close in the
second quarter of 1998.
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Sun Services of America, Inc. and R. Bodden Coin-Op-
Laundry, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statement of income, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of Sun
Services of America, Inc. and R. Bodden Coin-Op-Laundry, Inc. (the
"Companies") at December 31, 1996, and the results of the Companies'
operations and cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Companies' management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
May 2, 1997
F-19
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful ac-
counts of $16...................................... $ 33 $ 22
Due from shareholder................................ 173 173
Inventory........................................... 164 151
Prepaid expenses and other current assets........... 230 242
------ ------
Total current assets.............................. 600 588
Property and equipment, net........................... 1,693 1,687
Intangible assets, net................................ 1,540 1,651
Prepaid commissions and other assets.................. 787 734
------ ------
Total assets...................................... $4,620 $4,660
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................... $ 765 $ 765
Accounts payable.................................... 329 169
Accrued expenses.................................... 383 462
------ ------
Total current liabilities......................... 1,477 1,396
------ ------
Long-term debt........................................ 2,209 2,268
------ ------
Commitments and contingencies (Note 10)............... -- --
Stockholder's equity:
Common stock--Sun Services of America, Inc., $1 par
value; 1,000 shares authorized; 30 shares issued
and outstanding.................................... -- --
Common stock--R. Bodden Coin-Op-Laundry Inc. $1 par
value; 7,000 shares authorized; 1,000 shares issued
and outstanding.................................... 1 1
Additional paid-in capital.......................... 90 90
Retained earnings................................... 843 905
------ ------
Total stockholder's equity........................ 934 996
------ ------
Total liabilities and stockholder's equity........ $4,620 $4,660
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1996 1996 1997
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenue............................................ $6,664 $1,628 $2,032
Cost of revenue:
Commissions...................................... 2,718 723 797
Laundry route expenditures....................... 820 193 183
Depreciation and amortization.................... 655 129 209
Cost of equipment sales.......................... 277 19 164
------ ------ ------
Total cost of revenue.......................... 4,470 1,064 1,353
------ ------ ------
Operating expenses:
General and administration....................... 1,220 292 307
Sales and marketing.............................. 160 30 47
Depreciation..................................... 25 5 6
------ ------ ------
Total operating expenses....................... 1,405 327 360
------ ------ ------
Income from operations............................. 789 237 319
Interest expense................................. (267) (42) (89)
Other expense, net............................... (60) (3) --
------ ------ ------
Net income......................................... $ 462 $ 192 $ 230
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK--SHARES COMMON STOCK--VALUE
---------------------- ----------------------
SUN SERVICES R. BODDEN SUN SERVICES R. BODDEN
OF COIN-OP OF COIN-OP- ADDITIONAL
AMERICA, LAUNDRY, AMERICA, LAUNDRY, PAID-IN RETAINED
INC. INC. INC. INC. CAPITAL EARNINGS TOTAL
------------ --------- ------------ --------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 30 1,000 $-- $ 1 $ 90 $ 772 $ 863
Net income............. -- -- -- -- -- 462 462
Dividends.............. -- -- -- -- -- (391) (391)
--- ----- ---- --- ---- ----- -----
Balance, December 31,
1996................... 30 1,000 -- 1 90 843 934
Net income (unau-
dited)................ -- -- -- -- -- 230 230
Dividends (unaudited).. -- -- -- -- -- (168) (168)
--- ----- ---- --- ---- ----- -----
Balance, March 31, 1997
(unaudited)............ 30 1,000 $-- $ 1 $ 90 $ 905 $ 996
=== ===== ==== === ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1996 1996 1997
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Net income....................................... $ 462 $ 192 $ 230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 680 134 215
Changes in assets and liabilities:
(Increase) decrease in trade receivables,
net......................................... (26) (2) 11
