<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1998
REGISTRATION STATEMENT NO. 333-49795
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MAC-GRAY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7215 04-3361982
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
22 WATER STREET
CAMBRIDGE, MASSACHUSETTS 02141
(617) 492-4040
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
STEWART GRAY MACDONALD, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MAC-GRAY CORPORATION
22 WATER STREET
CAMBRIDGE, MASSACHUSETTS 02141
(617) 492-4040
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
STUART M. CABLE, ESQ.
GOODWIN, PROCTER & HOAR LLP
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
(617) 570-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Post-Effective Amendment becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
----------------
THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE UPON ORDER OF THE COMMISSION PURSUANT TO SECTION 8(C) OF THE
SECURITIES ACT OF 1933, AS AMENDED.
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- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
MAC-GRAY CORPORATION
250,000 SHARES OF COMMON STOCK
This Prospectus relates to the sale of 250,000 shares (the "Shares") of
common stock, par value $.01 per share (the "Mac-Gray Common Stock"), of Mac-
Gray Corporation, a Delaware corporation ("Mac-Gray" or the "Company"), by
certain former shareholders (the "Selling Securityholders") of Copico, Inc., a
Massachusetts corporation ("Copico"). The Selling Securityholders received the
Shares in connection with Mac-Gray's acquisition of Copico, which was
consummated on April 23, 1998, pursuant to the Stock Purchase Agreement, dated
as of March 31, 1998 (the "Stock Purchase Agreement"), by and among Mac-Gray
Services, Inc., a Delaware corporation and a wholly-owned subsidiary of Mac-
Gray ("Mac-Gray Services"), Copico and the Selling Securityholders, pursuant
to which Mac-Gray Services acquired all of the issued and outstanding capital
stock of Copico. See "Prospectus Summary--Recent Developments."
The Selling Securityholders, directly or through agents, dealers or
underwriters designated from time to time, may sell all or a portion of the
Shares offered hereby from time to time on terms to be determined at the time
of sale. To the extent required by law, the specific Shares to be sold, the
names of the Selling Securityholders, the respective purchase prices and
public offering prices, the names of any such agent, dealer or underwriter,
and any applicable commissions or discounts with respect to a particular offer
will be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." Each Selling Securityholder reserves the sole right to accept
and, together with such Selling Securityholder's agents, dealers or
underwriters from time to time, to reject, in whole or in part, any proposed
purchase of Shares to be made directly or through agents, dealers or
underwriters.
The aggregate proceeds to the Selling Securityholders from the sale of the
Shares offered hereby (the "Offering") will be the purchase price of the
Shares sold less the aggregate agents' commissions and underwriters'
discounts, if any, and other expenses of issuance and distribution not borne
by Mac-Gray. Pursuant to an agreement with the Selling Securityholders, Mac-
Gray has agreed to pay the costs, fees and expenses incurred in connection
with the registration of the Shares; provided, however, that the Selling
Securityholders will be responsible for underwriting commissions or discounts,
transfer taxes, if any, attributable to the sale of the Shares, any fees or
expenses of any counsel, accountants or other persons retained or employed by
the Selling Securityholders and out-of-pocket expenses of the Selling
Securityholders and their agents, including, without limitation, any travel
costs. See "The Selling Securityholders and the Offered Shares--Registration
Rights Agreement."
Mac-Gray will not receive any proceeds from the sale of the Shares offered
hereby by the Selling Securityholders.
The Selling Securityholders and any brokers, dealers or agents that
participate with the Selling Securityholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any profit on the sale of the
Shares by them and any discounts, concessions or commissions received by such
underwriters, brokers, dealers or agents may be deemed to be underwriting
discounts and commissions under the Securities Act. See "Plan of
Distribution."
The Mac-Gray Common Stock is listed on the New York Stock Exchange (the
"NYSE") under the symbol "TUC." On August 19, 1998, the last reported sales
price for the Mac-Gray Common Stock on the NYSE was $14 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE HEREIN
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION
OF THE SHARES OF MAC-GRAY COMMON STOCK HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE AFFAIRS OF MAC-GRAY SINCE THE DATE HEREOF.
The date of this Prospectus is August 20, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 1
PROSPECTUS SUMMARY....................................................... 2
Mac-Gray Corporation................................................... 2
Recent Developments.................................................... 2
Selected Historical Financial Data..................................... 3
RISK FACTORS............................................................. 6
Implementation of Acquisition Strategy; Integration of Acquired Busi-
nesses................................................................ 6
Competition............................................................ 7
Dependence Upon Senior Executives...................................... 7
Significant Capital Expenditures; Additional Financings................ 7
Uncertainty of Market Acceptance of New Products and Services.......... 7
Dependence Upon Lease Renewals......................................... 7
Dependence Upon Certain Suppliers...................................... 8
Restrictions Imposed by Mac-Gray's Indebtedness........................ 8
Product Liability; Limited Insurance Coverage.......................... 8
Intellectual Property Rights........................................... 9
Voting Control by Principal Stockholders, Directors and Executive Offi-
cers.................................................................. 9
Common Stock Contingent Repurchase Obligation.......................... 9
Anti-takeover Effect of the Mac-Gray Charter, the Mac-Gray By-laws and
Delaware Law.......................................................... 9
Potential Volatility of Stock Price.................................... 10
Absence of Dividends................................................... 10
Material Benefits to Certain Insiders.................................. 10
BUSINESS................................................................. 11
General................................................................ 11
Financial Characteristics of Mac-Gray's Business....................... 11
Industry Overview...................................................... 11
Company Strategy....................................................... 12
Internal Growth........................................................ 13
Strategic Acquisitions................................................. 14
Card and Coin-Operated Laundry Route Business.......................... 14
Technology............................................................. 16
Competition............................................................ 17
Laundry Equipment Sales, Leasing and Service........................... 17
Employees.............................................................. 18
Properties............................................................. 18
Legal Proceedings...................................................... 18
SELECTED HISTORICAL FINANCIAL DATA....................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 21
Overview............................................................... 21
Recent Developments.................................................... 21
Results of Operations.................................................. 22
Seasonality............................................................ 26
Liquidity and Capital Resources........................................ 26
Year 2000.............................................................. 28
Inflation.............................................................. 28
Recently Issued Accounting Pronouncements.............................. 28
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT................................................................. 29
Directors and Executive Officers......................................... 29
Board of Directors....................................................... 30
Executive Compensation................................................... 31
1997 Stock Option and Incentive Plan..................................... 33
Stock Appreciation Rights................................................ 36
Employment Agreements with Executive Officers............................ 36
Compensation Committee Interlocks and Insider Participation.............. 36
Certain Relationships and Related Transactions........................... 36
PRINCIPAL STOCKHOLDERS..................................................... 38
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION......................... 41
MARKET PRICES AND DIVIDEND DATA............................................ 43
DESCRIPTION OF CAPITAL STOCK............................................... 43
Authorized and Outstanding Capital Stock................................. 43
Certain Provisions of Charter and By-laws................................ 44
Statutory Business Combination Provision................................. 45
Transfer Agent and Registrar............................................. 46
THE SELLING SECURITYHOLDERS AND THE OFFERED SHARES......................... 46
Background............................................................... 46
Registration Rights Agreement............................................ 46
PLAN OF DISTRIBUTION....................................................... 47
LEGAL MATTERS.............................................................. 48
EXPERTS.................................................................... 48
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
(iii)
<PAGE>
AVAILABLE INFORMATION
Mac-Gray is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information concerning Mac-Gray can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a site
on the Internet's World Wide Web at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, including Mac-Gray. In addition,
reports, proxy statements and other information concerning Mac-Gray may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005, on which shares of Mac-Gray Common Stock are traded under the symbol
"TUC."
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement,
which is available for inspection and copying as set forth above. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete (though to
the extent of the provisions referred to herein, such statements are complete
in all material respects), and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
No information relating to Mac-Gray is incorporated herein by reference.
1
<PAGE>
PROSPECTUS SUMMARY
The following is a brief summary, which is necessarily incomplete, of certain
information contained elsewhere in this Prospectus. Reference is made to, and
this summary is qualified in its entirety by, the more detailed information
contained herein, and in the exhibits and appendices hereto, all of which
should be reviewed carefully. The information contained in this Prospectus
gives effect to: (i) the acquisition of Intirion Corporation, a Delaware
corporation ("Intirion"), on March 12, 1998, which was accounted for as a
pooling of interests, (ii) the reorganization (the "Mac-Gray Combination") of
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 (iii) the acquisitions of (A)
Amerivend Corporation, a Florida Corporation, and the assets of Amerivend
Southeast Corporation, a Georgia Corporation (together with Amerivend
Corporation, "Amerivend"), on April 24, 1998, (B) Copico on April 23, 1998, and
(C) 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 of which occurred on April 17, 1997 (the "Sun Services
Acquisition"). Unless the context requires otherwise, all references to Mac-
Gray or the Company shall mean Mac-Gray Corporation and its subsidiaries and
predecessors, including Mac-Gray Co. and the Limited Partnership, and
businesses that it has acquired from their respective dates of acquisition. See
"Business."
Certain of the information contained in this Prospectus may constitute
forward-looking statements. There are a number of important factors that could
cause actual results to differ materially from those indicated by such forward-
looking statements. Such factors include, but are not limited to, those set
forth in this Prospectus under the heading "Risk Factors."
MAC-GRAY CORPORATION
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 of 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 room business consists of more than 155,000 laundry machines,
operated in over 25,000 multiple housing laundry rooms located in 27 states
east of the Rocky Mountains. Mac-Gray's principal offices are located at 22
Water Street, Cambridge, Massachusetts 02141, and its telephone number at that
location is (617) 492-4040.
RECENT DEVELOPMENTS
New Credit Facility. On April 23, 1998, the outstanding debt under Mac-Gray's
$50 million revolving credit facility with State Street Bank and Trust Company
and CoreStates Bank (the "Old Credit Facility") was refinanced under a new
senior secured revolving and term loan credit facility with State Street Bank
and Trust Company, CoreStates Bank and BankBoston, N.A. (the "Credit
Facility"). The Credit Facility provides for borrowings under a revolving line
of credit of up to $90 million and converts to a term loan after three years.
Outstanding indebtedness under the Credit Facility bears interest at Mac-Gray's
option, at a rate equal to the prime rate minus .5% or LIBOR plus the
applicable margin (either (i) 1.5% for loans outstanding which aggregate less
than $50 million, or (ii) 1.75% for loans outstanding which exceed $50
million), or cost of funds plus the applicable margin. The Credit Facility
restricts payments of dividends and other distributions, restricts Mac-Gray
from making certain acquisitions and incurring indebtedness, and requires it to
maintain certain financial ratios. The Credit Facility is secured by pledges of
the capital stock of Mac-Gray's subsidiaries and a lien on Mac-Gray's assets.
2
<PAGE>
Acquisitions. On April 24, 1998, Mac-Gray acquired through Mac-Gray Services,
one hundred percent of the outstanding capital stock of Amerivend Corporation
and the assets of Amerivend Southeast Corporation. The acquisition was
completed pursuant to a Stock and Asset Purchase Agreement, dated as of March
4, 1998 (the "Amerivend Agreement"), by and among Mac-Gray Services, Amerivend,
Gerald E. Pulver and the Gerald E. Pulver Grantor Retained Annuity Trust.
Pursuant to the Amerivend Agreement, the purchase price was approximately $33.5
million in cash, including the payment of approximately $6.8 million of debt. A
portion of the purchase price, $1.5 million, is being held in escrow to satisfy
any potential claims in accordance with the Amerivend Agreement. The
acquisition was accounted for as a purchase transaction. The funds used to pay
the purchase price were comprised primarily of borrowings under the Credit
Facility. Amerivend is a provider of card and coin-operated laundry equipment
in Florida and Georgia. Amerivend also is the principal distributor of Maytag
Corporation's ("Maytag") commercial laundry products in Alabama, Florida and
Georgia.
On April 23, 1998, Mac-Gray acquired Copico through the purchase by Mac-Gray
Services, of one hundred percent of the outstanding capital stock of Copico.
The acquisition was completed pursuant to a Stock Purchase Agreement, dated as
of March 31, 1998 (the "Copico Agreement"), by and among Mac-Gray Services,
Copico and certain stockholders of Copico. In consideration and pursuant to the
Copico Agreement, Mac-Gray issued 250,000 shares of Mac-Gray Common Stock
valued at approximately $4.2 million based upon the closing price of the Mac-
Gray Common Stock on April 23, 1998. The cash portion of the purchase price was
approximately $11.1 million, including the payment of approximately $6.1
million of debt. The acquisition was accounted for as a purchase transaction.
The funds used to pay the cash portion of the consideration were comprised
primarily of borrowings under the Credit Facility. Copico is a major provider
of card and coin-operated reprographics equipment and services to the academic
and public library markets in New England, New York and Florida. Copico
provides and services copiers, laser printers and microform reader-printers for
libraries of colleges, universities and graduate schools. Copico also is the
sole provider of reprographics services to the New York public library system,
as well as other public libraries.
On March 12, 1998, Mac-Gray acquired Intirion pursuant to an Agreement and
Plan of Merger, dated as of December 22, 1997 (the "Merger Agreement"), by and
among Mac-Gray, MI Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Mac-Gray ("MIAC"), Intirion and Robert P. Bennett, pursuant to
which Mac-Gray acquired Intirion by merging (the "Merger") MIAC with and into
Intirion. Pursuant to the Merger, Mac-Gray issued 1,592,992 shares of Mac-Gray
Common Stock and paid approximately $1 million in cash, which cash was paid to
the holder of Intirion's Senior Redeemable Preferred Stock, par value $.01 per
share (the "Intirion Senior Preferred Stock"). Intirion is a supplier of
combination refrigerator/freezer/microwave ovens to multiple housing facilities
such as colleges and universities, military bases, economy hotels and motels
and assisted living facilities. The transaction is being accounted for as a
pooling of interests.
SELECTED HISTORICAL 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 PricewaterhouseCoopers LLP, whose report appears elsewhere in this
Prospectus. Results for interim periods have not been audited and include all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for the fair presentation of the results for such periods;
however, they are not necessarily indicative of results for the full year. The
selected consolidated 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 Prospectus.
3
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------
1993 1994 1995 1996 1997(1) 1997(2) 1998(3)
------- ------- ------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue..................... $54,364 $60,633 $66,352 $ 82,260 $104,847 $52,311 $ 60,857
Cost of revenue:
Commissions................ 17,762 19,168 20,471 25,760 31,717 14,639 18,689
Route expenditures......... 7,458 7,889 8,251 10,971 12,449 6,791 9,033
Depreciation and amortiza-
tion...................... 4,831 4,822 5,455 7,060 9,725 4,229 6,162
Cost of product sales...... 7,737 11,110 12,234 15,408 22,021 12,469 11,002
------- ------- ------- -------- -------- ------- --------
Total cost of revenue...... 37,788 42,989 46,411 59,199 75,912 38,128 44,886
------- ------- ------- -------- -------- ------- --------
Operating expenses:
General and administra-
tion...................... 4,130 4,070 5,804 5,939 6,923 3,197 3,486
Sales and marketing........ 4,443 5,134 6,455 7,718 10,181 5,014 5,012
Depreciation............... 466 501 639 783 753 487 403
Merger-related costs....... -- -- -- -- -- -- 884
------- ------- ------- -------- -------- ------- --------
Total operating expenses... 9,039 9,705 12,898 14,440 17,857 8,698 9,785
------- ------- ------- -------- -------- ------- --------
Income from operations...... 7,537 7,939 7,043 8,621 11,078 5,485 6,186
Interest expense net....... (1,526) (1,300) (1,328) (2,354) (2,975) (1,630) (1,263)
Other income (expense),
net....................... 71 70 55 (87) 181 39 (1)
------- ------- ------- -------- -------- ------- --------
Income before provision for
income taxes............... 6,082 6,709 5,770 6,180 8,284 3,894 4,922
Provision for income tax-
es(4)..................... (330) (271) (400) (514) (5,228) (251) (1,895)
------- ------- ------- -------- -------- ------- --------
Net income before accretion
and dividends on
redeemable preferred stock.. $ 5,752 $ 6,438 $ 5,370 $ 5,666 $ 3,056 $ 3,643 $ 3,027
------- ------- ------- -------- -------- ------- --------
Accretion and dividends on
redeemable preferred
stock...................... $ -- $ -- $ 240 $ 240 $ 320 $ 160 $ 62
------- ------- ------- -------- -------- ------- --------
Net income available to com-
mon stockholders........... $ 5,752 $ 6,438 $ 5,130 $ 5,426 $ 2,736 $ 3,483 $ 2,965
======= ======= ======= ======== ======== ======= ========
Net income per common
share...................... $ 0.76 $ 0.85 $ 0.68 $ 0.72 $ 0.32 $ 0.46 $ 0.24
======= ======= ======= ======== ======== ======= ========
Weighted average common
shares outstanding......... 7,554 7,554 7,554 7,554 8,449 7,554 12,390
======= ======= ======= ======== ======== ======= ========
Net income per common
share--assuming dilution... $ 0.75 $ 0.84 $ 0.67 $ 0.71 $ 0.31 $ 0.45 $ 0.23
======= ======= ======= ======== ======== ======= ========
Weighted average common
shares outstanding--
assuming dilution.......... 7,686 7,686 7,686 7,686 8,709 7,797 12,838
======= ======= ======= ======== ======== ======= ========
UNAUDITED PRO FORMA TAX AD-
JUSTED EARNINGS PER SHARE
DATA(5):
Pro forma tax adjusted net
income.................... $ 5,105 $ 2,336
======== =======
Pro forma tax adjusted net
income available to
common stockholders ...... $ 4,785 $ 2,176
======== =======
Pro forma tax adjusted net
income available to
common stockholders per
common share.............. $ 0.57 $ 0.29
======== =======
Pro forma tax adjusted net
income available to
common stockholders per
common share--
assuming dilution......... $ 0.55 $ 0.28
======== =======
OTHER FINANCIAL DATA:
EBITDA(6).................. $12,451 $13,332 $13,192 $ 16,377 $ 21,737 $10,240 $ 12,750
Depreciation and amortiza-
tion...................... 4,843 5,323 6,094 7,843 10,478 4,716 6,565
Capital expenditures....... 5,855 6,090 8,121 10,010 11,584 5,575 6,108
Cash flows from operating
activities................ 9,565 11,106 10,364 15,768 10,473 5,476 5,068
Cash flows used in invest-
ing activities............ (6,137) (6,024) (8,952) (24,338) (22,791) (9,991) (53,505)
Cash flows provided by
(used in) financing
activities................ (3,453) (6,167) (589) 7,516 13,248 4,333 50,710
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital............ $(3,710) $(3,726) $(3,311) $ (8,489) $ (4,041) $(5,573) $ 5,402
Total assets............... 35,096 36,184 46,785 66,217 97,843 82,081 158,895
Long-term debt, net of cur-
rent portion.............. 15,718 13,919 12,125 23,473 5,395 33,067 64,659
Redeemable common and pre-
ferred stock(7)........... -- -- 3,947 4,187 12,304 12,145 7,797
Stockholders' equity....... 7,113 10,190 12,165 13,774 48,302 $14,113 59,253
</TABLE>
4
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(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) In March 1998, Mac-Gray consummated its acquisition of Intirion in a
transaction accounted for as a pooling of interests. As Mac-Gray and
Intirion had differing year ends, financial information for dissimilar
periods have been combined in the consolidated financial statements (see
Notes to Consolidated Financial Statements). Actual results presented for
the six months ended June 30, 1997 were calculated by combining the
historical first six months of each entity (June 30, 1997 for Mac-Gray and
December 31, 1996 for Intirion). Pro forma consolidated revenue, income
from operations, and net income calculated by combining the June 30, 1997
periods for both entities amounted to $47,742, $4,672, and $2,789,
respectively.
(3) Effective April 24, 1998, Mac-Gray acquired Amerivend in a purchase
transaction. Unaudited interim results for the six months ended June 30,
1998 include Amerivend's operating results for the period subsequent to the
acquisition. If the Amerivend acquisition had occurred on January 1, 1998,
the Company's pro forma revenue and net income for the six months ended
June 30, 1998 would have been $65,743 and $3,088, respectively. Effective
April 23, 1998, Mac-Gray acquired Copico in a purchase transaction. The pro
forma results of operations assuming this acquisition had occurred on
January 1, 1998 would not have differed materially from the unaudited
results of operations reported for the six months ended June 30, 1998.
(4) 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.
(5) 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 rate of 40%)
during the periods presented.
(6) "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.
(7) Shares of Mac-Gray Common Stock issued in connection with the Sun Services
Acquisition are redeemable pursuant to a contractual arrangement.
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RISK FACTORS
Information provided by Mac-Gray, including information contained in this
Prospectus, 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, those
set forth below, may cause Mac-Gray's future results to differ materially from
those projected in any forward-looking statement.
Prospective investors should carefully consider the following risk factors,
in addition to other information contained in this Prospectus, in evaluating
an investment in the shares of Mac-Gray Common Stock offered hereby.
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 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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Business--Company
Strategy."
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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
property owners and managers that operate their own laundry rooms ("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 two larger companies
participating in the industry consolidation, each of which has 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. See "Business--
Competition."
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. See "Management."
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
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Business--
Card and Coin-Operated Laundry Route Business" and "--Technology."
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. See "Business--Technology."
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
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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. See "Business--Card
and Coin-Operated Laundry Route Business--Facility Leasing."
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 Technologies, Inc. ("Schlumberger"), a
manufacturer of card-based electronic transaction systems. In addition, Mac-
Gray currently procures a substantial amount of the products used by its
Intirion business unit from certain suppliers, including Sanyo E&E
Corporation. A termination of, or substantial revision of the terms of, the
contractual arrangements or business relationships with the suppliers
described above could have a material adverse effect on Mac-Gray's business,
results of operations, financial condition and prospects. See "Business--
Technology" and "--Laundry Equipment Sales, Leasing and Service."
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
Intirion, Mac-Gray's wholly-owned subsidiary, markets and distributes
MicroFridge(R), a combination microwave and refrigerator. The sale and
distribution of MicroFridge(R), as well as Mac-Gray's other products, entails
a certain risk of product liability claims. Further, the manufacturing of
MicroFridge(R), although it is done by third-party manufacturers under
contract with Intirion, may subject Intirion to further inherent risks of
product liability claims. Potential product liability claims may exceed the
amount of the Company's insurance coverage or may be excluded from coverage
under the terms of the policy. There can be no assurance that the Company's
existing insurance can be renewed at a cost and level of coverage comparable
to that presently in effect, if at all. In the event that Intirion is held
liable for a claim against which it is not indemnified or for damages
exceeding the limits of its insurance coverage, such claim could have a
material adverse effect on the Company's business, results of operations,
financial condition and prospects. See "Managements's Discussion and Analysis
of Financial Condition and Results of Operations."
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INTELLECTUAL PROPERTY RIGHTS
Mac-Gray relies upon certain trademark, servicemark, copyright, patent and
trade secret laws, employee and third party non-disclosure and non-
solicitation agreements and other methods to protect the proprietary rights of
Mac-Gray. Mac-Gray periodically makes filings with the Patent and Trademark
Office to protect certain of its proprietary rights, although it has
traditionally relied upon the protections afforded by contractual arrangements
and through common law assertions of ownership. There can be no assurance that
these contractual arrangements and legal claims to ownership will adequately
protect Mac-Gray and its operations from adverse claims made by third parties.
In addition, any such adverse claims or litigation, with or without merit,
could be costly and could divert management's attention from the operation of
Mac-Gray's business.
VOTING CONTROL BY PRINCIPAL STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
As of August 19, 1998, the principal stockholders, directors and executive
officers of Mac-Gray and their affiliates beneficially own in the aggregate
approximately 53% of the outstanding shares of Mac-Gray Common Stock. This
percentage ownership does not include options to purchase 432,315 shares of
Mac-Gray Common Stock (options to acquire 92,063 shares of Mac-Gray Common
Stock are currently exercisable) held by certain of these persons, which, if
exercised in whole or in part, will further concentrate ownership of Mac-Gray
Common Stock. As a result, the above-referenced stockholders, if they act
together, possess the voting power required to elect all of Mac-Gray's
directors and to approve all other matters requiring approval by a majority of
the stockholders of Mac-Gray including, in many cases, significant corporate
transactions, such as mergers and sales of all or substantially all of Mac-
Gray's assets. Such concentration of ownership, together, in some cases, with
certain provisions of Mac-Gray's Amended and Restated Certificate of
Incorporation (the "Mac-Gray Charter") and Mac-Gray's By-laws (the "Mac-Gray
By-laws") and certain sections of the Delaware General Corporation Law (the
"DGCL"), may have the effect of delaying or preventing a change in control of
Mac-Gray. See "--Anti-takeover Effect of the Mac-Gray Charter, the Mac-Gray
By-laws and Delaware Law," "Management--Directors and Executive Officers" and
"Principal Stockholders."
COMMON STOCK CONTINGENT REPURCHASE OBLIGATION
Mac-Gray is obligated to repurchase up to 612,026 shares of Mac-Gray Common
Stock issued in connection with the Sun Services Acquisition at a purchase
price of $12.74 per share in the event the holder or holders of such shares
elect to require Mac-Gray to repurchase such shares (the "Put Right"). The Put
Right terminates on October 22, 2000. There can be no assurance that the
holder or holders of such shares will not exercise the Put Right, nor can
there be any assurance that, once exercised, Mac-Gray will be able to obtain
financing to satisfy such Put Right on terms satisfactory to Mac-Gray, if at
all. In the event Mac-Gray becomes required to repurchase such shares, it may
be required to incur additional indebtedness under its Credit Facility to fund
such repurchase. If Mac-Gray were unable to borrow such funds under its Credit
Facility, Mac-Gray would need to pursue alternative financing sources which,
if available, might be at higher interest rates than presently available under
the Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Management--Certain Relationships and Related Transactions."
ANTI-TAKEOVER EFFECT OF THE MAC-GRAY CHARTER, THE MAC-GRAY BY-LAWS AND
DELAWARE LAW
Certain provisions of the Mac-Gray Charter and the Mac-Gray By-laws, certain
sections of the DGCL and the ability of Mac-Gray's Board of Directors (the
"Mac-Gray Board") to issue shares of preferred stock and to establish the
voting rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved
by the Mac-Gray Board, including takeovers which certain stockholders may deem
to be in their best interests. These provisions and the ability of the Mac-
Gray Board to issue preferred stock without further action by stockholders
could delay or frustrate the removal of incumbent directors or the assumption
of control by stockholders, even if such removal or assumption of control
would be beneficial to stockholders. These provisions also could discourage or
make more difficult a merger, tender offer or proxy contest, even if such
events would be beneficial, in the short term, to the interests of
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stockholders. Such anti-takeover provisions include, among other things, a
classified Mac-Gray Board serving staggered three-year terms, the elimination
of stockholder voting by written consent, the absence of cumulative voting for
directors, the removal of directors only for cause, the vesting of exclusive
authority in the Mac-Gray Board to determine the size of the Mac-Gray Board
and (subject to certain limited exceptions) to fill vacancies thereon, the
vesting of exclusive authority in the Mac-Gray Board (except as otherwise
required by law) to call special meetings of stockholders, and certain advance
notice requirements for stockholder proposals and nominations for election to
the Mac-Gray Board. Mac-Gray is subject to Section 203 of the DGCL ("Section
203") which, in general, imposes restrictions upon certain acquirors
(including their affiliates and associates) of 15% or more of Mac-Gray Common
Stock. See "Description Capital Stock--Certain Provisions of Charter and By-
laws" and "--Statutory Business Combination Provision."
POTENTIAL VOLATILITY OF STOCK PRICE
The trading price of Mac-Gray Common Stock may be subject to fluctuations in
response to quarter-to-quarter variations in operating results, changes in
earnings estimates by investment analysts or changes in business or regulatory
conditions affecting Mac-Gray, its customers or its competitors. The stock
market historically has experienced volatility which sometimes has been
unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the price of Mac-Gray Common Stock.
ABSENCE OF DIVIDENDS
Mac-Gray intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. Declaration of dividends will in the future depend upon, among other
things, Mac-Gray's results of operations, financial condition, acquisitions,
capital requirements and general business condition. The Credit Facility also
restricts dividend payments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
MATERIAL BENEFITS TO CERTAIN INSIDERS
As a result of an agreement entered into in connection with the Sun Services
Acquisition, Mac-Gray is obligated to make certain payments to a current
director of Mac-Gray who owned Sun Services. In addition, Mac-Gray is
obligated to make certain payments to the wife of Mac-Gray's co-founder and
former Chief Executive Officer for the remainder of her life. See
"Management--Certain Relationships and Related Transactions."
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BUSINESS
GENERAL
Mac-Gray derives its revenue principally through the operation and
maintenance of card and coin-operated laundry rooms in multiple housing
facilities, such as apartment buildings, colleges and universities,
condominiums and public housing complexes. Mac-Gray operates its laundry rooms
under long-term leases with property owners, colleges and universities and
governmental agencies. The leases typically grant Mac-Gray the exclusive right
to operate laundry rooms on the lessor's premises for a fixed term, which is
generally seven to ten years, in exchange for a percentage of the revenue
collected. Mac-Gray's laundry route business consists of more than 155,000
laundry machines, operated in over 25,000 multiple housing laundry rooms
located in 27 states east of the Rocky Mountains.
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, 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. 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.
DIVERSIFIED AND STABLE CUSTOMER BASE--Mac-Gray provides laundry services
to more than 25,000 laundry rooms located in 27 states east of the Rocky
Mountains. 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
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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.
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 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,
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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.
IMPLEMENT NEWLY AVAILABLE TECHNOLOGY--Mac-Gray has smart card readers in
more than 12,000 laundry machines and intends to accelerate the use of
cost-effective smart-card 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 POSITION IN COLLEGE AND UNIVERSITY MARKET--Mac-Gray intends to
strengthen its 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 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 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, permit Mac-Gray or the property owner to implement modest
periodic price increases and to use variable time pricing. 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.
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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.
CONVERT SELF-OWNERS--Mac-Gray actively markets to property owners and
managers who own and operate on-premise laundry rooms. 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.
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. Since
May 1996, Mac-Gray has acquired more than nine laundry route businesses,
contributing to the growth in its machine base.
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.
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 155,000 machines in over
25,000 laundry rooms located in multiple housing facilities. 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 more than 40 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
14
<PAGE>
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.
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 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:
<TABLE>
<S> <C>
Apartments, condominiums and co-operatives............................. 74%
Colleges, universities and schools..................................... 20%
Public housing......................................................... 3%
Other.................................................................. 3%
</TABLE>
Mac-Gray operates card and coin-operated laundry rooms in approximately 350
of the more than 1,600 public and private residential institutions in the
North American college and university market. 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 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.
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 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. See "Risk Factors-- Dependence Upon
Certain Suppliers."
Periodic Preventive Maintenance. Mac-Gray performs scheduled, periodic,
preventive maintenance on Mac-Gray's equipment at its various leased
laundry rooms.
15
<PAGE>
On-Call Service. Mac-Gray employs approximately 130 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 within the past ten years.
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.
Mac-Gray has installed smart card readers in more than 12,000 laundry
machines 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 has experienced increased usage at
existing facilities which have been equipped with smart card readers. The
additional benefits associated with smart-card based transactions include
reduced administrative burdens and expenditures, reduced vandalism, improved
security and more efficient revenue collections.
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.
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. In addition, cashless technology will
enable Mac-Gray to establish variable time pricing
16
<PAGE>
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.
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 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.
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 Alabama, Connecticut, Florida,
Georgia, Illinois, Maine, Massachusetts, New Hampshire, New York (except
metropolitan New York City), western Pennsylvania, Rhode Island, South
Carolina, Vermont and portions of Arkansas, Indiana, Iowa, Mississippi and
Missouri. Mac-Gray 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 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 has also established a leasing program for commercial laundry
customers who choose neither to purchase equipment nor to become a laundry
route customer. This program involves the leasing of commercial laundry
equipment to customers who maintain their own coin-operated laundry rooms, as
well as to customers (such as hotels) who operate their own on-premise laundry
equipment.
Mac-Gray 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.
17
<PAGE>
EMPLOYEES
Mac-Gray has approximately 575 employees. None of Mac-Gray's employees is
covered by a collective bargaining agreement. Mac-Gray believes its relations
with its employees are good.
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
Chula Vista, California..................................... 25,000
Miami, Florida.............................................. 25,000
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.............................................. 12,000
Atlanta, Georgia............................................ 12,000
Walpole, Massachusetts...................................... 19,000
Canton, Massachusetts....................................... 10,000
</TABLE>
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.
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.
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<PAGE>
SELECTED HISTORICAL 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 PricewaterhouseCoopers LLP, whose report appears elsewhere in
this Prospectus. Results for interim periods have not been audited and include
all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for the fair presentation of the results for
such periods; however, they are not necessarily indicative of results for the
full year. 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 Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997(1) 1997(2) 1998(3)
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue..................... $54,364 $60,633 $66,352 $82,260 $104,847 $52,311 $60,857
Cost of revenue:
Commissions................ 17,762 19,168 20,471 25,760 31,717 14,639 18,689
Route expenditures......... 7,458 7,889 8,251 10,971 12,449 6,791 9,033
Depreciation and amortiza-
tion...................... 4,831 4,822 5,455 7,060 9,725 4,229 6,162
Cost of product sales...... 7,737 11,110 12,234 15,408 22,021 12,469 11,002
------- ------- ------- ------- -------- ------- -------
Total cost of revenue...... 37,788 42,989 46,411 59,199 75,912 38,128 44,886
------- ------- ------- ------- -------- ------- -------
Operating expenses:
General and administra-
tion...................... 4,130 4,070 5,804 5,939 6,923 3,197 3,486
Sales and marketing........ 4,443 5,134 6,455 7,718 10,181 5,014 5,012
Depreciation............... 466 501 639 783 753 487 403
Merger-related costs....... -- -- -- -- -- -- 884
------- ------- ------- ------- -------- ------- -------
Total operating expenses... 9,039 9,705 12,898 14,440 17,857 8,698 9,785
------- ------- ------- ------- -------- ------- -------
Income from operations...... 7,537 7,939 7,043 8,621 11,078 5,485 6,186
Interest expense net....... (1,526) (1,300) (1,328) (2,354) (2,975) (1,630) (1,263)
Other income (expense),
net....................... 71 70 55 (87) 181 39 (1)
------- ------- ------- ------- -------- ------- -------
Income before provision for
income taxes............... 6,082 6,709 5,770 6,180 8,284 3,894 4,922
Provision for income tax-
es(4)..................... (330) (271) (400) (514) (5,228) (251) (1,895)
------- ------- ------- ------- -------- ------- -------
Net income before accretion
and dividends on
redeemable preferred stock.. $ 5,752 $ 6,438 $ 5,370 $ 5,666 $ 3,056 $ 3,643 $ 3,027
------- ------- ------- ------- -------- ------- -------
Accretion and dividends on
redeemable preferred
stock...................... $ -- $ -- $ 240 $ 240 $ 320 $ 160 $ 62
------- ------- ------- ------- -------- ------- -------
Net income available to com-
mon stockholders........... $ 5,752 $ 6,438 $ 5,130 $ 5,426 $ 2,736 $ 3,483 $ 2,965
======= ======= ======= ======= ======== ======= =======
Net income per common
share...................... $ 0.76 $ 0.85 $ 0.68 $ 0.72 $ 0.32 $ 0.46 $ 0.24
======= ======= ======= ======= ======== ======= =======
Weighted average common
shares outstanding......... 7,554 7,554 7,554 7,554 8,449 7,554 12,390
======= ======= ======= ======= ======== ======= =======
Net income per common
share--assuming dilution... $ 0.75 $ 0.84 $ 0.67 $ 0.71 $ 0.31 $ 0.45 $ 0.23
======= ======= ======= ======= ======== ======= =======
Weighted average common
shares outstanding--
assuming dilution.......... 7,686 7,686 7,686 7,686 8,709 7,797 12,838
======= ======= ======= ======= ======== ======= =======
UNAUDITED PRO FORMA TAX AD-
JUSTED EARNINGS PER SHARE
DATA(5):
Pro forma tax adjusted net
income.................... $ 5,105 $ 2,336
======== =======
Pro forma tax adjusted net
income available to
common stockholders ...... $ 4,785 $ 2,176
======== =======
Pro forma tax adjusted net
income available to
common stockholders per
common share.............. $ 0.57 $ 0.29
======== =======
Pro forma tax adjusted net
income available to
common stockholders per
common share--
assuming dilution......... $ 0.55 $ 0.28
======== =======
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(6).............. $12,451 $13,332 $13,192 $ 16,377 $ 21,737 $10,240 $12,750
Depreciation and amor-
tization.............. 4,843 5,323 6,094 7,843 10,478 4,716 6,565
Capital expenditures... 5,855 6,090 8,121 10,010 11,584 5,575 6,108
Cash flows from operat-
ing activities........ 9,565 11,106 10,364 15,768 10,473 5,476 5,068
Cash flows used in in-
vesting activities.... (6,137) (6,024) (8,952) (24,338) (22,791) (9,991) (53,505)
Cash flows provided by
(used in) financing
activities............ (3,453) (6,167) (589) 7,516 13,248 4,333 50,710
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $(3,710) $(3,726) $(3,311) $ (8,489) $ (4,041) $(5,573) $ 5,402
Total assets........... 35,096 36,184 46,785 66,217 97,843 82,081 158,895
Long-term debt, net of
current portion....... 15,718 13,919 12,125 23,473 5,395 33,067 64,659
Redeemable common and
preferred stock(7).... -- -- 3,947 4,187 12,304 12,145 7,797
Stockholders' equity... 7,113 10,190 12,165 13,774 48,302 14,113 59,253
</TABLE>
- --------
(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) In March 1998, Mac-Gray consummated its acquisition of Intirion in a
transaction accounted for as a pooling of interests. As Mac-Gray and
Intirion had differing year ends, financial information for dissimilar
periods have been combined in the consolidated financial statements (see
Notes to Consolidated Financial Statements). Actual results presented for
the six months ended June 30, 1997 were calculated by combining the
historical first six months of each entity (June 30, 1997 for Mac-Gray and
December 31, 1996 for Intirion). Pro forma consolidated revenue, income
from operations, and net income calculated by combining the June 30, 1997
periods for both entities amounted to $47,742, $4,672, and $2,789,
respectively.
(3) Effective April 24, 1998, Mac-Gray acquired Amerivend in a purchase
transaction. Unaudited interim results for the six months ended June 30,
1998 include Amerivend's operating results for the period subsequent to
the acquisition. If the Amerivend acquisition had occurred on January 1,
1998, the Company's pro forma revenue and net income for the six months
ended June 30, 1998 would have been $65,743 and $3,088, respectively.
Effective April 23, 1998, Mac-Gray acquired Copico in a purchase
transaction. The pro forma results of operations assuming this acquisition
had occurred on January 1, 1998 would not have differed materially from
the unaudited results of operations reported for the six months ended June
30, 1998.
(4) 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.
(5) 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 rate of 40%)
during the periods presented.
(6) "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.
(7) Shares of Mac-Gray Common Stock issued in connection with the Sun Services
Acquisition are redeemable pursuant to a contractual arrangement.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. Mac-Gray's actual
results could differ significantly from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include: implementation of acquisition strategy; integration of acquired
businesses; ability to meet future capital requirements; dependence upon
certain suppliers, lease renewals; retention of senior executives; market
acceptance of new products and services; and those factors discussed in Mac-
Gray's filings with the Commission. The historical financial information
presented herein represents (i) consolidated results of Mac-Gray, including
the consolidated results of Intirion, (ii) the combined results of Mac-Gray
Co. and the Limited Partnership and (iii) the combined results of Amerivend,
Copico and Sun Services for the period subsequent to each purchase
acquisition. The following discussion and analysis should be read in
conjunction with the combined financial statements and related notes thereto
presented elsewhere in this Prospectus.
OVERVIEW
Mac-Gray derives its revenue principally through the operation and
maintenance of card and coin-operated laundry rooms in multiple housing
facilities, such as apartment buildings, colleges and universities,
condominiums and public housing complexes. Mac-Gray operates its laundry rooms
under long-term leases with property owners, colleges and universities and
governmental agencies. The leases typically grant Mac-Gray the exclusive right
to operate laundry rooms on the lessor's premises for a fixed term, which is
generally seven to ten years, in exchange for a percentage of the revenue
collected. Mac-Gray's laundry route business consists of more than 155,000
laundry machines, operated in over 25,000 multiple housing laundry rooms
located in 27 states east of the Rocky Mountains.
Mac-Gray also derives revenue as a distributor and servicer of commercial
laundry equipment manufactured by Maytag. Mac-Gray has Maytag distributor
agreements for Alabama, Connecticut, Florida, Georgia, Illinois, Maine,
Massachusetts, New Hampshire, New York (except metropolitan New York City),
western Pennsylvania, Rhode Island, South Carolina, Vermont and portions of
Arkansas, Indiana, Iowa, Mississippi and Missouri. Mac-Gray also sells or
rents laundry equipment manufactured by American Dryer, Dexter and Whirlpool
to provide several alternatives in machine type, cost and capacity.
Additionally, Mac-Gray sells or rents laundry equipment to restaurants,
hotels, health clubs and similar institutional users that operate their own
on-premise laundry facilities.
On October 22, 1997, Mac-Gray completed its initial public offering (the
"IPO"). Upon consummation of the IPO, Mac-Gray's status as an S corporation
automatically terminated and Mac-Gray became subject to taxation as a C
corporation for federal and state income tax purposes.
RECENT DEVELOPMENTS
New Credit Facility. On April 23, 1998, the outstanding debt under Mac-
Gray's $50 million revolving credit facility with State Street Bank and Trust
Company and CoreStates Bank was refinanced under a new senior secured
revolving and term loan credit facility with State Street Bank and Trust
Company, CoreStates Bank and BankBoston, N.A. The Credit Facility provides for
borrowings under a revolving line of credit of up to $90 million and converts
to a term loan after three years. Outstanding indebtedness under the Credit
Facility bears interest at Mac-Gray's option, at a rate equal to the prime
rate minus .5% or LIBOR plus the applicable margin (either (i) 1.5% for loans
outstanding which aggregate less than $50 million or (ii) 1.75% for loans
outstanding which exceed $50 million), or cost of funds plus the applicable
margin. The Credit Facility restricts payments of dividends and other
distributions, restricts Mac-Gray from making certain acquisitions and
incurring indebtedness, and requires it to maintain certain financial ratios.
The Credit Facility is secured by pledges of the capital stock of Mac-Gray's
subsidiaries and a lien on Mac-Gray's assets.
Acquisitions. On April 24, 1998, Mac-Gray acquired through Mac-Gray
Services, one hundred percent of the outstanding capital stock of Amerivend
Corporation and the assets of Amerivend Southeast Corporation. The acquisition
was completed pursuant to the Amerivend Agreement. The purchase price was
approximately
21
<PAGE>
$33.5 million in cash, including the payment of approximately $6.8 million of
debt. A portion of the purchase price, $1.5 million, is being held in escrow
to satisfy any potential claims in accordance with the Amerivend Agreement.
The funds used to pay the purchase price were comprised primarily of
borrowings under the Credit Facility. Amerivend is a provider of card and
coin-operated laundry equipment in Florida and Georgia. Amerivend also is the
principal distributor of Maytag commercial laundry products in Alabama,
Florida and Georgia.
On April 23, 1998, Mac-Gray acquired Copico through the purchase by Mac-Gray
Services, of one hundred percent of the outstanding capital stock of Copico.
The acquisition was completed pursuant to the Copico Agreement. In
consideration and pursuant to the Copico Agreement, Mac-Gray issued 250,000
shares of Mac-Gray Common Stock valued at approximately $4.2 million based
upon the closing price of the Mac-Gray Common Stock on April 23, 1998. The
cash portion of the purchase price was approximately $11.1 million, including
the payment of approximately $6.1 million of debt. The funds used to pay the
cash portion of the consideration were comprised primarily of borrowings under
the Credit Facility. Copico is a major provider of card and coin-operated
reprographics equipment and services to the academic and public library
markets in New England, New York and Florida. Copico provides and services
copiers, laser printers and microform reader-printers for libraries of
colleges, universities and graduate schools. Copico also is the sole provider
of reprographics services to the New York public library system, as well as
other public libraries. The Amerivend and Copico acquisitions have been
accounted for using the purchase method of accounting.
On March 12, 1998, Mac-Gray acquired Intirion. The consideration paid
consisted of 1,592,992 shares of Mac-Gray Common Stock and approximately $1
million in cash, which cash was paid to the holder of the Intirion Senior
Preferred Stock. Intirion is a supplier of combination
refrigerator/freezer/microwave ovens to multiple housing facilities such as
colleges and universities, military bases, economy hotels and motels and
assisted living facilities. The transaction has been accounted for as a
pooling of interests. Mac-Gray and Intirion incurred aggregate transaction
costs of $884,000 associated with the Merger, primarily in the first quarter
of 1998.