(Increase) in shareholder receivable......... (10) -- --
(Increase) decrease in inventory............. (46) (1) 13
(Increase) decrease in prepaid expenses and
other current assets........................ (329) (185) 1
Increase (decrease) in accounts payable and
accrued expenses............................ 172 (197) (81)
------- ------ ------
Net cash provided by (used in) operating
activities.................................. 903 (59) 389
------- ------ ------
Cash flows from investing activities:
Capital expenditures........................... (444) (105) (15)
Acquisition of businesses (Note 3)............. (1,720) (300) (265)
------- ------ ------
Net cash used in investing activities........ (2,164) (405) (280)
------- ------ ------
Cash flows from financing activities:
Advances under line of credit agreement, net... 116 163 143
Principal payments on long-term debt........... (953) (627) (194)
Proceeds from issuance of long-term debt....... 2,507 984 110
Dividends paid................................. (391) (56) (168)
Cash paid for refinancing of debt.............. (18)
------- ------ ------
Net cash provided by (used in) financing
activities.................................. 1,261 464 (109)
------- ------ ------
Net change in cash and cash equivalents.......... $ -- $ -- $ --
======= ====== ======
Supplemental cash flow information:
Cash paid for interest......................... $ 241 $ 25 $ 64
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION AND THE BUSINESS
Basis of Presentation--The accompanying combined financial statements
include the accounts of Sun Services of America, Inc. (Sun Services) and R.
Bodden Coin-Op-Laundry, Inc. (Bodden) (collectively, the Companies). The
Companies are 100% owned by the same shareholder and are under common
management.
Nature of Business--The Companies are engaged in the coin operated laundry
business throughout Florida. The majority of the Companies' customers are
apartment complexes and laundromats. The Companies lease coin operated laundry
equipment to their customers for percentages of the monies collected. The
majority of the Companies purchases of coin route laundry equipment are from
one supplier.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Combined Interim Financial Statements--The accompanying combined
financial information as of March 31, 1997 and for the three month periods
ended March 31, 1996 and 1997 is unaudited. The interim financial statements
have been prepared on the same basis as the accompanying annual financial
statements. In the opinion of management, such interim financial information
reflects adjustments consisting of normal and recurring adjustments necessary
for a fair presentation of such financial information. The unaudited results
of operations for the interim periods ended March 31, 1996 and 1997 are not
necessarily indicative of the results of operations to be expected for any
other interim period or for the full year.
Principles of Combined Financial Statements--The combined financial
statements include the accounts of Sun Services and Bodden, including the 1996
Acquisitions (Note 3) from their respective acquisition dates. All significant
intercompany transactions and balances have been eliminated in combination.
Cash and Cash Equivalents--The Companies consider all highly liquid
investments with original maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk--Financial instruments which potentially expose
the Companies to concentrations of credit risk consist principally of trade
receivables generated by the Companies as a result of the selling and leasing
of laundry machines. To minimize this risk, ongoing credit evaluations of
customer's financial condition are performed and reserves are maintained. The
Companies typically do not require collateral.
Inventory--Inventory is stated at the lower of cost or market with cost
determined using the first-in, first-out method.
Property and Equipment--Property and equipment are recorded at cost.
Expenditures for repairs and maintenance are charged to expense as incurred;
expenditures for renewals and betterments are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the 1996
Acquisitions (Note 3). The non-compete agreements are amortized using the
straight-line method over the life of the agreements, which range from five to
seven years. Goodwill is amortized over fifteen years from the acquired
companies respective dates of acquisition.
Income Taxes--Sun Services and Bodden have elected to be taxed as "S
corporations" as defined in the Internal Revenue Code. This results in the
pass-through of any taxable income directly to the shareholder. Accordingly,
no taxes are provided on the earnings attributable to the Companies.