RESULTS OF OPERATIONS
Six months ended June 30, 1998 compared to six months ended June 30, 1997
and pro forma six months ended June 30, 1997
In 1998, Mac-Gray consummated its acquisition of Intirion in a transaction
accounted for as a pooling of interests. Due to the differing year ends of
Mac-Gray and Intirion, the six months ended June 30, 1997 represents
consolidated results for the period from January 1997 through June 1997 for
Mac-Gray consolidated with the six-month period from July 1996 through
December 1996 for Intirion. The six months ended June 30, 1998 represents
consolidated results for the period from January 1998 through June 1998 for
both Mac-Gray and Intirion. The pro forma six months ended June 30, 1997,
summarized below, represents consolidated results for the period from January
1997 through June 1997 for both Mac-Gray and Intirion.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
JUNE 30, 1997
(IN THOUSANDS)
----------------
(UNAUDITED)
<S> <C>
Revenue..................................................... $47,742
Cost of Revenue............................................. 34,545
-------
Gross profit................................................ 13,197
Operating expenses.......................................... 8,525
-------
Income from operations...................................... 4,672
Interest expense, net....................................... (1,687)
Other income (expense), net................................. 39
-------
Income before provision for income taxes.................... 3,024
Provision for income taxes.................................. 235
-------
Net income.................................................. $2,789
=======
</TABLE>
22
<PAGE>
Revenue. Revenue increased by $8,546,000, or 16%, to $60,857,000 for the six
months ended June 30, 1998 from $52,311,000 for the six months ended June 30,
1997. Revenue increased $13,115,000 for the pro forma six months ended June
30, 1998. Route Revenue increased $5,875,000, due to the expansion of existing
operations and the additional revenues from the route businesses acquired
during 1998 and 1997. Product sales decreased by $2,312,000 from the six
months ended June 30, 1997 to the six months ended June 30, 1998. This
decrease was a result of the comparison of dissimilar periods for 1997 and
1998, since Intirion historically experiences stronger product sales to the
college and university market during the period from July to December than
during January through June. Product sales from the pro forma six months ended
June 30, 1997 to the six months ended June 30, 1998 increased by $3,128,000.
This increase was primarily due to the increase in existing business, as a
result of increased sales and marketing efforts, and from sales by the
businesses acquired during 1998 and 1997.
Commissions. Commissions increased by $4,050,000, or 28%, to $18,689,000 for
the six months ended June 30, 1997. This increase was primarily attributable
to an increase in Route Revenue, since commissions are generally paid based
upon a percentage of revenue earned in the Company's route locations. The
Copico acquisition, which was consummated in April, resulted in a decrease in
the commission percentage paid.
Route Expenditures. Route expenditures, which include costs associated with
installing and servicing machines, as well as the costs of collecting,
counting and depositing the revenue, increased by $2,242,000, or 33%, to
$9,033,000 for the six months ended June 30, 1998 from $6,791,000 for the six
months ended June 30, 1997, and by $2,568,000, or 40%, from the pro forma six
months ended June 30, 1997. The increase was due in part to the general
increase in revenue, which resulted in increased servicing, collecting,
counting and depositing activity, and to the addition of branch locations as a
result of acquisitions. The increase was also attributable to the acquisitions
made during 1998 for which the fixed and variable cost mix associated with
route expenditures is different and causes increases in route expenditures
relative to route revenue to rise during the slower periods of the year which
include the months from June through August. The costs for the three and six
months ended June 30, 1997 were higher than the costs for the pro forma three
and six months ended June 30, 1997 due to the historically higher costs
incurred by Intirion during the period from July through September for the
rental program to the college and university market.
Depreciation and Amortization. Depreciation and amortization include amounts
included as a component of cost of revenue, and amounts included as an
operating expense. Aggregate depreciation and amortization increased by 39% to
$6,565,000 for the six months ended June 30, 1998 from $4,716,000 for the six
months ended June 30, 1997. The increase was primarily attributable to the
acquisitions of businesses during 1998 and 1997, which resulted in additional
machines to depreciate, as well as an increase in intangible assets to
amortize, and the increase in the Company's machine base due to internal
growth.
Cost of Product Sales. Cost of product sales decreased by $1,467,000, or
12%, to $11,002,000 for the six months ended June 30, 1998 from $12,469,000
for the six months ended June 30, 1997. These changes correspond to the
changes in product sales revenue.
General and Administration. General and administration expenses increased by
$289,000, or 9%, to $3,486,000 for the six months ended June 30, 1998 from
$3,197,000 for the six months ended June 30, 1997, and by $307,000 from the
pro forma six months ended June 30, 1997. These changes resulted from the
addition of administrative personnel at both Mac-Gray and Intirion to handle
the business growth. General and administrative expenses grew at a slower rate
than revenues due to synergies in accounting and management.
Sales and Marketing. This increase resulted from the addition of marketing
personnel at Mac-Gray to bring in house duties previously performed by outside
enterprises. Sales and marketing expense decreased by $2,000 to $5,012,000 for
the six months ended June 30, 1998 from $5,014,000 for the six months ended
June 30, 1997. Sales and marketing expense increased by $194,000 from the pro
forma six months ended June 30, 1997 to the six months ended June 30, 1998.
The increase was attributable to the expansion of the marketing department and
an increase in the number of field sales representatives.
23
<PAGE>
Merger-Related Costs. One-time, non-recurring costs associated with the
acquisition of Intirion, which was accounted for as a pooling transaction,
totaled $884,000 in the six months ended June 30, 1998.
Interest Expense. Interest expense, net of interest income, decreased by
$367,000, or 23%, to $1,263,000 for the six months ended June 30, 1998 from
$1,630,000 for the six months ended June 30, 1997, and decreased by $424,000
from the pro forma six months ended June 30, 1997. A portion of the net
proceeds received from the Company's initial public offering (IPO) in October
1997, were used to reduce existing indebtedness of the Company under the Old
Credit Facility and resulted in reduced interest expense for the first quarter
of 1998.
Income Tax Expenses. Upon termination of the S corporation status, Mac-Gray
became subject to federal and state income taxes, with a statutory rate of
approximately 40%. The results of operations for the three and six months
ended June 30, 1998 include a tax benefit of $370,000 due to the release of a
valuation allowance on certain tax assets available for use by Intirion. Based
on the results of operations of Intirion subsequent to the combination,
management believes that it is more likely than not that such assets will be
realized. The effective tax rate was also affected by certain merger related
expenses which are not deductible for tax purposes.
Fiscal year ended December 31, 1997 compared to fiscal year ended December
31, 1996
Revenue. Revenue increased by $22,587,000, or 27%, to $104,847,000 in 1997
from $82,260,000 in 1996. This increase was primarily attributable to growth
in existing laundry route revenue, the Sun Services Acquisition and the impact
of a full year's operation of businesses acquired in 1996. Laundry route
revenue increased $12,826,000, due to the expansion of existing operations and
to an increase in the number of machines operated as a result of the nine
acquisitions of laundry route businesses subsequent to March 31, 1996. Product
sales increased by $9,115,000, due to growth of revenue from existing
distributorships and the distributorships acquired during 1996 and 1997 and
due to increased sales of Microfridge(R) products to all market segments. Mac-
Gray believes that its increased focus on sales and marketing efforts since
mid-1996 has had a significant impact on the growth of revenue from existing
laundry routes and distributorships. Rental revenue also increased $646,000
due to Intirion's academic living rental program.
Commissions. Commissions increased by $5,957,000, or 23%, to $31,717,000 in
1997 from $25,760,000 in 1996. This increase was primarily attributable to an
increase in laundry route revenue, since commissions are generally paid based
upon a percentage of laundry route revenue.
Route Expenditures. Route expenditures, which are primarily variable
expenses which change with the increases and decreases in revenue and include
costs associated with installing and servicing machines, as well as the costs
of collecting, counting and depositing the revenue, increased by $1,478,000,
or 13%, to $12,449,000 in 1997 from $10,971,000 in 1996. This increase was due
to the general increase in revenue, which resulted in increased servicing,
collecting, counting and depositing activity, increased levels of expenses
associated with improving service in some of the acquired businesses, and
other associated costs.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization included as a component of cost of revenue, as
well as depreciation which is included as an operating expense. Aggregate
depreciation and amortization increased by $2,635,000, or 34%, to $10,478,000
in 1997 from $7,843,000 in 1996. This increase was primarily attributable to
the acquisition of nine laundry route businesses in 1996 and 1997, which
resulted in additional machines to depreciate, as well as an increase in
intangible assets to amortize, and the placement of additional machines at
existing locations.
Cost of Product Sales. Cost of product sales increased by $6,613,000, or
43%, to $22,021,000 in 1997 from $15,408,000 in 1996. This increase was a
direct result of increased product sales.
General and Administration. General and administration expenses increased by
$984,000, or 17%, to $6,923,000 in 1997 from $5,939,000 in 1996. This increase
was attributable to an increase in professional fees and to the hiring of
additional clerical and administrative staff to support the growth in Mac-
Gray's business.
24
<PAGE>
Sales and Marketing. Sales and marketing expense increased by $2,463,000, or
32%, to $10,181,000 in 1997 from $7,718,000 in 1996. This increase was
attributable to the expansion of the marketing department, led by the hiring
of an experienced national marketing executive in the third quarter of 1996,
and an increase in the number of field sales representatives.
Interest Expense. Interest expense, net of interest income, increased by
$621,000, or 26%, to $2,975,000 in 1997 from $2,354,000 in 1996. This increase
was primarily attributable to the increased borrowings incurred to finance the
acquisitions made during 1996 and 1997 and to the increase in product
purchases. Interest expense was minimal subsequent to the IPO because a
portion of the net proceeds from that offering was used to repay the existing
indebtedness under the Old Credit Facility, as further described below.
Income Tax Expense. Income tax expense increased by $4,714,000 to $5,228,000
in 1997 from $514,000 in 1996 due to the termination of Mac-Gray's S
corporation status concurrent with the IPO. Upon termination of the S
corporation status, Mac-Gray became subject to federal and state income taxes,
with a statutory rate of approximately 40%. As a result, Mac-Gray recognized a
non-recurring charge to income tax expense of approximately $4,037,000 in
October 1997, representing additional net deferred tax liabilities as of the
date the S corporation election was terminated. As the historical income tax
provision for Mac-Gray prior to the termination of the S corporation status
was established only to provide for income taxes in states that do not
recognize Subchapter S corporations, the income tax provision recorded in 1997
was significantly higher than the amount recorded in 1996.
Fiscal year ended December 31, 1996 compared to fiscal year ended December
31, 1995
Revenue. Revenue increased by $15,908,000, or 24%, to $82,260,000 in 1996
from $66,352,000 in 1995. This increase was primarily attributable to the
acquisition of six laundry route businesses, two of which also maintained
Maytag distributorships, as well as internal growth of both card and coin
laundry route revenue and revenue from product sales. Laundry route revenue
increased $9,506,000, of which $3,596,000 was attributable to the expansion of
existing operations and $5,910,000 was attributable to an increase in the
number of machines operated as a result of the six acquisitions of laundry
route businesses. Product sales increased by $5,674,000 due to acquisitions
and growth of existing businesses. Mac-Gray believes that a substantial
portion of the growth of revenue from existing laundry routes and from
existing distributorships was attributable to Mac-Gray's increased
expenditures on sales and marketing efforts, which are described below. Rental
revenue also increased $728,000 due to Intirion's academic living rental
program.
Commissions. Commissions increased by $5,289,000, or 26%, to $25,760,000 in
1996 from $20,471,000 in 1995. This increase was primarily attributable to an
increase in laundry route revenue, which resulted in an increase in variable
expenses, including commissions, related thereto, as well as slightly higher
commission rates applicable to the new leases that Mac-Gray acquired or
entered into during 1995 and 1996.
Route Expenditures. Route expenditures, which include costs associated with
installing and servicing machines and cost of equipment sales, as well as the
cost of collecting, counting and depositing the revenue, increased by
$2,720,000, or 33%, to $10,971,000 in 1996 from $8,251,000 in 1995. This
increase was primarily attributable to the increase in laundry route business,
which resulted in increased servicing and collecting activity.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization which is included as a component of cost of
revenue, as well as depreciation which is included as an operating expense.
Aggregate depreciation and amortization increased by $1,749,000, or 29%, to
$7,843,000 in 1996 from $6,094,000 in 1995. The increase was primarily
attributable to the acquisition of six laundry route businesses, which
resulted in additional machines to depreciate, as well as an increase in
intangible assets to amortize, and the placement of additional machines at
existing locations.
Cost of Product Sales. Cost of product sales increased by $3,174,000, or
26%, to $15,408,000 in 1996 from $12,234,000 in 1995. This increase was
attributable to increased product sales.
25
<PAGE>
General and Administration. General and administration expenses increased by
$135,000, or 2%, to $5,939,000 in 1996 from $5,804,000 in 1995. This increase
was attributable to the hiring of additional clerical and administrative staff
to help support the increase in Mac-Gray's business. General and
administration expenses for 1995 were unusually high as a result of certain
expenses related to the hiring, relocation and subsequent termination of a
senior executive.
Sales and Marketing. Sales and marketing expenses increased by $1,263,000,
or 20%, to $7,718,000 in 1996 from $6,455,000 in 1995. This increase was
attributable to the hiring of a significant number of additional field sales
representatives, the expansion of the marketing department and the hiring of
an experienced national marketing executive in the third quarter of 1996.
Interest Expense. Interest expense increased by $1,026,000, or 77%, to
$2,354,000 in 1996 from $1,328,000 in 1995. This increase was primarily
attributable to increased borrowings incurred to finance the six acquisitions
completed during 1996 and the increase in product purchases to support the
increase in revenues.
Income Tax Expense. Income tax expenses increased by $114,000, or 29%, to
$514,000 in 1996 from $400,000 in 1995. As the historical income tax provision
for Mac-Gray was established only to provide for income taxes in states that
do not recognize Subchapter S corporations, the statutory income tax rate for
1995 and 1996 was 6%. The effective income tax rate differed from the
statutory rate in 1995 and 1996 due to expenses recorded for book purposes
that are not deductible for income tax purposes.
The statutory income tax rate utilized by Mac-Gray during 1995 and 1996 is
not indicative of the statutory income tax rate of approximately 40% that has
been utilized since the termination of Mac-Gray's S corporation status on
October 16, 1997.
SEASONALITY
Mac-Gray experiences moderate seasonality as a result of its significant
operations in the college and university market. Revenues derived from the
college and university market represent approximately thirty-five percent
(35%) of Mac-Gray's total revenue. Route and rental revenues are derived
substantially during the school year which includes the first, second and
fourth calendar quarters. Conversely, Mac-Gray increases its operating
expenditures during the third calendar quarter when colleges and universities
are not in session as a result of Mac-Gray's increased product installation
activities. Product sales, principally MicroFridge(R), to this market are also
high during the third calendar quarter.
LIQUIDITY AND CAPITAL RESOURCES
Mac-Gray's primary sources of cash have been operating activities, bank
borrowings, and the proceeds of the IPO. Mac-Gray's primary uses of cash have
been business acquisitions, capital expenses including the purchase of new
laundry machines, Microfridge(R) equipment and smart card based payment
systems, the payment of a dividend of $9,000,000 to Mac-Gray's shareholders
prior to the IPO and the repayment of the Old Credit Facility. Mac-Gray
anticipates that it will continue to use cash flow from its operating
activities to finance working capital needs, including interest payments on
any outstanding indebtedness, as well as capital expenditures. Funds available
under the Credit Facility were used as needed to finance the acquisitions of
Amerivend and Copico. Mac-Gray also anticipates that it will use additional
funds available to it under the Credit Facility to finance additional possible
acquisitions, larger capital expenditures and, as needed, working capital.
Cash flows (used in) provided by operations were ($5,068,000) and $5,476,000
for the six months ended June 30, 1998 and 1997, respectively, and
$10,473,000, $15,768,000 and $10,364,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Cash flow from operations consists
primarily of laundry route revenue, product sales, laundry equipment service
revenue, and rental revenue, commissions, route expenditures, cost of product
sales, cost of rental revenue, general and administration expenses and sales
and marketing expenses. Mac-Gray also incurred costs as a result of the Mac-
Gray and Intirion pooling transaction.
26
<PAGE>
Cash used in investing activities was $53,505,000 and $9,991,000 for the six
months ended June 30, 1998 and 1997, respectively, and $22,791,000,
$24,338,000 and $8,952,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Mac-Gray invested $48,269,000 in connection with the
Intirion, Copico and Amerivend acquisitions and a small route acquisition
during the six months ended June 30, 1998 and $12,196,000, $14,487,000 and
$1,178,000 for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively, in connection with the acquisitions consummated during those
years. Capital expenditures were $6,108,000 and $5,575,000 for the six months
ended June 30, 1998 and 1997, respectively, and $11,584,000, $10,010,000 and
$8,121,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash flows provided by (used in) financing activities were $50,710,000
and $4,333,000 for the six months ended June 30, 1998 and 1997, respectively,
and $13,248,000, $7,516,000 and ($589,000) for the years ended December 31,
1997, 1996 and 1995, respectively. Financing activities for those periods
consist primarily of proceeds from the IPO, proceeds from and repayments of
bank borrowings, capital stock transactions, and payments of dividends. Mac-
Gray also utilized $125,000 as a portion of the consideration paid in
connection with the redemption of 2,275 shares of Mac-Gray Common Stock as of
January 1, 1996.
Until April 23, 1998, Mac-Gray maintained a $50 million revolving line of
credit with State Street Bank and Trust Company and CoreStates Bank. Mac-Gray
was in material compliance with all covenants of that facility, or received a
written waiver with respect to any non-compliance therewith, for the three
months ended March 31, 1998. On April 23, 1998, Mac-Gray refinanced the
amounts outstanding under the Old Credit Facility with the proceeds of a new
revolving line of credit and term loan facility with State Street Bank and
Trust Company, CoreStates Bank and BankBoston, N.A. The Credit Facility
provides for borrowings under a revolving line of credit of up to $90 million,
and converts to a term loan after three years. The term loan has a weighted
five year amortization schedule with a balloon payment due after the second
year of the term loan. Outstanding indebtedness under the Credit Facility
bears interest at Mac-Gray's option at a rate equal to the prime rate minus
.5% or LIBOR plus the applicable margin (either (i) 1.5% for loans outstanding
which aggregate less than $50 million or (ii) 1.75% for loans outstanding
which exceed $50 million) or the cost of funds rate plus the applicable
margin. The Credit Facility imposes certain financial and operational
covenants on Mac-Gray, including restrictions on indebtedness, certain capital
expenditures, investments and acquisitions, and on Mac-Gray's ability to pay
dividends and to make distributions. The Credit Facility is secured by a
blanket lien on the assets of Mac-Gray and each of its subsidiaries, as well
as a pledge by Mac-Gray of all of the capital stock of its subsidiaries.
In connection with the Sun Services Acquisition in April 1997, Mac-Gray
issued 612,026 shares of Mac-Gray Common Stock to the owner of Sun Services.
As a privately owned company issuing shares of its common stock, which, at
that point, were substantially illiquid, Mac-Gray provided the Sun Services
owner with the right to require Mac-Gray to repurchase the shares of Mac-Gray
Common Stock issued by Mac-Gray as consideration in the acquisition. Mac-Gray
also received certain rights ( the "Call Rights") to repurchase such shares of
Mac-Gray Common Stock. Upon consummation of the IPO, the Call Rights
terminated. Mac-Gray remains obligated to repurchase the 612,026 shares of
Mac-Gray Common Stock at a price of $12.74 per share in the event the holder
or holders of such shares elect to exercise the Put Rights, representing an
aggregate purchase price of approximately $7.8 million. Such remaining Put
Rights expire on October 22, 2000. In the event such Put Rights are exercised,
Mac-Gray would likely fund the purchase price for such shares of Mac-Gray
Common Stock by incurring additional indebtedness under its Credit Facility.
See "Management--Certain Relationships and Related Transactions."
Mac-Gray has used all of the net proceeds from the IPO to repay existing
outstanding indebtedness under the Old Credit Facility, to fund a $9,000,000
dividend paid to shareholders in October 1997 and to provide partial funding
for two laundry route acquisitions. The cash paid in connection with the
acquisitions of Intirion, Amerivend and Copico, including expenses related
thereto, has been paid from amounts available under the Old Credit Facility,
the Credit Facility and cash flow generated from operating activities. Mac-
Gray believes that amounts available under the Credit Facility and cash flow
generated by operations will be sufficient to fund
27
<PAGE>
Mac-Gray's normal working capital needs and capital expenditures for the
foreseeable future, including Mac-Gray's current purchase commitment with
Schlumberger to purchase smart-card based equipment. Based upon the purchase
commitment with Schlumberger, such purchases, in the aggregate, could
represent a material portion of Mac-Gray's capital expenditures for fiscal
year 1998. In addition, if Mac-Gray were to borrow all amounts then available
to it under the Credit Facility in connection with one or more acquisitions,
or in connection with significant capital expenditures, either in the short-
term or in the long-term, management believes that cash generated from
operating activities would be sufficient to fund Mac-Gray's operating expenses
and debt service needs for the foreseeable future. Additional financing under
the Credit Facility or otherwise may, however, be required in connection with
an acquisition or acquisitions which Mac-Gray may consummate in the future. If
any such additional financing were needed, and could not be obtained on terms
favorable to Mac-Gray, if at all, Mac-Gray's ongoing capital improvement
efforts and acquisition activity would likely be reduced or delayed as cash
generated from operating activities was used for operating expenses and debt
service. See "Risk Factors--Risks Associated with Acquisitions; Integration of
Acquired Businesses."
YEAR 2000
Mac-Gray continues to evaluate the impact of year 2000 issues within its
systems. Based on the Company's assessment to date, management does not
believe the issue will have a material impact on the Company's business,
results of operations, or financial condition. Mac-Gray has not incurred and
does not expect to incur significant costs in identifying and resolving year
2000 issues.
INFLATION
Mac-Gray does not believe that its financial performance has been materially
affected by inflation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130) in June 1997. Mac-Gray adopted SFAS 130 for fiscal 1998. SFAS 130
requires presentation of certain information related to comprehensive income.
During the three years ended December 31, 1997, Mac-Gray had comprehensive
income/(expense) of $28,000, $(32,000) and $0, respectively. This
comprehensive income/(expense), as defined in SFAS 130, related to unrealized
gains/(losses) on available for sale securities. FASB issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131) which is required to be adopted
by Mac-Gray in its fiscal 1998 financial statements. SFAS 131 establishes
standards for reporting information on operating segments in financial
statements. Mac-Gray is currently reviewing the impact of SFAS 131 on its
financial statements.
28
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Mac-Gray, their positions with Mac-
Gray and their ages as of August 19, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chairman, Chief Executive Officer and
Stewart Gray MacDonald, Jr. ......... 48 Director
Executive Vice President, Sales and
Neil F. MacLellan, III............... 38 Marketing
John S. Olbrych...................... 42 Chief Financial Officer and Treasurer
Patrick A. Flanagan.................. 45 Executive Vice President, Mergers and
Acquisitions, Secretary and Director
Eugene B. Doggett.................... 62 Director
Jeffrey C. Huenink................... 41 Director
John P. Leydon....................... 65 Director
Jerry A. Schiller.................... 65 Director
</TABLE>
STEWART GRAY MACDONALD, JR. serves as Chairman of the Board and Chief
Executive Officer and has served as a Director of Mac-Gray since 1983. Mr.
MacDonald served Mac-Gray in various executive capacities from 1989 until his
election as Chairman of the Board in 1992. Mr. MacDonald, the son of Mac-
Gray's co-founder and first President, is the fourth member of Mac-Gray's
founding families to lead the organization. Mr. MacDonald, a three time member
of the U.S. Olympic Rowing Team and a former coach with the U.S. National
Rowing Team, also had an academic career for fifteen years. He received his
B.A. from the University of Wisconsin.
NEIL F. MACLELLAN, III has been with Mac-Gray since 1985 and has served as
Executive Vice President, Sales and Marketing since December 1995. From
January 1991 through December 1995, Mr. MacLellan served as Mac-Gray's
Director of Finance and Administration and from March 1985 through January
1991, Mr. MacLellan served as Controller of Mac-Gray. Mr. MacLellan received
his B.S. in Accounting from Bentley College.
JOHN S. OLBRYCH has served as Chief Financial Officer of Mac-Gray since
April 1996 and served as a Director of Mac-Gray from November 1993 until May
1997. From 1991 through 1996, Mr. Olbrych was an independent business
consultant. In this role he served as interim Chief Financial Officer of
AirTran Corporation, Airways Corporation, Carus Corporation, Carus Publishing
Company and Daisytek International. He remains on the board of directors of
both Carus Corporation and Carus Publishing Company. From 1986 through 1991,
Mr. Olbrych served as a Vice President of State Street Bank. Mr. Olbrych
received his B.A. from Dartmouth College and his M.B.A. from The Amos Tuck
School at Dartmouth College.
PATRICK A. FLANAGAN has served as a Director of Mac-Gray since 1992 and has
served as Executive Vice President, Mergers and Acquisitions of Mac-Gray since
April 1996. From January 1993 through April 1996, Mr. Flanagan was a partner
with American Capital Strategies, an investment bank specializing in mergers
and acquisitions. From 1990 to January 1993, Mr. Flanagan was a partner in
Fidelis Group, an investment bank. From 1983 to 1990, Mr. Flanagan was an
investment banker in the Corporate Finance Department at Drexel Burnham
Lambert where he was a First Vice President. Mr. Flanagan serves as a director
of Cains Foods, Inc. and National Forge Corporation. Mr. Flanagan holds a B.S.
from Purdue University and received his M.B.A. from Harvard Business School.
29
<PAGE>
EUGENE B. DOGGETT has been a Director of Mac-Gray since October 1997. Mr.
Doggett is an Executive Vice President and Director of Iron Mountain
Incorporated ("Iron Mountain"), a publicly traded records management company.
From 1987 until June 1997, Mr. Doggett was also Chief Financial Officer of
Iron Mountain. Prior to joining Iron Mountain, Mr. Doggett had extensive
experience in commercial and investment banking, as well as financial and
general management experience at senior levels. He holds a B.A. from Yale
University and an M.B.A. from Harvard Business School.
JEFFREY C. HUENINK has been a Director of Mac-Gray since April 1997. From
1986 until the Sun Services Acquisition in April 1997, Mr. Huenink was the
President and owner of Sun Services. Mr. Huenink was a member of the Florida
House of Representatives from 1988 until 1992. Mr. Huenink received his B.S.
in Business Administration from the University of South Florida.
JOHN P. LEYDON has been a Director of Mac-Gray since April 1997. Mr. Leydon
has been the Chief Financial Officer of Pacific Packaging Products, Inc. since
December 1996. From 1983 to 1996, Mr. Leydon was a partner at Leydon &
Gallagher, a certified public accounting firm. Mr. Leydon received his B.S. in
Business Administration from Boston College, his M.B.A. from Babson College
and his M.S. in Taxation from Bentley College.
JERRY A. SCHILLER has been a Director of Mac-Gray since April 1997. Mr.
Schiller has been a private investor and consultant since 1993. In October
1993, Mr. Schiller retired after 31 years of service with The Maytag
Corporation. From 1985 until his retirement, Mr. Schiller served as the
Executive Vice President and Chief Financial Officer, as well as a Director,
of The Maytag Corporation. From 1962 until 1985, Mr. Schiller held various
executive positions with The Maytag Corporation. Mr. Schiller received his
B.S. in Business Administration and Accounting from Augustana College.
Executive officers are elected annually by the Mac-Gray Board and serve at
its discretion. There are no family relationships among any of the directors
and executive officers of Mac-Gray except that Eugene B. Doggett is the uncle
of Cynthia V. Doggett, Stewart Gray MacDonald, Jr.'s wife.
BOARD OF DIRECTORS
The business of Mac-Gray is managed under the direction of the Mac-Gray
Board and the number of directors of Mac-Gray is currently fixed at six. The
Mac-Gray Charter provides that the Mac-Gray Board shall be divided into three
classes. The members of each class of directors serve for staggered three-year
terms. The Mac-Gray Board is composed of two Class I Directors (Messrs.
Flanagan and Leydon), two Class II Directors (Messrs. Huenink and Schiller)
and two Class III Directors (Messrs. MacDonald and Doggett), whose terms will
expire upon the election and qualification of directors at the annual meetings
of stockholders held following the fiscal years ending December 31, 2000, 1998
and 1999, respectively. At each annual meeting of stockholders, directors will
be re-elected or elected for a full term of three years to succeed those
directors whose terms are expiring.
The Mac-Gray Board has established an Audit Committee (the "Audit
Committee") and a Compensation Committee (the "Compensation Committee"). The
Audit Committee recommends to the Mac-Gray Board the firm to be appointed as
independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent
accountants Mac-Gray's year-end operating results, considers the adequacy of
the internal accounting procedures and considers the effect of such procedures
on the accountants' independence. The Audit Committee consists of Messrs.
Doggett and Schiller. The Compensation Committee, which consists of Messrs.
MacDonald, Leydon and Schiller, reviews and recommends to the Mac-Gray Board
the compensation arrangements for all directors and officers other than Mr.
MacDonald, whose compensation arrangements are reviewed and recommended by
Messrs. Leydon and Schiller, approves such arrangements for other senior level
employees and administers and takes such other action as may be required in
connection with certain compensation and incentive plans of Mac-Gray. The
Compensation Committee also determines the number of options to be granted or
shares of Mac-Gray Common Stock to be issued to eligible persons under Mac-
Gray's 1997 Stock Option and Incentive Plan (the "1997 Stock Plan") and
prescribes the terms and provisions of each
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<PAGE>
grant made under the 1997 Stock Plan other than with respect to the
eligibility of Mr. MacDonald, as to whom the full Mac-Gray Board makes such
determinations. In addition, the Compensation Committee construes and
interprets the 1997 Stock Plan and issuances thereunder, and establishes,
amends and revokes rules and regulations for administration of the 1997 Stock
Plan. The Mac-Gray Board does not have a nominating committee.
Members of the Mac-Gray Board who are also employees of Mac-Gray do not
receive compensation for their services on the Mac-Gray Board or any committee
thereof. Each director who is not an employee of Mac-Gray (an "Independent
Director") receives an annual fee of $12,000 and an additional fee of $500 per
meeting of the Mac-Gray Board. In addition, upon consummation of the IPO, each
Independent Director was granted an option to purchase 1,000 shares of Mac-
Gray Common Stock at an exercise price equal to the fair market value of Mac-
Gray Common Stock. Under the 1997 Stock Plan, each new Independent Director is
also entitled to receive an initial grant of an option to purchase 1,000
shares of Mac-Gray Common Stock upon his or her election to the Mac-Gray
Board, and each Independent Director who is serving as a director of Mac-Gray
on the fifth business day after each annual meeting of stockholders, beginning
with the 1998 annual meeting, will automatically be granted an option to
purchase 1,000 shares of Mac-Gray Common Stock. All options granted to
Independent Directors under the 1997 Stock Plan shall be exercisable
immediately and shall terminate upon the tenth anniversary of the date of
grant. See "--1997 Stock Option and Incentive Plan--Stock Options Granted to
Independent Directors."
All members of the Mac-Gray Board are reimbursed for travel expenses
incurred in attending meetings of the Mac-Gray Board and its committees.
EXECUTIVE COMPENSATION
Summary Compensation. The following summary compensation table sets forth
information concerning compensation paid or awarded during the last three
years to Mac-Gray's Chief Executive Officer and the other executive officers
named in the table (the "Named Executive Officers"). Other than the Named
Executive Officers, no other executive officer of Mac-Gray who held office as
of December 31, 1997 met the definition of "highly compensated" within the
meaning of the Commission's executive compensation disclosure rules for this
period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
--------------------- COMPENSATION
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) ($)(2)
- --------------------------- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stewart Gray MacDonald,
Jr........................ 1997 176,596 30,000 14,870 5,349
Chairman and Chief Execu-
tive Officer 1996 131,976 98,380 148,700 2,245
Neil F. MacLellan, III..... 1997 158,846 25,000 8,180 15,971
Executive Vice President,
Sales and Marketing 1996 85,000 115,188 81,800 8,624
John S. Olbrych(3)......... 1997 187,500 25,000 8,180 6,634
Chief Financial Officer
and Treasurer 1996 88,411 70,000 81,800 --
Patrick A. Flanagan(4)..... 1997 160,144 20,000 7,435 --
Executive Vice President, 1996 97,500 89,133 74,350 --
Mergers and
Acquisitions and Secretary
</TABLE>
- --------
(1) Mac-Gray's executive officers are eligible for annual cash bonuses. Such
bonuses are based upon achievement of individual or corporate performance
objectives determined by the Mac-Gray Board.
(2) Includes contributions made on the executive's behalf to Mac-Gray's profit
sharing plan and, in the case of Mr. MacLellan, premiums paid by Mac-Gray
for life insurance benefitting such executive's spouse.
(3) Mr. Olbrych was appointed Mac-Gray's Chief Financial Officer in April
1996.
(4) Mr. Flanagan was appointed Mac-Gray's Executive Vice President, Merger and
Acquisitions in April 1996.
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<PAGE>
Option Grants. The following table sets forth information concerning options
granted to the Chief Executive Officer and the other Named Executive Officers
during the fiscal year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF PERCENT ANNUAL RATES OF
SECURITIES OF TOTAL STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM (3)
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------
(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
---------- ------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stewart Gray MacDonald,
Jr..................... 14,870 16.6% 9.25 8/14/07 86,503 219,215
Neil F. MacLellan, III.. 8,180 9.1 9.25 8/14/07 47,585 120,591
John S. Olbrych......... 8,180 9.1 9.25 8/14/07 47,585 120,591
Patrick A. Flanagan..... 7,435 8.3 9.25 8/14/07 43,251 109,608
</TABLE>
- --------
(1) Each option agreement with respect to one or more shares of Mac-Gray
Common Stock provides that such option will vest and become exercisable
with respect to twenty percent (20%) of the shares of Mac-Gray Common
Stock to which such option agreement relates on each of August 14, 1998,
1999, 2000, 2001 and 2002.
(2) All options were granted at fair market value as determined by the Mac-
Gray Board on the date of grant. See "--1997 Stock Option and Incentive
Plan--Stock Options."
(3) This column shows the hypothetical gain or option spreads of the options
granted based on assumed annual compound stock appreciation rates of 5%
and 10% over the full 10-year term of the options. The gains shown are net
of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise. The 5% and 10% assumed rates
of appreciation are mandated by the rules of the Commission and do not
represent Mac-Gray's estimate or projection of future Mac-Gray Common
Stock prices. Actual gains, if any, on stock option exercises will depend
on the future performance of the Mac-Gray Common Stock, the optionholders'
continued employment through the option period and the date on which the
options are exercised.
Option Exercises and Holdings. The following table sets forth information
concerning the number and value of unexercised options to purchase shares of
Mac-Gray Common Stock held by the Chief Executive Officer and the other Named
Executive Officers who held such options at December 31, 1997. None of the
Chief Executive Officer or the other Named Executive Officers exercised any
stock options during the fiscal year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
-------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Stewart Gray MacDonald,
Jr. ................... 29,740 133,830 $202,975 $906,698
Neil F. MacLellan, III.. 16,360 73,620 111,657 498,776
John S. Olbrych......... 16,360 73,620 111,657 498,776
Patrick A. Flanagan..... 14,870 66,915 101,488 453,349
</TABLE>
- --------
(1) These values have been calculated based upon the closing sale price of
Mac-Gray Common Stock, as reported by the NYSE, on December 31, 1997
($15.625) less the applicable exercise price.
32
<PAGE>
1997 STOCK OPTION AND INCENTIVE PLAN
In December 1996, the Mac-Gray Board adopted, and the Mac-Gray stockholders
approved, the Mac-Gray Co., Inc. 1996 Stock Option and Incentive Plan (the
"Predecessor Plan"). On April 7, 1997, the Mac-Gray Board adopted and Mac-
Gray's stockholders approved the 1997 Stock Plan, which replaced the
Predecessor Plan and is designed and intended as a performance incentive for
officers, employees, consultants and Independent Directors to promote the
financial success and progress of Mac-Gray. Mac-Gray anticipates that
providing such persons with a direct stake in Mac-Gray's welfare will assure a
closer identification of their interests with those of Mac-Gray, thereby
stimulating their efforts on Mac-Gray's behalf and strengthening their desire
to remain with Mac-Gray. All officers, employees and Independent Directors are
eligible to participate in the 1997 Stock Plan.
The 1997 Stock Plan provides for the issuance of up to the greater of (i)
750,000 shares of Mac-Gray Common Stock or (ii) ten percent of the then
outstanding shares of Mac-Gray Common Stock. As of August 19, 1998, Mac-Gray
has reserved 1,342,411 shares of Mac-Gray Common Stock for issuance under the
1997 Stock Plan, of which 807,150 shares are subject to outstanding options
and 535,261 remain available for issuance. Pursuant to Section 162(m) of the
Code, options with respect to no more than 150,000 shares of Mac-Gray Common
Stock may be granted to any one individual in any calendar year.
On December 30, 1996, Mac-Gray Co. granted to Messrs. MacDonald, MacLellan,
Olbrych and Flanagan, as well as certain other employees of Mac-Gray, options
to purchase 148,700, 81,800, 81,800 and 74,350 shares, respectively, of Mac-
Gray Common Stock (the "1996 Options") pursuant to the Predecessor Plan. The
1996 Options were subsequently assumed by Mac-Gray under the 1997 Stock Plan,
and the Predecessor Plan was terminated. On August 14, 1997, Mac-Gray granted
to Messrs. MacDonald, MacLellan, Olbrych and Flanagan, as well as certain
other employees of Mac-Gray, options to purchase 14,870, 8,180, 8,180 and
7,435 shares, respectively, of Mac-Gray Common Stock (the "1997 Options")
pursuant to the 1997 Stock Plan. The vesting schedule of the 1996 Options and
the 1997 Options provide that an additional twenty percent (20%) of such
options are exercisable on each of the first through fifth anniversaries of
the date of grant of such options. Accordingly, twenty percent (20%) of the
1996 Options and none of the 1997 Options, which have exercise prices of $8.80
and $9.25 per share, respectively, are currently exercisable. The exercise
prices of $8.80 and $9.25 per share were determined by the Mac-Gray Board to
be the fair market value of the shares underlying such options on the
respective dates of grant.
The following summary description does not purport to be complete and is
qualified in its entirety by the 1997 Stock Plan.
Plan Administration; Eligibility. The 1997 Stock Plan is administered by the
Mac-Gray Board or the Compensation Committee. All members of the Compensation
Committee must be "disinterested persons" as that term is defined under the
rules promulgated by the Commission and "outside directors" as defined in
Section 162(m) of the Code and the regulations promulgated thereunder.
The Compensation Committee has full power to select, from among the
employees and other persons eligible for awards, the individuals to whom
awards will be granted, to make any combination of awards to participants, and
to determine the specific terms and conditions of each award, subject to the
provisions of the 1997 Stock Plan. The Compensation Committee may permit Mac-
Gray Common Stock, and other amounts payable pursuant to an award, to be
deferred. In such instances, the Compensation Committee may permit dividend or
deemed dividends to be credited to the amount of deferrals.
Persons eligible to participate in the 1997 Stock Plan will be those
officers, employees and other key persons, such as consultants, of Mac-Gray
and its subsidiaries who are responsible for or contribute to the management,
growth or profitability of Mac-Gray and its subsidiaries, as selected from
time to time by the Compensation Committee. Independent Directors will also be
eligible for certain awards under the 1997 Stock Plan.
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<PAGE>
Stock Options. The 1997 Stock Plan permits the granting of (i) options to
purchase Mac-Gray Common Stock intended to qualify as incentive stock options
under Section 422 of the Code ("Incentive Options") and (ii) options that do
not so qualify ("Non-Qualified Options"). Only employees of Mac-Gray and its
subsidiaries may be granted Incentive Options. The option exercise price of
each option will be determined by the Compensation Committee but may not be
less than 100% of the fair market value of the Mac-Gray Common Stock on the
date of grant in the case of Incentive Options, and may not be less than 85%
of the fair market value of the Mac-Gray Common Stock on the date of grant in
the case of Non-Qualified Options. Employees participating in the 1997 Stock
Plan may, however, elect, with the consent of the Compensation Committee, to
receive discounted Non-Qualified Options in lieu of cash bonuses. In the case
of such grants, the option exercise price must be at least 50% of the fair
market value of the Mac-Gray Common Stock on the date of grant.
The term of each option will be fixed by the Compensation Committee and may
not exceed ten years from the date of grant in the case of an Incentive
Option. The Compensation Committee will determine at what time or times each
option may be exercised and, subject to the provisions of the 1997 Stock Plan,
the period of time, if any, after retirement, death, disability or termination
of employment during which options may be exercised. Options may be made
exercisable in installments, and the exercisability of options may be
accelerated by the Compensation Committee.
Upon exercise of options, the option exercise price must be paid in full
either in cash or by certified or bank check or other instrument acceptable to
the Compensation Committee or, if the Compensation Committee so permits, by
delivery of shares of Mac-Gray Common Stock already owned by the optionee. The
exercise price may also be delivered to Mac-Gray by a broker pursuant to
irrevocable instructions to the broker from the optionee.
At the discretion of the Compensation Committee, stock options granted under
the 1997 Stock Plan may include a "re-load" feature pursuant to which an
optionee exercising an option by the delivery of shares of Mac-Gray Common
Stock would automatically be granted an additional stock option (with an
exercise price equal to the fair market value of the Mac-Gray Common Stock on
the date the additional stock option is granted) to purchase that number of
shares of Mac-Gray Common Stock equal to the number delivered to exercise the
original stock option. One of the purposes of this feature is to enable
participants to maintain an equity interest in Mac-Gray without dilution.
To qualify as Incentive Options, options must meet additional federal tax
requirements, including limits on the value of shares subject to Incentive
Options which first become exercisable in any one calendar year, and a shorter
term and higher minimum exercise price in the case of certain large
stockholders.
Stock Options Granted to Independent Directors. Pursuant to the 1997 Stock
Plan, upon the consummation of the IPO, each Independent Director was
automatically granted a Non-Qualified Option to purchase 1,000 shares of Mac-
Gray Common Stock. The 1997 Stock Plan also provides for the automatic grant
to each Independent Director of a Non-Qualified Option to purchase 1,000
shares of Mac-Gray Common Stock upon his or her initial election to the Mac-
Gray Board. In addition, each Independent Director who is serving as a
director of Mac-Gray on the fifth business day after each annual meeting of
stockholders, beginning with the 1998 annual meeting, will automatically be
granted on such day a Non-Qualified Option to acquire 1,000 shares of Mac-Gray
Common Stock. The exercise price of each such Non-Qualified Option is the fair
market value of the Mac-Gray Common Stock on the date of grant. All of such
Non-Qualified Options granted to Independent Directors are exercisable
immediately and terminate on the tenth anniversary of the date of grant.
Stock Appreciation Right. The Compensation Committee may award a stock
appreciation right ("SAR") either as a freestanding award or in tandem with a
stock option. Upon exercise of the SAR, the holder will be entitled to receive
an amount equal to the excess of the fair market value on the date of exercise
of one share of Mac-Gray Common Stock over the exercise price per share
specified in the related stock option (or, in the case of freestanding SAR,
the price per share specified in such right, which price may not be less than
85% of the fair market value of the Mac-Gray Common Stock on the date of
grant) times the number of shares of Mac-Gray
34
<PAGE>
Common Stock with respect to which the SAR is exercised. This amount may be
paid in cash, Mac-Gray Common Stock, or a combination thereof, as determined
by the Compensation Committee. If the SAR is granted in tandem with a stock
option, exercise of the SAR cancels the related option to the extent of such
exercise.
Restricted Stock. The Compensation Committee may also award shares of Mac-
Gray Common Stock to officers, other employees and key persons of Mac-Gray
subject to such conditions and restrictions as the Compensation Committee may
determine ("Restricted Stock"). These conditions and restrictions may include
the achievement of certain performance goals and/or continued employment with
Mac-Gray through a specified restricted period. The purchase price of shares
of Restricted Stock will be determined by the Compensation Committee. If the
performance goals and other restrictions are not attained, the employees will
forfeit their awards of Restricted Stock.
Unrestricted Stock. The Compensation Committee may also grant shares (at no
cost or for a purchase price determined by the Committee) which are free from
any restrictions under the 1997 Stock Plan ("Unrestricted Stock").
Unrestricted Stock may be issued to employees and key persons in recognition
of past services or other valid consideration, and may be issued in lieu of
cash bonuses to be paid to such employees and key persons.
Subject to the consent of the Compensation Committee, an employee or key
person of Mac-Gray may make an irrevocable election to receive a portion of
his compensation in Unrestricted Stock (valued at fair market value on the
date the cash compensation would otherwise be paid).
An Independent Director may, pursuant to an irrevocable written election at
least six months before directors' fees would otherwise be paid, receive all
or a portion of such fees in Unrestricted Stock, valued at fair market value
on the date the directors' fees would otherwise be paid. In certain instances,
an Independent Director may also elect to defer a portion of his director fees
payable in the form of Unrestricted Stock, in accordance with such rules and
procedures as may from time to time be established by Mac-Gray. During the
period of deferral, the deferred Unrestricted Stock would receive dividend
equivalent rights.
Performance Share Awards. The Compensation Committee may also grant
performance share awards to employees or other key persons of Mac-Gray
entitling the recipient to receive shares of Mac-Gray Common Stock upon the
achievement of individual or company performance goals and such other
conditions as the Compensation Committee shall determine ("Performance Share
Award").
Dividend Equivalent Rights. The Compensation Committee may grant dividend
equivalent rights, which give the recipient the right to receive credits for
dividends that would be paid if the grantee had held specified shares of Mac-
Gray Common Stock. Dividend equivalent rights may be granted as a component of
another award or as a freestanding award. Dividend equivalents credited under
the 1997 Stock Plan may be paid currently or be deemed to be reinvested in
additional shares of Mac-Gray Common Stock, which may thereafter accrue
additional dividend equivalents at fair market value at the time of deemed
reinvestment or on the terms then governing the reinvestment of dividends
under Mac-Gray's dividend reinvestment plan, if any. Dividend equivalent
rights may be settled in cash, shares, or a combination thereof, in a single
installment or installments, as specified in the award. Awards payable in cash
on a deferred basis may provide for crediting and payment of interest
equivalents.