F-24
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Earnings Per Share--Given the capital structure of the Companies, historical
earnings per share information is not considered meaningful or relevant and
has not been presented in the accompanying financial statements.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS
During 1996, the Companies acquired certain assets of a number of coin-
operated laundry businesses (the 1996 Acquisitions). The 1996 Acquisitions
were paid in cash, with the exception of the Coin Laundry Leasing acquisition,
which also included a deferred note payable of $350. The 1996 Acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
purchase price assigned to the assets and liabilities assumed was their fair
market values on the respective acquisition dates. Purchase price in excess of
the fair value of net assets acquired was allocated to goodwill. The
Companies' combined financial statements includes the results of the 1996
Acquisitions from their respective acquisition dates. The 1996 Acquisitions
purchase price allocation is summarized as follows:
<TABLE>
<CAPTION>
1996
ACQUISITIONS
------------
<S> <C>
Acquisition price, including non-compete payments and other
direct acquisition costs........................................ $2,070
======
Fair market value of assets acquired:
Inventory...................................................... 110
Coin-route equipment........................................... 485
Other fixed assets............................................. 28
Intangible assets:
Non-compete.................................................. 15
Goodwill..................................................... 1,432
------
Total...................................................... $2,070
======
</TABLE>
In connection with financing the 1996 Acquisitions, the Companies entered
into a Credit Agreement on January 26, 1996 (Note 8).
The pro forma effect of the 1996 Acquisitions was not material to the
results of the Companies' historical operations or the Companies' historical
financial position.
4. PREPAID COMMISSIONS OTHER CURRENT ASSETS
Prepaid commissions other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Prepaid commissions............................................. $140
Other receivables............................................... 40
Prepaid insurance............................................... 29
Other........................................................... 21
----
$230
====
</TABLE>
F-25
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
LIFE DECEMBER 31,
(YEARS) 1996
--------- ------------
<S> <C> <C>
Coin-route equipment.................................. 8 $2,708
Furniture and fixtures................................ 7 140
Vehicles.............................................. 5 189
Computer equipment.................................... 4 49
Leasehold improvements................................ 2-3 15
------
3,101
Less: accumulated depreciation........................ 1,408
------
Property and equipment, net........................... $1,693
======
</TABLE>
Depreciation expense for the year ended December 31, 1996 was approximately
$360.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Goodwill........................................................ $1,746
Non-compete agreements.......................................... 290
Other........................................................... 18
------
2,054
Less: accumulated amortization.................................. 514
------
Intangible assets, net.......................................... $1,540
======
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Accrued commissions............................................. $218
Accrued payroll................................................. 28
Accrued interest and loan fees.................................. 63
Other........................................................... 74
----
$383
====
</TABLE>
F-26
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Note payable, 8% fixed interest, semi-annual principal pay-
ments, due September 1, 1999.................................. $ 300
Credit Agreement
Line of credit............................................... 432
Acquisition note............................................. 773
Term loan A facility......................................... 917
Term loan B facility......................................... 523
Other........................................................ 29
------
Total long-term debt....................................... 2,974
Less: current portion........................................ 765
------
Total...................................................... $2,209
======
</TABLE>
CREDIT AGREEMENT
In connection with the Companies 1996 Acquisitions (Note 3), the Companies
entered into a new Credit Agreement in January of 1996. The Credit Agreement
consists of a $700 Line of Credit; a $850 Acquisition Note; a $1,100 Term A
Facility, payable in thirty-five equal monthly installments beginning March
1996; and a $584 Term Loan B Facility, payable in thirty-seven monthly
installments of $6 beginning March 1996, with a balloon payment due April
1999. Borrowings under the Credit Agreement are restricted to only provide for
working capital requirements of the Companies and fund future permitted
acquisitions and capital expenditures. As of December 31, 1996, $346 was
available to be borrowed under the Credit Agreement. The Credit Agreement
expires in April of 1999.
A portion of the proceeds from the Credit Agreement were used to pay down
the Companies' outstanding debt under the previous credit facilities.
Interest--Borrowings under the Credit Agreement bear interest at 1% above
the banks prime interest rate (the "Prime Rate") (9.25% rate as of December
31, 1996). In addition, the Companies shall pay 3% of annual gross revenues
generated by all permitted acquisitions financed by proceeds from the
Acquisition Note.