Adjustments for Stock Dividends, Mergers, Etc. The Compensation Committee
will make appropriate adjustments in outstanding awards to reflect stock
dividends, stock splits and similar events. In the event of a merger,
liquidation, sale of Mac-Gray or similar event, the Compensation Committee, in
its discretion, may provide for substitution or adjustments of outstanding
options and SARs, or may terminate all unexercised options and SARs with or
without payment of cash consideration.
Amendments and Termination. The Mac-Gray Board may at any time amend or
discontinue the 1997 Stock Plan and the Compensation Committee may at any time
amend or cancel outstanding awards for the purpose of satisfying changes in
the law or for any other lawful purpose. No such action may be taken, however,
35
<PAGE>
which adversely affects any rights under outstanding awards without the
holder's consent. Further, amendments to the 1997 Stock Plan shall be subject
to approval by Mac-Gray's stockholders if and to the extent required by the
Exchange Act, to ensure that awards granted under the 1997 Stock Plan are
exempt under Rule 16b-3 promulgated under the Exchange Act, or required by the
Code to preserve the qualified status of Incentive Options.
Change in Control Provisions. The 1997 Stock Plan provides that in the event
of a sale of all or substantially all of the assets or Mac-Gray Common Stock,
a merger or consolidation which results in a change in control of Mac-Gray or
the liquidation or dissolution of Mac-Gray (a "Change in Control"), all stock
options and SARs shall automatically become fully exercisable. In addition, at
any time prior to or after a Change in Control, the Compensation Committee may
accelerate awards and waive conditions and restrictions on any awards to the
extent it may determine appropriate.
STOCK APPRECIATION RIGHTS
Prior to the IPO, Mac-Gray terminated the Mac-Gray Co., Inc. 1992 Stock
Appreciation Rights Plan (the "1992 SAR Plan"). There are no outstanding stock
appreciation rights under the 1992 SAR Plan.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Mac-Gray is not a party to any employment agreements with any of its
executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All executive officer compensation decisions are made by the Compensation
Committee. The Compensation Committee reviews and makes recommendations
regarding the compensation for management and key employees of Mac-Gray,
including salaries and bonuses. The members of the Compensation Committee are
Messrs. MacDonald, Leydon and Schiller. Mr. MacDonald, the Chairman and Chief
Executive Officer of Mac-Gray, does not participate in the review and
decisions regarding his own compensation. Prior to May 2, 1997, and prior to
the creation of the Compensation Committee, each of Messrs. MacDonald, Olbrych
and Flanagan participated in deliberations of the Mac-Gray Board concerning
executive compensation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1997, Mac-Gray consummated the Sun Services Acquisition whereby it
acquired Sun Services via mergers in which it paid an aggregate consideration
of approximately $2 million and issued 612,026 shares of Mac-Gray Common Stock
to Jeffrey C. Huenink, who is currently a member of the Mac-Gray Board and a
stockholder of Mac-Gray. In connection with the Sun Services Acquisition, Mac-
Gray entered into a non-competition agreement (the "Huenink Non-Competition
Agreement") and a Consulting Agreement (the "Consulting Agreement") with Mr.
Huenink, the former owner of Sun Services. The Huenink Non-Competition
Agreement prohibits Mr. Huenink from conducting business in Mac-Gray's
principal industry for a period of three years from the later of the date of
termination of the Consulting Agreement and the date that Mr. Huenink ceases
to be a director of Mac-Gray. Pursuant to the terms of the Consulting
Agreement, Mr. Huenink is to advise Mac-Gray through April 16, 2002 with
respect to its acquisition strategy and assist Mac-Gray in seeking out
acquisition candidates that complement this strategy. Mac-Gray has provided
Mr. Huenink with incentives to identify acquisition candidates that may be
successfully integrated into Mac-Gray including a combined fixed rate/bonus
compensation package. The fixed rate portion of the compensation package
provides Mr. Huenink with an annual consulting payment of $50,000 during each
of the first and second years of the Consulting Agreement and $100,000 for
each of the third through fifth years. In addition, the bonus portion of the
compensation package is computed based upon a percentage (1% during the first
and second years and .75% during each of the third through fifth years) of
revenues of certain acquired businesses and is guaranteed to be at least
$225,000 during each of the first and second years of the Consulting
Agreement.
In connection with the Sun Services Acquisition, Mac-Gray entered into a
Stockholders' Agreement (the "First Stockholders' Agreement") with Mr. Huenink
and certain principal stockholders of Mac-Gray pursuant
36
<PAGE>
to which (i) Mr. Huenink received demand and "piggy-back" registration rights,
(ii) each such stockholder agreed to vote their respective shares in favor of
Mr. Huenink's election to the Mac-Gray Board, which voting obligation
terminated upon the consummation of the Intirion acquisition, (iii) Mr.
Huenink received the Put Right, and (iv) Mac-Gray received the Call Right,
which Call Right terminated upon the consummation of the IPO. The Put Right
expires on October 22, 2000. See "Mac-Gray's Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources" and Footnote 3 to the table included under "Principal
Stockholders of Mac-Gray."
In connection with the Mac-Gray Combination, Mac-Gray (i) acquired all of
the shares of common stock, $.01 par value per share, of Mac-Gray Co. from
each of Mr. Stewart Gray MacDonald, Jr. ("Mr. S. MacDonald, Jr."), Ms. Sandra
E. MacDonald ("Ms. S. MacDonald"), Mr. Daniel W. MacDonald ("Mr. D.
MacDonald," and collectively, the "MacDonalds") and certain trusts under which
such individuals are beneficiaries in exchange for an aggregate of 5,000,000
shares of Mac-Gray Common Stock and (ii) acquired all of the limited partner
interests in the Limited Partnership from each of the MacDonalds in exchange
for an aggregate of 1,367,800 shares of Mac-Gray Common Stock. Immediately
after the Mac-Gray Combination, Mac-Gray effected the merger of the Limited
Partnership with and into Mac-Gray Co., the Limited Partnership's sole general
partner. Mac-Gray and Mac-Gray Co. have assumed the existing liabilities and
indebtedness of the Limited Partnership. Mr. S. MacDonald, Jr. is Chief
Executive Officer and Chairman of the Mac-Gray Board, and each of Mr. S.
MacDonald, Jr., Ms. S. MacDonald and Mr. D. MacDonald own of record and
beneficially greater than five percent of the outstanding shares of Mac-Gray
Common Stock.
Pursuant to a Stockholders' Agreement by and among Mac-Gray and certain of
its stockholders (the "Second Stockholders' Agreement," and together with the
First Stockholders' Agreement, the "Stockholders' Agreements"), (i) each of
Mr. S. MacDonald, Jr., Ms. S. MacDonald and Mr. D. MacDonald (and any
assignees or trusts created by them or under which they are beneficiaries)
received "piggy-back" and demand registration rights, (ii) each of the
MacDonalds granted to and received rights of first offer to purchase shares of
Mac-Gray Common Stock offered for sale by another stockholder who is a party
thereto and (iii) the MacDonalds granted to Mac-Gray rights of second offer to
purchase such shares. See Footnote 3 to the table included under "Principal
Stockholders of Mac-Gray."
In 1977, Mac-Gray Co. entered into an arrangement with Mac-Gray's co-founder
and then Chief Executive Officer that provided his wife, Ms. Evelyn C.
MacDonald ("Ms. E. MacDonald"), with an annual payment following his death.
Mac-Gray, through its subsidiary, Mac-Gray Services, pays Ms. E. MacDonald,
the mother of Mr. S. MacDonald, Jr., Mac-Gray's Chairman and Chief Executive
Officer, a fixed amount of $104,000 per year pursuant to this arrangement,
which is not evidenced by a comprehensive written agreement, and will continue
to make such payments for the remainder of Ms. E. MacDonald's life. See Note 8
of the Notes to Combined Financial Statements of Mac-Gray Corporation.
Immediately following the consummation of the IPO, Mac-Gray distributed
approximately $9.0 million of the proceeds thereof to its stockholders of
record as of a date immediately prior to the consummation of the IPO. This
distribution represented a significant portion of Mac-Gray's and certain of
its predecessor's historical, undistributed earnings through June 30, 1997,
which were previously taxed for federal and state income tax purposes directly
to the stockholders of Mac-Gray.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Mac-Gray Common Stock as of August 19, 1998 by (i)
each person known by Mac-Gray to own beneficially five percent or more of the
outstanding shares of the Mac-Gray Common Stock, (ii) each director of Mac-
Gray, the Chief Executive Officer and each of the Named Executive Officers,
and (iii) all directors and executive officers of Mac-Gray as a group. Except
as otherwise indicated, Mac-Gray believes that the beneficial owners of Mac-
Gray Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER(1) OWNED (2)(3) BENEFICIALLY OWNED
--------------------------- ------------ --------------------
<S> <C> <C>
Evelyn C. MacDonald(3)(4).................... 1,700,000 12.7%
Stewart Gray MacDonald, Jr.(3)(4)(5)......... 1,947,314 14.5%
Sandra E. MacDonald(3)(4)(6)................. 3,209,250 23.9%
Daniel W. MacDonald(3)(4)(7)................. 2,122,600 15.8%
Patrick A. Flanagan(3)(4)(8)................. 1,717,857 12.8%
Peter C. Bennett(3)(4)(9).................... 1,700,000 12.7%
R. Robert Woodburn, Jr.(3)(4)(10)............ 1,700,000 12.7%
Cynthia V. Doggett(3)(11).................... 1,435,100 10.7%
Richard G. MacDonald(3)(12).................. 459,750 3.4%
Gilbert M. Roddy, Jr.(3)(13)................. 580,000 4.3%
Jeffrey C. Huenink(14)....................... 614,026 4.6%
Jerry A. Schiller(15)........................ 2,000 *
John P. Leydon(14)........................... 3,000 *
Eugene B. Doggett(14)........................ 4,000 *
Neil F. MacLellan, III(16)................... 20,496 *
John S. Olbrych(16).......................... 17,996 *
All executive officers and directors as a
group (8 persons)........................... 3,760,022 27.8%
</TABLE>
- --------
* less than 1%
(1) Unless otherwise indicated, the mailing address for each stockholder and
director is c/o Mac-Gray Corporation, 22 Water Street, Cambridge, MA
02141.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares of Mac-Gray Common Stock
beneficially owned by a person, shares of Mac-Gray Common Stock subject
to options and warrants held by that person that are currently
exercisable or exercisable within 60 days of the date of this Prospectus
are deemed outstanding. As of August 19, 1998, a total of 13,425,758
shares of Mac-Gray Common Stock were issued and outstanding.
(3) Mac-Gray and certain stockholders of Mac-Gray, including The Evelyn C.
MacDonald Family Trust for the benefit of Stewart G. MacDonald, Jr., The
Evelyn C. MacDonald Family Trust for the benefit of Sandra E. MacDonald,
The Evelyn C. MacDonald Family Trust for the benefit of Daniel W.
MacDonald (each of these sub-trusts under The Evelyn C. MacDonald Family
Trusts is referred to herein as a "Sub-Trust" and collectively as "Sub-
Trusts"), Mr. S. MacDonald, Jr., Ms. S. MacDonald, Mr. D. MacDonald, The
Stewart G. MacDonald, Jr. 1984 Trust (the "SGM Trust"), The Daniel W.
MacDonald Trust 1988 (the "DWM Trust"), the New Century Trust, The
Whitney E. MacDonald GST Trust-1997, The Jonathan S. MacDonald GST Trust-
1997, The Robert C. MacDonald GST Trust-1997, The Whitney E. MacDonald
Gift Trust, The Jonathan S. MacDonald Gift Trust, The Robert C. MacDonald
Gift Trust and Jeffrey C. Huenink are parties to the First Stockholders'
Agreement. The First Stockholders' Agreement provides, among other
things, that the parties thereto must vote their respective shares,
subject to certain conditions contained therein, in favor of Mr.
Huenink's election as a director of Mac-Gray. See "Management of Mac-Gray
Certain Relationships and Related Transactions." In addition, the First
Stockholders' Agreement provides Mr. Huenink with certain rights to put
his shares of Mac-Gray Common Stock to
38
<PAGE>
Mac-Gray. As a result of the First Stockholders' Agreement, each
stockholder may be deemed to beneficially own all of the issued and
outstanding shares of Mac-Gray Common Stock owned by the other parties
thereto, although such beneficial ownership is not reflected in the table
of shares beneficially owned. Mac-Gray and each of the Sub Trusts, Mr. S.
MacDonald, Jr., Ms. S. MacDonald, Mr. D. MacDonald, the SGM Trust, the DWM
Trust, the New Century Trust, The Whitney E. MacDonald GST Trust-1997, The
Jonathan S. MacDonald GST Trust-1997, The Robert C. MacDonald GST Trust-
1997, The Whitney E. MacDonald Gift Trust, The Jonathan S. MacDonald Gift
Trust, The Robert C. MacDonald Gift Trust, and Cynthia V. Doggett are
parties to the Second Stockholders' Agreement. The Second Stockholders'
Agreement gives the parties thereto rights of first offer to purchase
shares offered for sale by another stockholder who is a party thereto, as
well as providing Mac-Gray with rights of second offer to purchase such
shares. As a result of the Second Stockholders' Agreement, each of the
parties thereto may be deemed to beneficially own all of the issued and
outstanding shares of Mac-Gray Common Stock owned by the other parties
thereto, although such beneficial ownership is not reflected in the table
of shares beneficially owned.
(4) Includes 1,700,000 shares of Mac-Gray Common Stock held in trust pursuant
to The Evelyn C. MacDonald Family Trusts (the "ECM Trust"), the grantor
of which is Ms. E. MacDonald. The independent trustees (the "Independent
Trustees") of the ECM Trust are Peter C. Bennett ("Mr. Bennett"), R.
Robert Woodburn, Jr. ("Mr. Woodburn") and Patrick A. Flanagan ("Mr.
Flanagan"). In addition, each of Mr. S. MacDonald, Jr., Ms. S. MacDonald
and Mr. D. MacDonald are trustees of the individual Sub-Trust under the
ECM Trust of which such individual is a beneficiary. 566,667 shares of
Mac-Gray Common Stock held by the ECM Trust are held in a Sub-Trust for
the benefit of Mr. S. MacDonald, Jr., 566,667 shares of Mac-Gray Common
Stock held by the ECM Trust are held in a Sub-Trust for the benefit of
Ms. S. MacDonald, and 566,667 shares of Mac-Gray Common Stock held by the
ECM Trust are held in a Sub-Trust for the benefit of Mr. D. MacDonald.
The Independent Trustees have voting power over the shares held by the
ECM Trust and the Sub-Trusts, and may be deemed to have beneficial
ownership of such shares of Mac-Gray Common Stock. Under the ECM Trust,
Ms. E. MacDonald has the right to replace the property held by the ECM
Trust, including the shares of Mac-Gray Common Stock, at any time by
contributing property of equivalent value to the ECM Trust. As a result,
Ms. E. MacDonald may be deemed to have beneficial ownership of the shares
of Mac-Gray Common Stock held by the ECM Trust. The four trustees of each
Sub-Trust (including each of Mr. S. MacDonald, Jr., Ms. S. MacDonald and
Mr. D. MacDonald as to their own respective Sub-Trust) generally have the
shared power to dispose of the shares of Mac-Gray Common Stock attributed
to such Sub-Trust and, therefore, may be deemed to have beneficial
ownership of the shares of Mac-Gray Common Stock held by such Sub-Trust.
(5) Includes (i) 655,000 shares of Mac-Gray Common Stock held by the SGM
Trust, of which Mr. S. MacDonald, Jr. serves as co-trustee and is sole
beneficiary, (ii) 580,000 shares of Mac-Gray Common Stock held by the New
Century Trust, of which Mr. S. MacDonald, Jr. is the grantor, and (iii)
566,667 shares of Mac-Gray Common Stock held by the ECM Trust for the
benefit of Mr. S. MacDonald, Jr., of which Mr. S. MacDonald, Jr. serves
as co-trustee and is the beneficiary. Mr. S. MacDonald, Jr., may replace
the shares of Mac-Gray Common Stock held by the New Century Trust at any
time with property of equivalent value and therefore may be deemed to
beneficially own all such shares of Mac-Gray Common Stock. Mr. S.
MacDonald, Jr. disclaims beneficial ownership of such shares of Mac-Gray
Common Stock. Mr. S. MacDonald, Jr. holds options to purchase up to
163,570 shares of Mac-Gray Common Stock, 32,714 of which are exercisable
and included in shares beneficially owned.
(6) Includes (i) 148,800 shares of Mac-Gray Common Stock held by The Whitney
E. MacDonald GST Trust-1997, (ii) 148,800 shares of Mac-Gray Common Stock
held by The Jonathan S. MacDonald GST Trust-1997, (iii) 148,800 shares of
Mac-Gray Common Stock held by The Robert C. MacDonald GST Trust-1997,
(iv) 566,667 shares held by the ECM Trust for the benefit of Ms. S.
MacDonald, of which Ms. S. MacDonald serves as co-trustee and is the
beneficiary, and (v) 1,100,000 shares of Mac-Gray Common Stock held by
the DWM Trust, of which Ms. S. MacDonald serves as co-trustee. Richard G.
MacDonald ("Mr. R. MacDonald") is the sole trustee of each of the
aforementioned trusts (other than the ECM Trust and DWM Trust) and may be
deemed to beneficially own all of such shares of Mac-Gray Common Stock.
The shares held by each of The Whitney E. MacDonald GST Trust-1997, The
Jonathan S. MacDonald GST Trust-1997 and The Robert C. MacDonald GST
Trust-1997 (collectively, the "GST Trusts") may be replaced at any
39
<PAGE>
time by Ms. S. MacDonald, the grantor of such trusts, with property of
equivalent value and, therefore, Ms. S. MacDonald may be deemed to
beneficially own all such shares of Mac-Gray Common Stock. Ms. S.
MacDonald disclaims beneficial ownership of the shares of Mac-Gray Common
Stock held by the GST Trusts and the 1,100,000 shares of Mac-Gray Common
Stock held by the DWM Trust.
(7) Includes (i) 1,100,000 shares of Mac-Gray Common Stock held by the DWM
Trust, of which Mr. D. MacDonald is co-trustee and sole beneficiary, and
(ii) 566,667 shares of Mac-Gray Common Stock held by the ECM Trust for
the benefit of Daniel W. MacDonald, of which Mr. D. MacDonald serves as
co-trustee and is the beneficiary.
(8) Includes 1,700,000 shares of Mac-Gray Common Stock in the aggregate held
by the ECM Trust for which Mr. Flanagan serves as co-trustee and shares
voting and dispositive power over the shares of Mac-Gray Common Stock.
Mr. Flanagan disclaims beneficial ownership of the shares of Mac-Gray
Common Stock held by the ECM Trust. Mr. Flanagan holds options to
purchase up to 81,785 shares of Mac-Gray Common Stock, 16,357 of which
are exercisable and included in shares of Mac-Gray Common Stock
beneficially owned.
(9) Includes 1,700,000 shares of Mac-Gray Common Stock held by the ECM Trust
for which Mr. P. Bennett serves as co-trustee and shares voting and
dispositive power over the shares of Mac-Gray Common Stock. Mr. P.
Bennett disclaims beneficial ownership of the shares of Mac-Gray Common
Stock held by the ECM Trust. Mr. P. Bennett's mailing address is c/o
State Street Research & Management Company, One Financial Center, 31st
Floor, Boston, MA 02110.
(10) Includes 1,700,000 shares of Mac-Gray Common Stock held by the ECM Trust
for which Mr. Woodburn serves as co-trustee and shares voting and
dispositive power over the shares of Mac-Gray Common Stock. Mr. Woodburn
disclaims beneficial ownership of the shares of Mac-Gray Common Stock
held by the ECM Trust. Mr. Woodburn's mailing address is c/o Palmer &
Dodge, One Beacon Street, Boston, Massachusetts 02108.
(11) Includes (i) 655,100 shares of Mac-Gray Common Stock held by the SGM
Trust, of which Ms. Doggett serves as co-trustee, and (ii) 580,000 shares
of Mac-Gray Common Stock held by the New Century Trust, of which Ms.
Doggett serves as co-trustee. The shares of Mac-Gray Common Stock held in
the New Century Trust may be replaced at any time by the grantor, Mr. S.
MacDonald, Jr., with property of equivalent value. The SGM Trust is
revocable by the grantor, Mr. S. MacDonald, Jr. Ms. Doggett disclaims
beneficial ownership of all of shares of Mac-Gray Common Stock held by
such trusts.
(12) Includes (i) 148,800 shares of Mac-Gray Common Stock held by The Whitney
E. MacDonald GST Trust-1997, (ii) 148,800 shares of Mac-Gray Common Stock
held by The Jonathan S. MacDonald GST Trust-1997, (iii) 148,800 of Mac-
Gray Common Stock shares held by The Robert C. MacDonald GST Trust-1997,
(iv) 4,450 shares of Mac-Gray Common Stock held by The Whitney E.
MacDonald Gift Trust, (v) 4,450 shares of Mac-Gray Common Stock held by
The Jonathan S. MacDonald Gift Trust, and (vi) 4,450 shares of Mac-Gray
Common Stock held by The Robert C. MacDonald Gift Trust (together with
The Whitney E. MacDonald Gift Trust and The Jonathan S. MacDonald Gift
Trust, collectively, the "Gift Trusts"). Mr. R. MacDonald is the sole
trustee of each of the aforementioned trusts and may be deemed to
beneficially own all such shares of Mac-Gray Common Stock. The 459,750
shares of Mac-Gray Common Stock held by the GST Trusts and the Gift
Trusts may be replaced at any time by Ms. S. MacDonald, the grantor, with
property of equivalent value, all 459,750 shares of Mac-Gray Common Stock
of which Mr. R. MacDonald disclaims beneficial ownership.
(13) Includes 580,000 shares of Mac-Gray Common Stock held by the New Century
Trust, of which Mr. Roddy serves as co-trustee. The shares of Mac-Gray
Common Stock held by the New Century Trust may be replaced at any time by
Mr. S. MacDonald, Jr., the grantor, with property of equivalent value, of
which all 580,000 shares of Mac-Gray Common Stock Mr. Roddy disclaims
beneficial ownership. Mr. Roddy's mailing address is c/o Loring, Wolcott
& Coolidge, 230 Congress Street, Boston, Massachusetts 02110.
(14) Each of Messrs. Doggett, Huenink and Leydon holds options to purchase up
to 2,000 shares of Mac-Gray Common Stock, all of which are exercisable
and included in shares of Mac-Gray Common Stock beneficially owned.
(15) Mr. Schiller holds options to purchase up to 1,000 shares of Mac-Gray
Common Stock, all of which are exercisable and included in shares of Mac-
Gray Common Stock beneficially owned.
(16) Each of Messrs. MacLellan and Olbrych holds options to purchase up to
89,980 shares of Mac-Gray Common Stock, 17,996 of which are exercisable
and included in shares of Mac-Gray Common Stock beneficially owned.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined statement of income for the year
ended December 31, 1997 has been adjusted to reflect the acquisitions of Sun
Services and Amerivend as if such acquisitions occurred on January 1, 1997.
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 Mac-Gray.
MAC-GRAY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
COMPANY PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, SUN SERVICES AMERIVEND PRO FORMA ACQUISITION DECEMBER 31,
1997 ACQUISITION (1) ACQUISITION COMBINED ADJUSTMENTS 1997
------------ --------------- ----------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $104,847 $2,032 $17,627 $124,506 $ $124,506
Cost of revenue......... 75,912 1,353 12,610 89,875 64 (2) 89,939
Operating expenses...... 17,857 360 2,881 21,098 (69)(3) 21,029
-------- ------ ------- -------- -------- --------
Income from operations.. 11,078 319 2,136 13,533 5 13,538
Interest expense...... (2,975) (89) (676) (3,740) (1,724)(4) (5,464)
Other income
(expense), net....... 181 -- (265) (84) (84)
-------- ------ ------- -------- -------- --------
Income before provision
for income taxes....... 8,284 230 1,195 9,709 (1,719) 7,990
Provision for income
taxes(5)............... (5,228) -- -- (5,228) (5,228)
-------- ------ ------- -------- -------- --------
Net income.............. $ 3,056 $ 230 $ 1,195 $ 4,481 $ (1,719) $ 2,762
-------- ------ ------- -------- -------- --------
Accretion and dividends
on redeemable preferred
stock.................. 320 -- -- 320 320
-------- ------ ------- -------- -------- --------
Income available to
common stockholders.... $ 2,736 $ 230 $ 1,195 $ 4,161 $ (1,719) $ 2,442
======== ====== ======= ======== ======== ========
Net income per common
share.................. $ 0.29
========
Weighted average common
shares outstanding..... 8,449
========
Net income per common
share--assuming
dilution............... $ 0.28
========
Weighted average common
shares outstanding--
assuming dilution...... 8,709
========
Pro forma tax adjusted
net income(6).......... $ 5,105 $ 138 $ 717 $ 5,960 $ (1,031) $ 4,929
======== ====== ======= ======== ======== ========
Pro forma tax adjusted
net income available to
common
stockholders(6)........ $ 4,785 $ 138 $ 717 $ 5,640 $ (1,031) $ 4,609
======== ====== ======= ======== ======== ========
Pro forma tax adjusted
net income per common
share(6)............... $ 0.55
========
Pro forma tax adjusted
net income per common
share--assuming
dilution(6)............ $ 0.53
========
</TABLE>
- --------
(1) For the year ended December 31, 1997, the historical results of Sun
Services for the period from April 1, 1997 to April 16, 1997 have not been
included and are not material to Mac-Gray.
(2) Reflects increased amortization of $1,441, due to Mac-Gray's application
of purchase accounting in the Sun Services and Amerivend acquisitions, in
which the excess of the purchase price over the fair value of the net
assets acquired was allocated to goodwill and is being amortized over
twenty years, offset by a reduction in depreciation of $1,377 resulting
from a write-down of fixed assets.
(3) Reflects the decrease in general and administration expenses due to the
reduction of Sun Services executive compensation costs as a result of
certain agreements entered into in connection with the Sun Services
Acquisition.
(4) Reflects additional interest expense associated with borrowings incurred
to finance the Amerivend acquisition.
(5) 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.
(6) Pro forma tax adjusted net income has been adjusted to give effect to Mac-
Gray's and Amerivend's operations as if they were subject to federal and
state income taxes on a corporate level (at an estimated income tax rate
of 40%) during the periods presented.
41
<PAGE>
The following unaudited pro forma combined statement of income for the six
months ended June 30, 1998 has been adjusted to reflect the Amerivend
acquisition as if it occurred on January 1, 1997. For the six months ended
June 30,1998, the historical results of Amerivend for the period from April 1,
1998 to April 24, 1998 have not been included and are not material to Mac-
Gray.
MAC-GRAY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
COMPANY PRO FORMA
SIX MONTHS SIX MONTHS
ENDED AMERIVEND PRO FORMA ACQUISITION AND OTHER ENDED
JUNE 30, 1998 ACQUISITION (1) COMBINED ADJUSTMENTS JUNE 30, 1998
------------- --------------- --------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue................. $60,857 $4,886 $65,743 $ $65,743
Cost of revenue......... 44,886 3,842 48,728 (29) (2) 48,699
Operating expenses...... 9,785 361 10,146 10,146
------- ------ ------- ----- -------
Income from operations.. 6,186 683 6,869 29 6,898
Interest expense...... (1,263) (126) (1,389) (434) (4) (1,823)
Other income
(expense). net....... (1) (29) (30) (30)
------- ------ ------- ----- -------
Income before provision
for income taxes....... 4,922 528 5,450 (405) 5,045
Provision for income
taxes(3)............... (1,895) -- (1,895) (1,895)
------- ------ ------- ----- -------
Net income.............. $ 3,027 $ 528 $ 3,555 $(405) $ 3,150
Accretion and dividends
on redeemable preferred
stock.................. 62 62 62
------- ------ ------- ----- -------
Income available to
common stockholders.... $ 2,965 $ 528 $ 3,493 $(405) $ 3,088
======= ====== ======= ===== =======
Net income per common
share.................. $ 0.25
=======
Weighted average common
shares outstanding..... 12,390
=======
Net income per common
share--assuming
dilution............... $ 0.24
=======
Weighted average common
shares outstanding--
assuming dilution...... 12,838
=======
</TABLE>
- --------
(1) For the six months ended June 30, 1998, the historical results of
Amerivend for the period from April 1, 1998 to April 24, 1998 have not
been included and are not material to Mac-Gray.
(2) Reflects increased amortization of $324 due to Mac-Gray's application of
purchase accounting in the Amerivend acquisition, in which the excess of
the purchase price over the fair value of the net assets acquired was
allocated to goodwill and is being amortized over twenty years, offset by
a reduction in depreciation of $353 resulting from a write-down of fixed
assets.
(3) No provision for income taxes was provided on Amerivend's net income as a
result of its S corporation status. Pro forma tax adjusted data has not
been provided as the amount of taxes on Amerivend's income offset by the
tax effect on acquisition adjustments is
not material.
(4) Reflects additional interest expense associated with borrowings incurred
to finance the Amerivend acquisition.
42
<PAGE>
MARKET PRICES AND DIVIDEND DATA
Mac-Gray first issued Mac-Gray Common Stock to the public in October 1997.
The following table sets forth the high and low sales prices on the NYSE.
<TABLE>
<CAPTION>
SALE PRICES
----------------
HIGH LOW
------ -----
<S> <C> <C>
Fourth Quarter (from October 17, 1997)................ $15 7/8 $13 11/16
First Quarter ........................................ $20 1/2 $15 3/8
Second Quarter ....................................... $ 17 3/4 $12 3/8
Third Quarter (through August 19, 1998)............... $ 14 15/16 $ 12 3/4
</TABLE>
On August 19, 1998, the closing sales price of Mac-Gray Common Stock, as
reported on the NYSE, was $14 per share. As of August 19, 1998, there were
13,425,758 shares of Mac-Gray Common Stock outstanding held by 112 holders of
record.
Mac-Gray does not currently pay dividends on Mac-Gray Common Stock. 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 Mac-Gray Board out of the funds legally available
therefor. In addition, the payment of dividends is restricted under the Credit
Facility.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of Mac-Gray consists of 30,000,000 shares of
Mac-Gray Common Stock, $.01 par value per share, and 5,000,000 shares of
undesignated preferred stock issuable in series by the Mac-Gray Board
("Preferred Stock"). As of August 19, 1998, there were 13,425,758 shares of
Mac-Gray Common Stock (including 612,026 shares of Mac-Gray Common Stock
subject to the Put Right) outstanding that were held of record by 112
stockholders. The following summary description of the capital stock of Mac-
Gray does not purport to be complete and is qualified in its entirety by
reference to the Mac-Gray Charter and the Mac-Gray By-laws. The Mac-Gray
Charter and the Mac-Gray By-laws have been adopted by the stockholders of Mac-
Gray and the Mac-Gray Board.
Mac-Gray Common Stock. The holders of Mac-Gray Common Stock are entitled to
one vote per share on all matters to be voted on by stockholders and are
entitled to receive such dividends, if any, as may be declared from time to
time by the Mac-Gray Board from funds legally available therefor. The possible
issuance of Preferred Stock with a preference over Mac-Gray Common Stock as to
dividends could impact the dividend rights of holders of Mac-Gray Common
Stock. Holders of Mac-Gray Common Stock are not entitled to cumulative voting
rights. Therefore, the holders of a majority of the shares voted in the
election of directors can elect all of the directors then standing for
election, subject to the rights of the holders of any then outstanding
Preferred Stock, if and when issued. The holders of Mac-Gray Common Stock have
no preemptive or other subscription rights, and there are no conversion rights
or redemption or sinking fund provisions with respect to the Mac-Gray Common
Stock. Upon the voluntary or involuntary liquidation, dissolution or winding
up of Mac-Gray, the net assets of Mac-Gray shall be distributed pro rata to
the holders of the Mac-Gray Common Stock in accordance with their respective
rights and interests, subject to the rights and interests of the holders of
Preferred Stock, if and when issued. All outstanding shares of Mac-Gray Common
Stock are fully paid and non-assessable.
43
<PAGE>
The Mac-Gray Charter and the Mac-Gray By-laws provide, subject to the rights
of the holders of any Preferred Stock then outstanding, that the number of
directors shall be fixed by the Mac-Gray Board. The directors, other than
those who may be elected by the holders of any Preferred Stock, are divided
into three classes, as nearly equal in number as possible, with each class
serving for a three-year term. Subject to any rights of the holders of
Preferred Stock to elect directors and to remove any director whom the holders
of any such stock had the right to elect, any director of Mac-Gray may be
removed from office only with cause and by the affirmative vote of at least
two-thirds of the total votes which would be eligible to be cast by
stockholders in the election of such director.
Undesignated Preferred Stock. The Mac-Gray Board is authorized, without
further action of the stockholders of Mac-Gray, to issue up to 5,000,000
shares of Preferred Stock in classes or series and to fix the designations,
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereon as set forth in the Mac-Gray Charter. Any such Preferred
Stock issued by Mac-Gray may rank prior to the Mac-Gray Common Stock as to
dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Mac-Gray Common Stock.
The purpose of authorizing the Mac-Gray Board to issue Preferred Stock is,
in part, to eliminate delays associated with a stockholder vote on specific
issuances. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring or seeking to acquire, a significant portion of the outstanding
Mac-Gray Common Stock.
CERTAIN PROVISIONS OF CHARTER AND BY-LAWS
General. A number of provisions of the Mac-Gray Charter and the Mac-Gray By-
laws concern matters of corporate governance and the rights of stockholders.
Certain of these provisions, as well as the ability of the Mac-Gray Board to
issue shares of Preferred Stock and to set the voting rights, preferences and
other terms thereof, may be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Mac-Gray Board,
including takeovers which certain stockholders may deem to be in their best
interests. To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of Mac-Gray Common Stock, which may result
from actual or rumored takeover attempts, may be inhibited. These provisions,
together with the classified Mac-Gray Board and the ability of the Mac-Gray
Board to issue Preferred Stock without further stockholder action, also could
delay or frustrate the removal of incumbent directors or the assumption of
control by stockholders, even if such removal or assumption would be
beneficial to stockholders of Mac-Gray. These provisions also could discourage
or make more difficult a merger, tender offer or proxy contest, even if a
transaction or contest could be favorable to the interests of stockholders,
and could potentially depress the market price of the Mac-Gray Common Stock.
The Mac-Gray Board believes that these provisions are appropriate to protect
the interests of Mac-Gray and all of its stockholders. The Mac-Gray Board has
no present plans to adopt any other measures or devices which may be deemed to
have an "anti-takeover effect."
Meetings of Stockholders. The Mac-Gray By-laws provide that a special
meeting of stockholders may be called only by the Mac-Gray Board unless
otherwise required by law. The Mac-Gray By-laws provide that only those
matters set forth in the notice of the special meeting may be considered or
acted upon at that special meeting, unless otherwise provided by law. In
addition, the Mac-Gray By-laws set forth certain other requirements, such as
advance notice and informational requirements and time limitations on any
director nomination or any new business which a stockholder wishes to propose
for consideration at an annual meeting of stockholders.
No Stockholder Action by Written Consent. The Mac-Gray Charter provides
that, for so long as Mac-Gray has a class of stock registered pursuant to the
provisions of the Exchange Act, any action required or permitted to be taken
by the stockholders of Mac-Gray at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders in lieu thereof.
44
<PAGE>
Indemnification and Limitation of Liability. The Mac-Gray By-laws provide
that directors and officers of Mac-Gray shall be, and in the discretion of the
Mac-Gray Board non-officer employees may be, indemnified by Mac-Gray to the
fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of Mac-Gray, and further permits the
advancing of expenses incurred in defense of claims. The Mac-Gray By-laws also
provide that the right of directors and officers to indemnification shall be a
contractual right and shall not be exclusive of any other right now possessed
or hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Mac-Gray Charter contains a provision permitted by Delaware law
that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director
has breached his or her duty of loyalty, failed to act in good faith, engaged
in intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the DGCL or obtained an improper
personal benefit. This provision does not alter a director's liability under
the federal securities laws. In addition, this provision does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty.
Amendment of the Mac-Gray Charter. The Mac-Gray Charter provides that an
amendment thereof must first be approved by a majority of the Mac-Gray Board
and (with certain exceptions) thereafter approved by the holders of a majority
of the outstanding shares entitled to vote on such amendment, and the
affirmative vote of a majority of the outstanding shares of each class
entitled to vote thereon as a class; provided, however, that the affirmative
vote of not less than 80% of the outstanding shares entitled to vote on such
amendment, and the affirmative vote of not less than 80% of the outstanding
shares of each class entitled to vote thereon as a class, is required to amend
provisions of the Mac-Gray Charter relating to the prohibition of stockholder
action by written consent, the establishment, composition and powers of the
Mac-Gray Board, the limitation of director liability and amendments to the
Mac-Gray Charter.
Amendment of the Mac-Gray By-laws. The Mac-Gray Charter provides that the
Mac-Gray By-laws may be amended or repealed by the Mac-Gray Board or by the
stockholders. Such action by the Mac-Gray Board requires the affirmative vote
of a majority of the directors then in office. Such action by the stockholders
requires the affirmative vote of the holders of at least three-fourths of the
total votes present and eligible to be cast by holders of voting stock voting
as a single class with respect to such amendment or repeal at an annual
meeting of stockholders or a special meeting called for such purpose, unless
the Mac-Gray Board recommends that the stockholders approve such amendment or
repeal at such meeting, in which case such amendment or repeal shall only
require the affirmative vote of a majority of the total votes present and
eligible to be cast by holders of voting stock voting as a single class with
respect to such amendment or repeal.
Ability to Adopt Stockholder Rights Plan. The Mac-Gray Board may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares, to implement a stockholder rights plan which creates voting or other
impediments or under which shares are distributed to a third-party investor, a
group of investors or stockholders or issued to an employee stock ownership
plan to discourage persons seeking to gain control of Mac-Gray by means of a
merger, tender offer, proxy contest or otherwise, if such change in control is
not in the best interests of Mac-Gray and its stockholders. The Mac-Gray Board
has no present intention of adopting a stockholder rights plan and is not
aware of any attempt to obtain control of Mac-Gray.
STATUTORY BUSINESS COMBINATION PROVISION
Mac-Gray is subject to the provisions of Section 203 of the DGCL. Section
203 provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person, or an
affiliate or associate of such person, who is an "interested stockholder" for
a period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the board
of directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding shares owned by persons who are both
officers and directors of the corporation,
45
<PAGE>
and shares held by certain employee stock ownership plans); or (iii) on or
after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least two-thirds of the corporation's outstanding voting stock
at an annual or special meeting, excluding shares owned by the interested
stockholder. Under Section 203, an "interested stockholder" is defined (with
certain limited exceptions) as any person that is (x) the owner of 15% or more
of the outstanding voting stock of the corporation or (y) an affiliate or
associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage; provided, however, that
such by-law or charter amendment shall not become effective until 12 months
after the date the stockholders adopt such exclusion. Neither the Mac-Gray
Charter nor the Mac-Gray By-laws contains any such exclusion.
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company is the transfer agent and registrar for
Mac-Gray Common Stock.
THE SELLING SECURITYHOLDERS AND THE OFFERED SHARES
BACKGROUND
The Shares were acquired by the Selling Securityholders pursuant to the
Stock Purchase Agreement on April 23, 1998 upon consummation of the Company's
acquisition of Copico.
REGISTRATION RIGHTS AGREEMENT
In connection with the acquisition of Copico, Mac-Gray and the Selling
Securityholders entered into a registration rights agreement (the
"Registration Rights Agreement"). The material provisions of the Registration
Rights Agreement are set forth below. A copy of the form of the Registration
Rights Agreement which was entered into in connection with the consummation of
the acquisition of Copico has been filed as an exhibit to the Registration
Statement and can be obtained in the manner described under "Available
Information."
Resale Registration. To facilitate the resale by the Selling Securityholders
of the Shares, Mac-Gray has agreed to use commercially reasonable efforts to
keep the Registration Statement continuously effective for a period ending
with the earlier of (a) the sale of all the Shares and (b) April 23, 1999.
Certain Other Provisions. All expenses incident to Mac-Gray's performance of
its registration obligations under the Registration Rights Agreement will be
paid by Mac-Gray. The Selling Securityholders will be responsible for
underwriting commissions or discounts, transfer taxes, if any, attributable to
the sale of the Shares, any fees or expenses of any counsel, accountants or
other persons retained or employed by the Selling Securityholders and out-of-
pocket expenses of the Selling Securityholders and their agents, including,
without limitation, any travel costs.
46
<PAGE>
The Registration Rights Agreement contains customary indemnification
provisions whereby Mac-Gray is obligated to indemnify and hold harmless the
Selling Securityholders and certain related parties, and the Selling
Securityholders are obligated under certain circumstances to indemnify and
hold harmless Mac-Gray and certain related parties, in each case in connection
with liabilities relating to the registration of the Shares.
<TABLE>
<CAPTION>
MAC-GRAY MAC-GRAY MAC-GRAY
COMMON STOCK COMMON STOCK COMMON STOCK
NAME OF OWNED PRIOR TO REGISTERED FOR OWNED AFTER
SECURITYHOLDER RESALE(1) RESALE RESALE(2)
- -------------- -------------- -------------- ------------
<S> <C> <C> <C>
Peter B. Finn...................... 2,500 2,500 --
Edward J. Goulart.................. 67,900 67,900 --
Ronald R. Jalbert.................. 58,200 58,200 --
Robert W. LaRoche.................. 67,900 67,900 --
David Luongo....................... 2,500 2,500 --
Joseph J. Tischler................. 2,500 2,500 --
Massachusetts Capital Resource Com-
pany.............................. 48,500 48,500 --
</TABLE>
- --------
(1) Assumes that the Selling Securityholders sell all the Shares and do not
acquire additional shares of Mac-Gray Common Stock.
PLAN OF DISTRIBUTION
The Selling Securityholders may sell the shares (i) directly to purchasers
as principals or through one or more underwriters, brokers, dealers or agents
from time to time in one or more transactions (which may involve crosses or
block transactions), (ii) on any exchange or in the over-the-counter market,
(iii) in transactions otherwise than in the over-the-counter market or on an
exchange or (iv) through the writing of options (whether such options are
listed on an options exchange or otherwise) on, or settlement of short sales
of, the Shares. Any such transactions may be effected at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated or
fixed prices, in each case as determined by the Selling Securityholders or by
agreement between the Selling Securityholders and underwriters, brokers,
dealers or agents or purchasers. If the Selling Securityholders effect such
transactions by selling the Shares to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders or commissions from purchasers of the Shares for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved). The Selling Securityholders
and any brokers, dealers or agents that participate in the distribution of the
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act, and any profit on the sale of the Shares by them and any discounts,
concessions or commissions received by any such underwriters, brokers, dealers
or agents may be deemed to be underwriting discounts and commissions under the
Securities Act.
In the event of a "distribution" of the Shares, the Selling Securityholders,
any selling broker-dealer or agent and any "affiliated purchasers" may be
subject to Regulation M under the Exchange Act, which would prohibit, with
certain exceptions, each such person from bidding for, purchasing or
attempting to induce any person to bid for or purchase any security which is
the subject of such distribution until his participation in that distribution
is completed. In addition, Regulation M under the Exchange Act prohibits
certain "stabilizing bids" or "stabilizing purchases" for the purpose of
pegging, fixing or maintaining the price of Mac-Gray Common Stock in
connection with any offer of the Shares by the Selling Securityholders.
To the extent not described herein and as otherwise required by law, the
specific amount of the Shares being offered or sold, the names of the Selling
Securityholders, the respective purchase prices and public offering prices,
the names of any agent, dealer or underwriter, and any applicable commissions
or discounts with respect to a particular offer or sale will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part.
47
<PAGE>
Mac-Gray will not receive any of the proceeds of the sale of the Shares by
any Selling Securityholder.
Under the securities laws of certain states, the Shares may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
certain states the Shares may not be sold unless the Shares have been
registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
LEGAL MATTERS
The validity of the shares of Mac-Gray Common Stock offered hereby will be
passed upon by Goodwin, Procter & Hoar LLP.
EXPERTS
The consolidated financial statements of Mac-Gray Corporation as of December
31, 1997 and 1996 and for each of the three years ended December 31, 1997 and
the combined financial statements of Sun Services of America, Inc. and R.
Bodden Coin-Op-Laundry, Inc. as of and for the year ended December 31, 1996
included in this Prospectus have been so included in reliance of the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Amerivend Corporation as of December 31, 1997
included in this Prospectus have been so included in reliance of the report of
Morrison, Brown, Argiz & Company, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
48
<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, 1997 and June 30,
1998 (unaudited)....................................................... F-3
Consolidated Statement of Income for the Years Ended December 31, 1995,
1996, 1997 and for the Six Months Ended June 30, 1997 and 1998 (unau-
dited)................................................................. F-4
Consolidated Statement of Stockholders' Equity for the Years Ended De-
cember 31, 1995, 1996, 1997 and for the Six Months Ended June 30, 1998
(unaudited)............................................................ F-5
Consolidated Statement of Cash Flows for the Years Ended December 31,
1995, 1996, 1997 and for the Six Months Ended June 30, 1997 and 1998
(unaudited)............................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
SUN SERVICES OF AMERICA, INC. AND R. BODDEN COIN-OP-LAUNDRY, INC.