Termination--The Credit Agreement may be terminated at any time after the
first two years without a penalty or premium. If borrowings under the Credit
Agreement are pre-paid within the first two years, the Companies must pay a
prepayment penalty of up to 2% of the total amounts available under the Credit
Agreement. In addition, the Companies are required to pay the bank 3% of the
average monthly gross revenues of the permitted acquisition multiplied by the
number of months remaining in the term of the Credit Agreement.
Amendment--In January of 1997, the Credit Agreement was amended to increase
the borrowings available under the line of credit to $850.
As of December 31, 1996, the scheduled future principal payments of long-
term debt are as follows:
<TABLE>
<S> <C>
1997................................................................ $ 765
1998................................................................ 747
1999................................................................ 1,462
------
$2,974
======
</TABLE>
F-27
<PAGE>
SUN SERVICES OF AMERICA, INC. AND
R. BODDEN COIN-OP-LAUNDRY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. EMPLOYEE BENEFIT PLAN
The Companies maintain a qualified profit sharing/401(k) plan (the "Plan")
covering substantially all employees. The Companies' contributions to the Plan
are at the discretion of the Board of Directors. Costs under the Plan amounted
to $4 for the year ended December 31, 1996.
10. COMMITMENT AND CONTINGENCIES
Operating Leases--The Companies lease facilities under three non-cancelable
operating leases. Total lease expense incurred for the year ended December 31,
1996 was approximately $74. These leases expire during fiscal 1998. The future
minimum payments under these leases are $77 and $55 in 1997 and 1998,
respectively.
Guaranteed Commissions--The Companies operate coin laundry routes under
various lease agreements in which the Companies are required to make minimum
guaranteed commission payments to the respective property owners. During 1996,
the Companies made guaranteed commission payments of approximately $150 as
required under certain lease agreements.
Litigation--The Companies are involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Companies ultimate liability, if any, under pending litigation would not
materially affect their financial condition or the results of their
operations.
10. RELATED PARTY
Periodically, the Companies make loans to their sole shareholder. The
balance of these shareholder loans is included on the accompanying balance
sheet as due from shareholder. The due from shareholder balance at December
31, 1996 included approximately $36 of interest imputed at 6%.
11. SUBSEQUENT EVENT (UNAUDITED)
On April 17, 1997, Mac-Gray Corporation acquired all of the outstanding
common stock of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry,
Inc., in exchange for 612,026 shares of its common stock ($7,797 approximate
value), approximately $2,170 in cash, $850 of a deferred obligation and the
assumption of outstanding indebtedness of the Companies of approximately
$2,787.
F-28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of December 22, 1997, by and
among Mac-Gray Corporation, MI Acquisition Corp., Intirion Corporation
and Robert P. Bennett (2.1).*
2.2 Stock 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. Pursuant to Item 601(b)(2) of Regulation S-K,
the Schedules referred to in the Stock and Asset Purchase Agreement
are omitted (10.24).*
3.1 Amended and Restated Certificate of Incorporation (3.1).+
3.2 By-laws (3.2).+
4.1 Specimen certificate for shares of Common Stock, $.01 par value, of
the Registrant (4.1).+
10.1 Stockholders' Agreement dated as of April 17, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.1).+
10.2 Stockholders' Agreement dated as of June 26, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.2).+
10.3 Agreement and Plan of Merger dated as of April 17, 1997 by and among
the Registrant and the other parties named therein (10.3).+
10.4 Credit Agreement dated April 17, 1997, by and among the Registrant,
the other Borrowers (as defined therein), the lenders named therein
and State Street Bank and Trust Company, as agent (10.4).+
10.5 Security Agreement dated as of April 17, 1997 by and among the