Report of Independent Accountants....................................... F-23
Combined Balance Sheet as of December 31, 1996 and March 31, 1997 (unau-
dited)................................................................. F-24
Combined Statement of Income for the Year Ended December 31, 1996 and
for the Three Months Ended March 31, 1996 and 1997 (unaudited)......... F-25
Combined Statement of Stockholder's Equity for the Year Ended December
31, 1996 and the Three Months Ended March 31, 1997 (unaudited)......... F-26
Combined Statement of Cash Flows for the Year Ended December 31, 1996
and for the Three Months Ended March 31, 1996 and 1997 (unaudited)..... F-27
Notes to Combined Financial Statements.................................. F-28
AMERIVEND CORPORATION
Independent Auditor's Report............................................ F-33
Balance Sheet as of December 31, 1997................................... F-34
Statement of Income for the Year Ended December 31, 1997................ F-35
Statement of Stockholder's Equity for the Year Ended December 31, 1997.. F-36
Statement of Cash Flows for the Year Ended December 31, 1997............ F-37
Notes to Financial Statements........................................... F-38
Condensed Balance Sheet as of March 31, 1998 (unaudited)................ F-44
Condensed Statement of Income for the Three Months Ended March 31, 1997
and 1998
(unaudited)............................................................ F-45
Statement of Cash Flows for the Three Months Ended March 31, 1997 and
1998 (unaudited)....................................................... F-46
Notes to Unaudited Interim Financial Statements......................... F-47
</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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 30, 1998,
except as to the pooling
of interests with Intirion
which is as of March 12, 1998
F-2
<PAGE>
MAC-GRAY CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
---------------- -----------
1996 1997 (UNAUDITED)
------- ------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 2,844 $ 3,774 $ 6,047
Trade receivables, net of allowance for doubt-
ful accounts.................................. 4,621 6,570 8,141
Available-for-sale security.................... 343 -- --
Inventory...................................... 4,749 7,208 7,318
Deferred income taxes.......................... 23 571 400
Prepaid commissions and other current assets... 1,819 2,377 3,499
------- ------- --------
Total current assets......................... 14,399 20,500 25,405
Property, plant and equipment, net............. 36,891 43,615 59,234
Intangible assets, net......................... 12,207 28,648 65,430
Prepaid commissions and other assets........... 2,720 5,080 8,826
------- ------- --------
Total assets................................. $66,217 $97,843 $158,895
======= ======= ========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCK-
HOLDER'S EQUITY
Current liabilities:
Current portion of long term debt.............. $ 7,550 $ 7,922 $ 2,411
Current portion of capital lease obligations... 251 476 481
Accounts payable............................... 8,399 7,825 6,622
Accrued commissions............................ 4,940 5,585 6,229
Accrued expenses............................... 1,653 2,631 3,465
Deferred revenues and deposits................. 95 102 795
------- ------- --------
Total current liabilities.................... 22,888 24,541 20,003
Long-term debt................................... 23,473 5,395 64,659
Long-term capital lease obligations.............. 193 491 569
Deferred income taxes............................ 546 5,329 5,254
Deferred retirement obligation................... 1,156 1,052 1,000
Other liabilities................................ -- 429 360
Commitments and contingencies (Note 12).......... -- -- --
Redeemable common stock, 612,026 shares.......... -- 7,797 7,797
Senior redeemable preferred stock................ 4,187 4,507 --
Stockholder's equity:
Preferred stock of Mac-Gray Corporation ($.01
par value, 5,000,000 shares authorized, no
shares issued and outstanding)................ -- -- --
Common stock of Mac-Gray Co., Inc. ($1 par
value; 200,000 shares authorized, 154,275
shares issued and outstanding at December 31,
1996)......................................... 154 -- --
Common stock of Mac-Gray Corporation ($.01 par
value; 30,000,000 shares authorized,
1,317,768, 12,285,568 and 12,812,092
(unaudited) shares issued and outstanding at
December 31, 1996, December 31, 1997 and June
30, 1998, respectively)....................... 13 123 128
Additional capital............................. 3,902 52,524 60,562
Retained earnings (deficit).................... 18,377 (4,345) (1,437)
Net unrealized gain on available-for-sale secu-
rity, net of tax.............................. 258 -- --
Less: 54,275 shares held in treasury at cost... (8,930) -- --
------- ------- --------
Total stockholders' equity..................... 13,774 48,302 59,253
------- ------- --------
Total liabilities, redeemable common stock
and stockholders' equity.................... $66,217 $97,843 $158,895
======= ======= ========
</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 SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................ $66,352 $82,260 $104,847 $ 52,311 $ 60,857
Cost of revenue:
Commissions................... 20,471 25,760 31,717 14,639 18,689
Route expenditures............ 8,251 10,971 12,449 6,791 9,033
Depreciation and amortiza-
tion......................... 5,455 7,060 9,725 4,229 6,162
Cost of product sales......... 12,234 15,408 22,021 12,469 11,002
------- ------- -------- -------- --------
Total Cost of Revenue ....... 46,411 59,199 75,912 38,128 44,886
------- ------- -------- -------- --------
Gross profit................... 19,941 23,061 28,935 14,183 15,971
Operating expenses:
General and administration.... 5,804 5,939 6,923 3,197 3,486
Sales and Marketing........... 6,455 7,718 10,181 5,014 5,012
Depreciation.................. 639 783 753 487 403
Merger-related costs.......... -- -- -- -- 884
------- ------- -------- -------- --------
Total operating expenses..... 12,898 14,440 17,857 8,698 9,785
------- ------- -------- -------- --------
Income from operations......... 7,043 8,621 11,078 5,485 6,186
Interest expense, net.......... (1,328) (2,354) (2,975) (1,630) (1,263)
Other income (expense), net.... 55 (87) 181 39 (1)
------- ------- -------- -------- --------
Income before provision for in-
come taxes.................... 5,770 6,180 8,284 3,894 4,922
Provision for income taxes..... (400) (514) (5,228) (251) (1,895)
------- ------- -------- -------- --------
Net income..................... $ 5,370 $ 5,666 $ 3,056 $ 3,643 $ 3,027
------- ------- -------- -------- --------
Accretion and dividends on re-
deemable preferred stock...... 240 240 320 160 62
------- ------- -------- -------- --------
Income available to common
stockholders.................. $ 5,130 $ 5,426 $ 2,736 $ 3,483 $ 2,965
======= ======= ======== ======== ========
Net income per common share.... $ 0.68 $ 0.72 $ 0.32 $ 0.46 $ 0.24
======= ======= ======== ======== ========
Weighted average common shares
outstanding................... 7,554 7,554 8,449 7,554 12,390
======= ======= ======== ======== ========
Net income per common share--
assuming dilution............. $ 0.67 $ 0.71 $ 0.31 $ 0.45 $ 0.23
======= ======= ======== ======== ========
Weighted average common shares
outstanding--assuming
dilution...................... 7,686 7,686 8,709 7,797 12,838
======= ======= ======== ======== ========
UNAUDITED PRO FORMA TAX AD-
JUSTED DATA (NOTE 15):
Income before provision for
income taxes................ $ 5,770 $ 6,180 $ 8,284 $ 3,894
Provision for income taxes... 2,484 2,446 3,179 1,558
------- ------- -------- --------
Pro forma tax adjusted net
income...................... $ 3,286 $ 3,734 $ 5,105 $ 2,336
======= ======= ======== ========
Pro forma tax adjusted net
income available to common
stockholders per common
share....................... $ 0.40 $ 0.46 $ 0.57 $ 0.29
======= ======= ======== ========
Pro forma tax adjusted net
income available to common
stockholders per common
share-assuming dilution..... $ 0.40 $ 0.45 $ 0.55 $ 0.28
======= ======= ======== ========
</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 DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
----------------- NET UNREALIZED ------------------
RETAINED GAINS (LOSSES)
NUMBER OF ADDITIONAL EARNINGS ON SECURITY, NUMBER OF
SHARES VALUE CAPITAL (DEFICIT) NET OF TAX SHARES VALUE TOTAL
---------- ----- ---------- --------- -------------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 1,472,043 $ 167 $ 1,489 $ 15,736 $ 262 52,000 $(8,384) $ 9,270
Net income............. -- -- -- 5,130 -- -- -- 5,130
Net change in
unrealized gains
(losses) on available-
for-sale security, net
of tax................ -- -- -- -- 28 -- -- 28
Dividends.............. -- -- -- (3,395) -- -- -- (3,395)
Contribution of capi-
tal................... -- -- 1,009 -- -- -- -- 1,009
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1995................... 1,472,043 167 2,498 17,471 290 52,000 (8,384) 12,042
Net income............. -- -- -- 5,426 -- -- -- 5,426
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (32) -- -- (32)
Dividends.............. -- -- -- (4,520) -- -- -- (4,520)
Common stock redemp-
tion.................. -- -- -- -- -- 2,275 (546) (546)
Contribution of capi-
tal................... -- -- 1,404 -- -- -- -- 1,404
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1996................... 1,472,043 167 3,902 18,377 258 54,275 (8,930) 13,774
Net income............. -- -- -- 2,736 -- -- -- 2,736
Elimination of capital
structure (Note 1).... (154,275) (154) (2,413) (6,363) -- (54,275) 8,930 --
Reorganization of the
Company (Note 1)...... 6,367,800 64 -- (64) -- -- -- --
Sale of common stock... 4,600,000 46 45,128 -- -- -- -- 45,174
Contribution of capital
(Note 3).............. -- -- 5,907 (5,907) -- -- -- --
Net change in
unrealized gains
(losses) on available-
for-sale securities,
net of tax............ -- -- -- -- (258) -- -- (258)
Dividends.............. -- -- -- (13,124) -- -- -- (13,124)
---------- ----- ------- -------- ----- -------- ------- --------
Balance, December 31,
1997................... 12,285,568 $ 123 $52,524 $ (4,345) $ -- -- $ -- $ 48,302
---------- ----- ------- -------- ----- -------- ------- --------
Net income (unaudited)
...................... -- -- -- 2,965 -- -- -- 2,965
Inclusion of Intirion's
net equity activity
for the six months
ended December 31,
1997 (unaudited) ..... -- -- (13) 15 -- -- -- 2
Exchange of Intirion
preferred shares for
Mac-Gray common stock
(unaudited) .......... 275,224 3 3,821 -- -- -- -- 3,824
Shares of Mac-Gray
common stock issued in
connection with the
Copico acquisition
(unaudited)........... 250,000 2 4,216 -- -- -- -- 4,218
Intirion dividends paid
(unaudited) .......... -- -- -- (72) -- -- -- (72)
Options exercised (un-
audited) ............. 1,300 -- 14 -- -- -- -- 14
---------- ----- ------- -------- ----- -------- ------- --------
Balance, June 30, 1998
(unaudited) ........... 12,812,092 $ 128 $60,562 $ (1,437) $ -- -- $ -- $ 59,253
========== ===== ======= ======== ===== ======== ======= ========
</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 SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income...................... $ 5,370 $ 5,666 $ 3,056 $ 3,643 $ 3,027
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortiza-
tion......................... 6,094 7,812 10,481 4,689 6,605
(Gain) loss on sale of as-
sets......................... (72) 11 (178) 48 (252)
Deferred income taxes......... 71 60 4,235 93 96
Decrease (increase) in accounts
receivable..................... 1,112 (2,207) (1,905) (135) (1,263)
(Increase) decrease in
inventory...................... (2,737) 827 (2,149) 1,110 2,081
(Increase) in prepaid expenses
and other assets............... (1,480) (1,331) (3,009) (1,566) (4,865)
Increase (decrease) in accounts
payable, accrued commissions
and accrued expenses........... 1,969 4,889 (65) (4,623) 1,396
Increase (decrease) in deferred
rental revenue and customer
deposits....................... 37 41 7 2,217 (1,757)
------- ------- ------- ------- -------
Net cash flows provided by op-
erating activities........... 10,364 15,768 10,473 5,476 5,068
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Capital expenditures............ (8,121) (10,010) (11,584) (5,575) (6,108)
Acquisition of businesses (Note
2)............................. (1,178) (14,487) (12,196) (4,958) (48,269)
Proceeds from sale of property
and equipment.................. 347 159 656 542 872
Proceeds from sale of
securities..................... -- -- 333 -- --
------- ------- ------- ------- -------
Net cash flows used in
investing activities......... (8,952) (24,338) (22,791) (9,991) (53,505)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Payments on long-term debt and
capital lease obligations...... (2,610) (2,293) (3,658) (1,212) (1,218)
Retirement of line of credit and
term loan...................... -- (5,378) (19,512) (18,646) --
Advances on line-of-credit,
net............................ 4,407 18,541 4,668 27,364 51,987
Contribution of capital and
proceeds from sale of common
stock.......................... 1,009 1,366 45,174 -- 13
Cash dividends paid............. (3,395) (4,520) (13,124) (3,173) (72)
Cash paid to repurchase shares
of common stock................ -- (125) -- -- --
Cash paid for refinancing of
long term debt................. -- (75) (300) -- --
------- ------- ------- ------- -------
Net cash flows (used in)
provided by financing
activities................... (589) 7,516 13,248 4,333 50,710
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents................. 823 (1,054) 930 (182) 2,273
Cash and cash equivalents,
beginning of period.............. 3,075 3,898 2,844 2,850 3,774
------- ------- ------- ------- -------
Cash and cash equivalents, end of
period........................... $ 3,898 $ 2,844 $ 3,774 $ 2,668 $ 6,047
======= ======= ======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMA-
TION:
Interest paid................... $ 1,321 $ 2,331 $ 3,272 $ 982 $ 1,044
Income taxes paid............... 242 437 1,116 208 1,851
</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)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
Basis of Presentation--The financial statements include the accounts of Mac-
Gray Corporation and its wholly owned subsidiaries. On April 17, 1997, Mac-
Gray Co., Inc. and Mac-Gray, L.P. were reorganized to create Mac-Gray
Corporation (the "Parent"). The Parent acquired all of the outstanding common
stock of Mac-Gray Co., Inc. and all of the outstanding limited partnership
interest of Mac-Gray, L.P. in exchange for 6,367,800 shares of the Parent's
common stock. On March 12, 1998, the Company completed the acquisition of
Intirion Corporation ("Intirion"). This transaction was accounted for as a
pooling-of-interests and, therefore, the accompanying financial statements
have been retroactively restated to reflect the financial position and results
of operations and cash flows of Intirion with the Company for all periods
presented (see Note 2). All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to the
financial statements to conform to the current year presentation.
Description of the Business--The Company generates the majority of its
revenue from card and coin route laundry rooms located in the Northeastern,
Midwestern and Southeastern United States. The Company's principal customer
base is the multi-housing market, which consists of apartments, condominium
units, colleges and universities. The Company sells, services and leases
commercial laundry equipment to commercial laundromats and institutions.
Through Intirion, the Company is now engaged in the development, distribution,
rental and sale of multi-purpose appliances to commercial and residential
markets. The Company sells its multi-purpose products primarily to academic
institutions and the U.S. government, and also rents its products to academic
institutions and the students at academic institutions. The majority of the
Company's purchases of coin route laundry equipment and multi-purpose
appliances are from two suppliers.
Unaudited Interim Financial Statements--The accompanying financial
information as of June 30, 1998 and for the six month periods ended June 30,
1997 and 1998 is unaudited. The unaudited interim financial information has
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 June 30, 1997 and 1998 are not
necessarily indicative of the results of operations to be expected for any
other interim period or for the full year.
2. ACQUISITIONS
On April 23, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Copico, Inc. ("Copico"). Copico is a provider of card and
coin-operated reprographics equipment and services to the academic and public
library markets in New England, New York and Florida. The purchase price was
250,000 shares of Mac-Gray common stock and $10,950 in cash, less the
assumption of certain debt. The acquisition was accounted for as a purchase
transaction. The pro forma results of operations assuming this acquisition had
occurred at January 1, 1997 would not have differed materially from the
results of operations reported.
On April 24, 1998, Mac-Gray acquired one hundred percent of the outstanding
capital stock of Amerivend Corporation and the assets of Amerivend Southeast
Corporation for approximately $33,500 in cash, including the payment of
certain debt. Amerivend is a provider of card and coin-operating laundry rooms
in multiple housing facilities. The acquisition was accounted for as a
purchase transaction. A portion of the purchase price, $1.5 million, is being
held in escrow to satisfy any potential claims in accordance with the
Amerivend agreement.
The unaudited June 30, 1998 financial statements include the results of
Copico and Amerivend for the periods subsequent to the acquisitions. Goodwill
amounting to $35,819 was recorded in connection with these acquisitions.
F-7
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
The following unaudited supplemental pro forma financial information
reflects the Amerivend acquisition as if it occurred on January 1, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
YEAR ENDED
DECEMBER 31,
1997 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Revenue........................................ $124,506 $ 61,393 $ 65,743
Net Income..................................... $ 2,762 $ 3,757 $ 3,150
Pro Forma tax adjusted net income available to
common
stockholders.................................. $ 4,609 $ 2,290 $ 3,088
Pro Forma tax adjusted net income Per Share.... $ 0.55 $ 0.30 $ 0.25
Pro Forma tax adjusted net income Per Share--
assuming dilution............................. $ 0.53 $ 0.29 $ 0.24
</TABLE>
On March 12, 1998, the Company acquired Intirion Corporation pursuant to an
Agreement and Plan of Merger dated December 22, 1997. Pursuant to the
agreement, Intirion equity securities were exchanged for approximately 1.6
million shares of Mac-Gray common stock and approximately $1 million in cash.
Intirion Corporation had a June 30 year end and the results of operations for
the three years ended June 30, 1997, were combined with the results of
operations for Mac-Gray's three years ended December 31, 1997, respectively.
Additionally, the financial position of Intirion as of June 30, 1996 and 1997
has been combined with the Company's financial position as of December 31,
1996 and 1997, respectively. As such, results of operations for Intirion for
the six months ended December 31, 1997 (including revenue and net income of
$13,355 and $289, respectively) were not included in the consolidated
statement of operations for the year ended December 31, 1997. In order to
conform Intirion's year end to Mac-Gray's year end, an adjustment has been
made to retained earnings in fiscal 1998 to include the net income of Intirion
for this six month period.
Costs directly associated with the pooling transaction of $884 were incurred
in the three months ended March 31, 1998. These costs include legal,
accounting and severance costs directly associated with the pooling
transaction and are classified as merger-related costs on the income
statement. Additionally, $123 of sales and marketing expenses and $66 of
general and administrative expenses incurred by Intirion in the three months
ended March 31, 1998 are considered to be non-recurring as they were directly
attributable to the individuals whose employment was terminated subsequent to
the transaction.
Revenues and net income (loss) for each of the two previously separate
companies for the period prior to the Intirion Acquisition were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- JUNE 30, 1997
1995 1996 1997 (UNAUDITED)
------- ------- -------- ----------------
<S> <C> <C> <C> <C>
NET REVENUES:
Mac-Gray........................ $50,710 $64,427 $ 81,370 $38,288
Intirion........................ 15,642 17,833 23,477 14,023
------- ------- -------- -------
$66,352 $82,260 $104,847 $52,311
======= ======= ======== =======
NET INCOME (LOSS):
Mac-Gray........................ $ 5,770 $ 5,527 $ 2,686 $ 3,032
Intirion........................ (400) 139 370 611
------- ------- -------- -------
$ 5,370 $ 5,666 $ 3,056 $ 3,643
======= ======= ======== =======
</TABLE>
F-8
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
In October and November, 1997, the Company acquired certain assets of two
coin-operated laundry businesses for approximately $7,150. These acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
purchase price assigned to the assets acquired was the fair market value on
the respective acquisition dates. Purchase price in excess of the fair value
of assets acquired was allocated to goodwill and amounted to approximately
$6,228. Pro forma financial information for the October and November 1997
acquisitions has not been presented due to their insignificance in relation to
the Company as a whole.
On April 17, 1997, the Company acquired in exchange for 612,026 shares of
its common stock, (approximate value of $7,797), approximately $2,170 in cash,
$850 of a deferred payment obligation, and assumption of approximately $2,787
in debt, each of Sun Services of America, Inc. and R.
Bodden Coin-Op Laundry, Inc. (collectively, "Sun Services"). The shares of the
Company's common stock are redeemable at the election of the shareholder. The
redeemable common stock has been valued at a contractual put price of $12.74
per common share (which was in excess of market as of that date). The
redemption feature of these shares expires on October 22, 2000. Sun Services
of America, Inc. and R. Bodden Coin-Op Laundry were 100% owned by the same
shareholder. The Parent acquired all of the outstanding capital stock of Sun
Services, which was accounted for pursuant to the purchase method of
accounting, and resulted in goodwill of approximately $11,600.
The following supplemental pro forma financial information reflects the Sun
Services Acquisition as if it occurred on January 1, 1996. For the year ended
December 31, 1997, the historical results of Sun Services for the period from
April 1, 1997 through April 16, 1997 have not been included and are not
material to the Company.
<TABLE>
<CAPTION>
UNAUDITED SUPPLEMENTAL
PRO FORMA RESULTS FOR THE
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
------------ -------------
<S> <C> <C>
Revenue......................................... $ 88,924 $ 106,879
Net Income...................................... 5,819 3,209
Pro Forma tax adjusted net income (Note 15)..... 3,826 5,197
Pro Forma tax adjusted net income available to
common stockholders............................ 3,586 4,877
Pro Forma tax adjusted net income Per Share..... $ 0.47 $ 0.58
Pro Forma tax adjusted net income Per Share--as-
suming dilution................................ $ 0.47 $ 0.56
</TABLE>
In 1995, the Company acquired certain assets of Commercial Appliance, Inc.
for $821 and recorded goodwill of approximately $564. During 1996, the Company
acquired certain assets of six coin-operated laundry businesses or divisions
for an aggregate purchase price of $15,561 and recorded goodwill of $10,184.
Non-compete agreements valued at $1,250 were also recorded in 1996 in
connection with these acquisitions. These acquisitions were accounted for
using the purchase method of accounting. Pro forma financial information has
not been provided for these acquisitions due to lack of historical financial
data of the acquired entities.
The Company's consolidated financial statements include the results of the
1995, 1996, and 1997 acquisitions from their respective acquisition dates.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
Mac-Gray Corporation completed its initial public offering of 4,600,000
shares of common stock at $11 per share on October 22, 1997. The net proceeds
from the sale of the common stock of $45,174 were used primarily to repay
existing indebtedness outstanding under the Credit Facility (Note 9) and to
fund a distribution of $9,000
F-9
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
of previously taxed but undistributed earnings to the Company's shareholders
of record as of October 16, 1997. As a result of the initial public offering,
the Company's S corporation status was terminated. Retained earnings of $5,907
as of that date were reclassified to additional paid-in capital to reflect
additional contributions of capital by the S-corporation shareholders.
4. SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Available-For-Sale Security--The Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
The Company invests excess cash in repurchase agreements and other highly
liquid short term investments. Accordingly, the investments are subject to
minimal credit and market risk. All of the Company's investments are
classified as available-for-sale. As such, unrealized gains and losses are
excluded from earnings and reported as a separate component of stockholders'
equity, net of tax.
Revenue Recognition--The Company recognizes coin route laundry revenue on
the accrual basis. Rental revenue is recognized ratably over the related
contractual period, which is less than one year. The Company recognizes
revenue from product sales upon shipment of the products. The Company offers
limited duration warranties on multi-purpose appliance products and, at the
time of sale, provides reserves for all estimated warranty costs.