Registrant, the other Borrowers (as defined therein) and the Banks (as
defined therein) (10.5).+
10.6 Revolving Line of Credit Note dated April 17, 1997 issued by the
Registrant in favor of the Banks (as defined therein) (10.6).+
10.7 Pledge Agreement dated as of April 17, 1997 by and among the
Registrant and the Banks (as defined therein) (10.7).+
10.8 Confidentiality and Noncompetition Agreement dated as of September 4,
1990, as amended on March 25, 1993, by and between the Registrant and
Caldwell and Gregory, Inc. (10.8).+
10.9 Consulting Agreement dated as of April 17, 1997 by and among the
Registrant and Jeffrey C. Huenink (10.9).+
10.10 Noncompetition Agreement dated as of April 17, 1997 by and among
Registrant and Jeffrey C. Huenink (10.10).+
10.11 Form of Noncompetition Agreement between the Registrant and its
executive officers (10.11).+
10.12 Form of Maytag Licensing Agreement for "Red Carpet Service" (10.12).+
10.13 Form of Maytag Distributorship Agreements (10.13).+
10.14 Promissory Note dated December 31, 1992 issued by the Registrant in
favor of Donald M. Shaw (10.14).+
10.15 Consulting and Noncompete Agreement dated December 31, 1992 by and
between Donald M. Shaw and the Registrant (10.15).+
10.16 The Registrant's 1997 Stock Option and Incentive Plan (with form of
option agreements attached as exhibits) (10.16).+
10.17 Form of Director Indemnification Agreement between the Registrant and
each of its Directors (10.17).+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.18 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).*
10.19 Form of Escrow Agreement by and among the Registrant, Gelco
Corporation, Michael Shanahan, the former securityholders of Intirion
Corporation and State Street Bank and Trust Company, as escrow agent
(10.19).*
10.20 Voting Agreement by and between the Registrant and each of Robert P.
Bennett, Eastech II Limited Partnership and Eastech III Limited
Partnership (10.20).*
10.21 Voting Agreement by and between the Registrant and Gelco Corporation
(10.21).*
10.22 Form of Noncompetition Agreement by and between the Registrant and
Robert P. Bennett (10.22).*
10.23 Distribution Agreement by and between Schlumberger Technologies, Inc.
and Mac-Gray Services, Inc., dated as of October 27, 1997 (certain
portions of this exhibit were omitted pursuant to the grant of a
request for confidential treatment) (10.23).*
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedules.
</TABLE>
Certain exhibits indicated above are incorporated by reference to documents
of Mac-Gray on file with the Commission. Each exhibit marked by a cross (+) was
previously filed as an exhibit to Mac-Gray's Registration Statement on Form S-1
(No. 333-33669) and the number in parentheses following the description of the
exhibit refers to the exhibit number in the Form S-1. Each exhibit marked by an
asterisk (*) was previously filed as an exhibit to Mac-Gray's Registration
Statement on Form S-4 (No. 333-45899) and the number in parentheses following
the description of the exhibit refers to the exhibit number in the Form S-4.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF REGISTRANT
----------------------------------
Mac-Gray Investments, Inc., a Delaware corporation
Mac-Gray Services, Inc., a Delaware corporation
Intirion Corporation, a Delaware corporation
Sun Services of America, Inc., a Delaware corporation which does business under
its own name and under the following names:
Atlantic Coin Laundry
Bay & Gulf Laundry Equipment
Coin Laundry Leasing
Coin Operated Apartment Laundries
H & H Laundry Equipment
Hicks Laundry Equip-Leasing
Hicks Laundry Equipment
Hicks Laundry Supplies
JMN Laundry Equipment
Keewes Laundry Services
Laundry Concessions
Laundry Leasing Services
M & M Laundry Equipment
Rainbow Laundry Leasing
Sun Services
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-44117) of our report dated January 30, 1998
relating to the consolidated financial statements of Mac-Gray Corporation and
our report dated May 2, 1997 relating to the combined financial statements of
Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry, Inc. appearing on
pages F2 and F19, respectively, of Mac-Gray Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997.
/s/ Price Waterhouse LLP
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,922
<SECURITIES> 343
<RECEIVABLES> 3,408
<ALLOWANCES> (651)
<INVENTORY> 1,886
<CURRENT-ASSETS> 12,325
<PP&E> 82,729
<DEPRECIATION> (47,549)
<TOTAL-ASSETS> 73,862
<CURRENT-LIABILITIES> 10,950
<BONDS> 37,666
0
0
<COMMON> 64
<OTHER-SE> 22,787
<TOTAL-LIABILITY-AND-EQUITY> 73,862
<SALES> 58,167
<TOTAL-REVENUES> 58,167
<CGS> 43,388
<TOTAL-COSTS> 51,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,327
<INCOME-PRETAX> 4,440
<INCOME-TAX> 345
<INCOME-CONTINUING> 4,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,095
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.63
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,660
<SECURITIES> 343
<RECEIVABLES> 2,099
<ALLOWANCES> (358)
<INVENTORY> 1,649
<CURRENT-ASSETS> 8,649
<PP&E> 78,051
<DEPRECIATION> (44,015)
<TOTAL-ASSETS> 68,971
<CURRENT-LIABILITIES> 10,872
<BONDS> 32,902
0
0
<COMMON> 64
<OTHER-SE> 22,275
<TOTAL-LIABILITY-AND-EQUITY> 68,971
<SALES> 38,288
<TOTAL-REVENUES> 38,288
<CGS> 28,477
<TOTAL-COSTS> 33,632
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,431
<INCOME-PRETAX> 3,264
<INCOME-TAX> 232
<INCOME-CONTINUING> 3,032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,032
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,774
<SECURITIES> 0
<RECEIVABLES> 4,746
<ALLOWANCES> (490)
<INVENTORY> 2,886
<CURRENT-ASSETS> 13,734
<PP&E> 84,568
<DEPRECIATION> (46,869)
<TOTAL-ASSETS> 84,374
<CURRENT-LIABILITIES> 14,619
<BONDS> 5,395
0
0
<COMMON> 110
<OTHER-SE> 56,848
<TOTAL-LIABILITY-AND-EQUITY> 84,374
<SALES> 81,370
<TOTAL-REVENUES> 81,370
<CGS> 60,771
<TOTAL-COSTS> 71,138
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,521
<INCOME-PRETAX> 7,892
<INCOME-TAX> 5,206
<INCOME-CONTINUING> 2,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,686
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,844
<SECURITIES> 343
<RECEIVABLES> 1,970
<ALLOWANCES> (330)
<INVENTORY> 1,509
<CURRENT-ASSETS> 1,699
<PP&E> 72,340
<DEPRECIATION> (40,428)
<TOTAL-ASSETS> 54,108
<CURRENT-LIABILITIES> 14,104
<BONDS> 23,325
0
0
<COMMON> 154
<OTHER-SE> 14,529
<TOTAL-LIABILITY-AND-EQUITY> 54,108
<SALES> 64,427
<TOTAL-REVENUES> 64,427
<CGS> 48,120
<TOTAL-COSTS> 56,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,956
<INCOME-PRETAX> 5,992
<INCOME-TAX> 465
<INCOME-CONTINUING> 5,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,527
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.87
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,882
<SECURITIES> 377
<RECEIVABLES> 1,393
<ALLOWANCES> (330)
<INVENTORY> 1,187
<CURRENT-ASSETS> 7,796
<PP&E> 61,234
<DEPRECIATION> (35,430)
<TOTAL-ASSETS> 36,754
<CURRENT-LIABILITIES> 10,033
<BONDS> 11,843
0
0
<COMMON> 154
<OTHER-SE> 12,696
<TOTAL-LIABILITY-AND-EQUITY> 36,754
<SALES> 50,710
<TOTAL-REVENUES> 50,710
<CGS> 36,559
<TOTAL-COSTS> 43,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,175
<INCOME-PRETAX> 6,144
<INCOME-TAX> 374
<INCOME-CONTINUING> 5,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,770
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