Allowance for Doubtful Accounts--The Company maintains an allowance for
doubtful accounts of $372 at December 31, 1996 and $508 at December 31, 1997.
Concentration of Credit Risk--Financial instruments which potentially expose
the Company to concentration of credit risk include trade receivables,
generated by the Company as a result of its selling and leasing activities. To
minimize this risk, ongoing credit evaluations of customers' financial
condition are performed and reserves are maintained. The Company typically
does not require collateral.
Fair Value of Financial Instruments--For purposes of financial reporting,
the Company has determined that the fair value of financial instruments
approximates book value at December 31, 1996 and 1997, based upon terms
currently available to the Company in financial markets.
Inventories--Inventories are stated at the lower of cost (as determined
using the first-in, first-out method) or market and consist primarily of
finished goods.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost and depreciated using the straight-line method over the estimated useful
lives of the respective assets. Tooling costs are depreciated using the units-
of-production method. Expenditures for maintenance and repairs are charged to
operations as incurred; acquisitions, major renewals, and betterments are
capitalized.
Coin route equipment-not yet placed in service--These assets represent
laundry machines that management estimates will be installed in coin route
laundry rooms and have not been purchased for commercial sale.
Intangible Assets--Intangible assets primarily consist of various non-
compete agreements and goodwill recorded in connection with the acquisitions
(Note 2). The non-compete agreements are amortized using the straight-line
method over the life of the agreements, which ranges from two to five years.
Goodwill is amortized
F-10
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
using the straight-line method over fifteen or twenty years from the acquired
companies respective dates of acquisitions. Intangible assets also include
customer lists which are being amortized on a straight-line basis ranging from
five to ten years.
Impairment of Long-Lived Assets--Impairment losses are recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount.
Income Taxes--Mac-Gray Co., Inc. which elected S corporation status, and
Mac-Gray, L.P. were "pass through" entities for income tax purposes prior to
the reorganization on April 17, 1997. From April 17, 1997 through October 16,
1997, Mac-Gray Corporation also elected S corporation status. Accordingly,
earnings and losses were included on the income tax returns of the respective
equity owners through October 16, 1997. On October 16, 1997, the Company's S
corporation status was terminated as a result of the initial public offering.
The Company accounts for income taxes utilizing the asset and liability
method as prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the provisions of SFAS 109,
the current or deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determined the amount of taxes
payable currently or in future years. The classification of net current and
non-current deferred tax assets or liabilities depend upon the nature of the
related asset or liability. Deferred income taxes, net of any valuation
allowance, are provided for temporary differences and operating loss
carryforwards.
Stock Compensation--The Company's stock option plans are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". In fiscal 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation".
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share--The Company accounts for earnings per share in
accordance with Statement of Financial Accounting Standard No. 128, "Earnings
Per Share" (SFAS 128). SFAS 128 replaces APB Opinion No. 15 "Earnings Per
Share" and requires the presentation of basic earnings per share and diluted
earnings per share (EPS). Basic EPS includes no dilution and is computed by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted EPS under APB 15. Diluted earnings per share
has been calculated using the treasury stock method and prior period earnings
per share have been restated in accordance with SFAS 128. Net income per share
gives effect to the exchange of shares between the Parent and the Company
(Note 1).
New Accounting Pronouncements--The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in June 1997. Mac-Gray adopted
SFAS 130 for fiscal 1998. SFAS 130 requires presentation of certain
information related to
F-11
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
comprehensive income. During the three years ended December 31, 1997, Mac-Gray
had comprehensive income/(expense) of $28, $(32) and $0, respectively. This
comprehensive income/(expense), as defined in SFAS 130, related to unrealized
gains/(losses) on available for sale securities. FASB issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). In accordance with this
statement, the Company will implement SFAS 131 which requires that certain
additional information related to operating segments be reported during fiscal
year 1998. The Company is currently reviewing the impact of this statement on
its financial statements.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------
USEFUL LIFE 1996 1997
------------- ------- -------
<S> <C> <C> <C>
Coin route equipment......................... 10 years $58,610 $68,179
Rental equipment............................. 7 years 5,984 7,439
Buildings and improvements................... 15-32 years 6,531 7,388
Furniture, fixtures and computer equipment... 2-7 years 4,712 5,967
Trucks and autos............................. 3-5 years 1,786 2,610
Tooling costs................................ 250,000 units 212 271
Land and improvements........................ -- 309 309
------- -------
78,144 92,163
Less: accumulated depreciation............... 42,305 49,548
------- -------
35,839 42,615
Coin route equipment, not yet placed in serv-
ice......................................... 1,052 1,000
------- -------
Property, plant and equipment, net........... $36,891 $43,615
======= =======
</TABLE>
Depreciation and amortization of property, plant and equipment totaled $697,
$932 and $1,912 for the years ended December 31, 1995, 1996 and 1997,
respectively.
At December 31, 1996 and 1997, trucks and autos includes $1,449 and $2,284,
respectively, of capital leased equipment with an accumulated amortization
balance of $1,052 and $1,307, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Goodwill.................................................... $10,348 $28,208
Covenants-not-to-compete.................................... 2,549 2,869
Customer lists.............................................. 901 1,008
Other....................................................... 153 451
------- -------
13,951 32,536
Less: accumulated amortization.............................. 1,744 3,888
------- -------
Intangible assets, net...................................... $12,207 $28,648
======= =======
</TABLE>
Amortization expense associated with the above intangible assets amounted to
$697, $932 and $1,912 for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-12
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Accrued interest.............................................. $134 $ 101
Accrued salaries.............................................. 332 596
Warranty...................................................... 131 128
Current portion of deferred retirement obligation............. 104 104
Current portion of deferred payment obligation................ -- 392
Other......................................................... 952 1,310
------ ------
$1,653 $2,631
====== ======
</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.............. $21,042 $2,525
Unsecured notes payable to former shareholders:
Variable rate note, lesser of prime rate plus 2% or 9%,
quarterly principal payments beginning January 1, 1996
(9% at December 31, 1997)................................ 3,360 2,560
Fixed rate notes, 8.4% interest rate, due September 1, 1997
and June 1, 2000........................................... 2,046 746
Discount note, 6% imputed interest rate (estimated fair
market rate), quarterly installments, due December 31,
2003....................................................... 2,613 2,239
Fixed note, 8.75% interest rate, due January 1, 2001........ 421 317
Note payable, 11.5% fixed interest rate, monthly principal
payments,
due September 1, 1999...................................... 249 172
Acquisition note payable, 8% imputed interest rate
(estimated fair
market rate), monthly payments, due May 31, 2006........... 1,010 911
Acquisition note payable, 10% imputed interest rate, annual
installments, due March, 1999.............................. 282 153
Demand line of credit with primary supplier, 9.5% variable
interest rate, at December 31, 1997........................ -- 3,694
------- ------
Total long-term debt.................................... 31,023 13,317
Less: current portion....................................... 7,550 7,922
------- ------
$23,473 $5,395
======= ======
</TABLE>
F-13
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
Credit Agreement and Revolving Credit Facility
On April 23, 1998, the outstanding debt under Mac-Gray's $50 million
revolving credit facility with State Street Bank and Trust Company and
CoreStates Bank was refinanced under a new senior secured revolving and term
loan credit facility with State Street Bank and Trust Company, CoreStates Bank
and BankBoston, N.A. The Credit Facility provides for borrowings under a
revolving line of credit of up to $90 million and converts to a term loan
after three years. Outstanding indebtedness under the Credit Facility bears
interest at Mac-Gray's option, at a rate equal to the prime rate minus .5% or
LIBOR plus the applicable margin (either (i) 1.5% for loans outstanding which
aggregate less than $50 million or (ii) 1.75% for loans outstanding which
exceed $50 million), or cost of funds plus the applicable margin. The Credit
Facility restricts payments of dividends and other distributions, restricts
Mac-Gray from making certain acquisitions and incurring indebtedness, and
requires it to maintain certain financial ratios. The Credit Facility is
secured by pledges of the capital stock of Mac-Gray's subsidiaries and a lien
on Mac-Gray's assets.
On April 17, 1997, the outstanding debt under the 1996 Credit Agreement and
Revolving Credit Facility was refinanced under terms of an amended and
restated agreement (the Senior Secured Credit Facility). The Senior Secured
Credit Facility provides for borrowings under (i) a revolving line of credit
and term loan facility and (ii) a revolving working capital line of credit
facility of up to $45,000 and $5,000, respectively. Outstanding indebtedness
under the Senior Secured Credit Facility bears interest at the Company's
option, at a rate equal to the prime rate plus .5% or LIBOR plus 2.5% with the
margin over the prime rate and LIBOR decreasing after October 22, 1997 due to
the initial public offering of the Company's common stock (Note 3) to the
prime rate less .5% or LIBOR plus 2.0%. The Senior Secured Credit Facility
restricts payments of dividends and other distributions, restricts the Company
from making certain acquisitions and incurring indebtedness, and requires it
to maintain certain financial ratios. The Senior Secured Credit Facility is
secured by pledges of assets of the Parent and its subsidiaries. The Senior
Secured Credit Facility provides for the issuance of standby letters of credit
of up to $15,000 in the aggregate. At December 31, 1997, outstanding letters
of credit amounted to $1,302. There is no outstanding balance on the Senior
Secured Credit Facility at December 31, 1997. The interest rate for the Senior
Secured Credit Facility at December 31, 1997 was 8.0%. Subsequent to year end,
the Company refinanced its credit facility (see Note 16).
Through Intirion the Company also had outstanding borrowings pursuant to a
secured demand line of credit agreement with a bank that allows for maximum
borrowings of $7,500 at December 31, 1997. Under the working capital component
of the agreement, borrowings are restricted to the lesser of (i) $4,800 or
(ii) the sum of (a) 80% of the eligible accounts receivable, as defined, and
50% of Intirion's eligible inventory, as defined, and (b) 50% of issued and
undrawn documentary purchase letters of credit advanced by the bank. The
working capital component bears interest at 1% plus the greater of (i) the
bank's base rate or (ii) the sum of (a) .5% and (b) the average rate on
overnight Federal funds transactions (9.25%, and 9.5% for fiscal 1996 and
1997, respectively). Under the rental asset component of the agreement,
borrowings are restricted to the lesser of (i) $1,500 or (ii) 70% of
Intirion's eligible rental equipment, as defined, plus 50% of outstanding
rental letters of credit advanced by the bank. The rental asset component
bears interest at 1.5% plus the greater of (i) the bank's base rate or (ii)
the sum of (a) .5% and (b) the average rate on overnight Federal funds
transactions (9.75%, and 10.0% for fiscal 1996 and 1997, respectively).
Borrowings under the line of credit agreement are secured by substantially all
assets of Intirion Corporation. On November 28, 1997, the Company amended the
secured demand line of credit agreement to increase the borrowing bases to
$5,500 and $2,000 relating to the working capital and rental asset components,
respectively. All outstanding borrowings of Intirion were repaid by Mac-Gray
subsequent to the merger and the line of credit was terminated.
F-14
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
In connection with the financing of the 1996 Acquisitions (Note 2), the
Company entered into a Credit Agreement with a bank which provided for
borrowings under a Revolving Line of Credit, Working Capital Line of Credit
and Acquisition Line of Credit of up to $14,000, $1,500 and $4,000,
respectively. Borrowings under the Credit Agreement were restricted to
providing working capital requirements of the Company and funding future
acquisitions.
During June 1996, the Company entered into an agreement with a bank which
provided a Revolving Credit Facility with aggregate borrowings of up to
$4,500. As of December 31, 1996, $2,893 was available to be borrowed under the
Revolving Credit Facility. A portion of the proceeds from the Credit Agreement
and the Revolving Credit Facility were used to pay the balance of the Bank
Note and Line of Credit outstanding prior to the refinancing of the Company.
The Credit Agreement and the Revolving Credit Facility provided for the
issuance of standby letters of credit up to $2,200 in the aggregate. At
December 31, 1996, outstanding letters of credit amounted to $1,526.
Borrowings under the 1996 Credit Agreement and the Revolving Credit Facility
bore interest, at the Company's option, at either (1) the banks' prime
interest rate (the "Prime Rate") or (2) 2.5% plus the rate at which certain
Eurodollar deposits were offered in the interbank Eurodollar market (the
"LIBOR Rate") or (3) 2.5% plus the rate at which funds were offered in the
secondary markets (the "Cost of Funds Rate").
Future Payments
As of December 31, 1997, the scheduled future principal payments of long-
term debt are as follows:
<TABLE>
<S> <C>
1998................................................................. $ 7,922
1999................................................................. 1,401
2000................................................................. 2,088
2001................................................................. 887
2002................................................................. 602
Thereafter........................................................... 417
-------
$13,317
=======
</TABLE>
10. INCOME TAXES
On October 16, 1997, the Mac-Gray Corporation's S corporation status was
automatically terminated due to the initial public offering (Note 3). As a
result, the current year provision includes a charge of $4,037 to provide for
net deferred tax liabilities resulting from the change in income tax status
from an S corporation to a C corporation, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
following information relates to temporary differences at October 16, 1997,
for which a deferred tax provision was not provided for until the Company's
termination of its S corporation status.
<TABLE>
<S> <C>
Accounts receivable................................................ (627)
Fixed assets....................................................... 16,051
Deferred compensation.............................................. (3,415)
Other.............................................................. (147)
--------
Total............................................................ $ 11,862
========
</TABLE>
F-15
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
Prior to October 16, 1997, the historical income tax provision for Mac-Gray
Corporation was established only to provide for income taxes in states that do
not recognize Subchapter S corporations, using a statutory income tax rate of
6%. The effective rate differed from the statutory rate in 1996 and 1997
(prior to October 16, 1997) due to meals and entertainment expenses and
goodwill amortization recorded for book purposes that are not deductible for
income tax purposes. In addition to the aforementioned items, the Company's
1996 effective tax rate differs from the statutory tax rate due to taxable
losses generated by Mac-Gray, L.P. for which only a 10% tax benefit
(equivalent to Mac-Gray Co., Inc.'s general partnership interest in Mac-Gray,
L.P.) was recognized by the Company.
The provision for state and federal income taxes of the Company consists of
the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Current state income tax................................... $315 $416 $ 460
Deferred state income tax.................................. 69 60 505
Current federal income tax................................. 16 38 533
Deferred federal income tax................................ -- -- 3,730
---- ---- ------
Total income taxes....................................... $400 $514 $5,228
==== ==== ======
</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:
Net operating loss carryforwards............................ $1,037 $1,080
Alternative minimum tax credit carryforwards................ 106 50
Accounts receivable......................................... 57 376
Deferred compensation....................................... 202 1,366
Amortization................................................ 53 53
Other....................................................... 50 86
------ ------
1,505 3,011
------ ------
Deferred tax liabilities:
Fixed assets................................................ 1,512 7,341
Other....................................................... 13 58
------ ------
1,525 7,399
------ ------
Excess of deferred tax liabilities over deferred tax assets... 20 4,388
Deferred tax asset valuation allowance........................ 503 370
------ ------
Net deferred tax liability.................................... $ 523 $4,758
====== ======
</TABLE>
A valuation allowance was applied against deferred tax assets at December
31, 1996 and 1997, respectively. During the period ended June 30, 1998, the
valuation allowance on deferred tax assets of $370 was released. Based on the
results of operations of Intirion subsequent to the combination, management
believes that it is more likely than not that such assets will be realized.
F-16
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
As Mac-Gray Corporation maintained its S corporation election through
October 16, 1997, the provision for income taxes recorded for the year ended
December 31, 1997 differs significantly from the amount of income taxes
determined by applying the applicable U.S. statutory federal income tax rate
to consolidated pretax income. For the period subsequent to the termination of
the S corporation, the statutory income tax rate differed from the effective
rate primarily as a result of the following differences:
<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 Mac-Gray Corporation was an S corporation and $657 in tax
for the period subsequent to the termination of the S corporation election.
The current provision for income taxes recorded for fiscal 1997 also includes
$22 in tax related to Intirion Corporation (Note 1), a C Corporation.
At December 31, 1997, the Company has the following net operating loss
carryforwards available to reduce certain future federal taxable income:
<TABLE>
<S> <C>
Net operating loss carryforwards relating to certain losses incurred
prior to November 30, 1990.......................................... $ 386
Net operating loss carryforwards relating to certain losses incurred
in the year ending December 31, 1994 and June 30, 1997.............. 330
Net operating loss carryforwards relating to certain losses incurred
in the year ended December 31, 1995................................. 1,826
------
$2,542
======
</TABLE>
Subsequent ownership changes could further affect the limitations in future
years.
11. STOCKHOLDERS EQUITY
On January 1, 1996, the Company redeemed 2,275 shares of its common stock at
$240 per share from minority shareholders. The aggregate redemption price was
$546, consisting of cash in the amount of $125 and the issuance of five-year
promissory notes in the amount of $421, bearing interest at 8.75% per year.
In April 1994, Intirion Corporation issued 100,000 shares of Senior
Redeemable Preferred Stock. Such securities are recorded at issuance cost plus
accumulated accretion and accrued dividends of $480 and $800 at December 31,
1996 and 1997, respectively. The Company was required to redeem one third of
the outstanding Senior Stock annually, over a three-year period beginning in
April 1999 at a redemption price equal to $40.00 per share, plus accrued but
unpaid dividends. This redemption obligation was being accreted through April
2001 by charges to retained earnings (deficit). Cumulative dividends of 6.0%
to 8.0% per annum were payable when and if declared by the Board of Directors,
upon mandatory redemption or upon liquidation. No dividends were paid in 1996
and 1997. Subsequent to year-end and in conjunction with the merger between
the Company and Intirion Corporation, on March 12, 1998, the Senior Redeemable
Preferred Stock was exchanged for approximately $1 million in cash and 275,224
shares of Mac-Gray common stock (Note 2).
F-17
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
12. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases certain equipment and facilities under non-
cancelable operating leases. The Company also leases certain vehicles under
capital leases.
Future minimum lease payments under non-cancelable operating and capital
leases consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1998................................................... $ 538 $ 608
1999................................................... 389 535
2000................................................... 133 456
2001................................................... -- 243
Thereafter............................................. -- 89
------ ------
Future lease payments.................................. 1,060 $1,931
======
Less: amount representing interest (8.5% at December
31, 1997)............................................. 93
------
967
Present value future minimum lease payments less
amounts due within one year........................... 476
------
Amounts due after one year............................. $ 491
======
</TABLE>
Rent expense incurred by the Company under non-cancelable operating leases
totaled $280, $369 and $675 for the years ended December 31, 1995, 1996 and
1997, respectively.
Guaranteed Commission Payments--The Company operates coin laundry routes
under various lease agreements in which the Company is required to make
minimum guaranteed commission payments to the respective property owners. The
following is a schedule by years of future minimum guaranteed commission
payments required under these lease agreements that have initial or remaining
non-cancelable contract terms in excess of one year as of December 31, 1997:
<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. was a
guarantor on a line-of-credit for a customer in the amount of $706. The
customer incurred substantial losses. While the guarantee was secured by a
pledge of the borrowing company's assets, it was uncertain if those assets and
profits from continuing operations would be adequate to retire the line-of-
credit. The Company recorded a reserve of $250 at December 31, 1997 for
estimated losses on this guarantee. During the three months ended March 31,
1998, the customer defaulted on the line of credit and the Company succeeded
to the assets and assumed the liabilities of the customer in accordance with
the guarantee and related agreements. At March 31, 1998, the fair market value
F-18
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
of the customer's assets and a liability of $677 were recorded on the
Company's financial statements and a loss was recorded against the reserve. In
April 1998, the customer's liability to its creditor was paid in full by the
Company.
Litigation--The Company is involved in various litigation proceedings
arising in the normal course of business. In the opinion of management, the
Company's ultimate liability, if any, under pending litigation would not
materially affect its financial condition or the results of its operations.
13. EMPLOYEE BENEFIT AND STOCK PLANS
Retirement Plans--The Company maintains a qualified profit-sharing/401(k)
plan (the Plan) covering substantially all employees. The Company's
contributions to the Plan are at the discretion of the Board of Directors.
Costs under the Plan amounted to $535, $532 and $285 for the years ended
December 31, 1995, 1996 and 1997, respectively.
1997 Stock Option and Incentive Plans--In December, 1996, the Board of
Directors of Mac-Gray Co. adopted, and the stockholders approved, the Mac-Gray
Co., Inc. 1996 Stock Option and Incentive Plan (the Predecessor Plan). On
April 7, 1997, the Board of Directors adopted and the Company's stockholders
approved the 1997 Stock Option and Incentive Plan for the Company (the 1997
Stock Plan). The 1997 Stock Plan is designed and intended as a performance
incentive for officers, employees, consultants and directors to promote the
financial success and progress of the Company. All officers, employees and
independent directors are eligible to participate in the 1997 Stock Plan.
Awards, when made, may be in the form of stock options, restricted stock,
unrestricted stock options, and dividend equivalent rights.
On December 30, 1996, Mac-Gray Co. granted 556,350 options to purchase
shares of common stock with an exercise price of $9.99 per share pursuant to
the Predecessor Plan. Concurrent with the reorganization of the Company, the
options issued pursuant to the Predecessory Plan were assumed by the Company
under the 1997 Stock Plan, and the Predecessory Plan was terminated. The
options assumed by the Company under the 1997 Plan were reflective of the
exchange of common stock between the Parent and Mac-Gray Co., Inc. The
exercise price of the options was adjusted to $8.80 in August 1997, in order
to restore the economic position of the option holders as a result of the
$9,000 distribution (Note 3). The change in the exercise price of these
options has been reflected as a cancellation of the $9.99 options and a grant
of the $8.80 options on the following option rollforward. Employee options
vest so that twenty percent (20%) of the options will become exercisable on
each of the first through fifth anniversaries of the date of grant of the
options. In the event of termination of the optionees' relationship with the
Company, options not yet exercised terminate within 90 days. The 1997 Stock
Plan also provided for the automatic grant to each of the four independent
directors to purchase 1,000 shares of common stock. The non-qualified options
granted to independent directors were exercisable immediately and will
terminate on the tenth anniversary of the grant. The exercise prices were
determined by the Board of Directors to be the fair market value of the shares
underlying the options on the respective dates of the grants. Other than the
stock option grants, there were no other grants of equity-based compensation
awards during 1996 and 1997.
The 1997 Stock Plan provides for the issuance of up to the greater of
750,000 shares of common stock or ten percent of the then outstanding shares
of common stock. Subsequent to the initial public offering (Note 3), a total
of 1,157,982 shares of common stock are reserved for issuance under the 1997
Stock Plan, of which 638,590 shares are subject to outstanding options and
519,392 remain available for issuance.
F-19
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
The following is a summary of stock option plan activity.
<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>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." The Company continues to measure compensation cost using the
intrinsic value based method of accounting prescribed by APB Opinion 25. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net income
and net income per share would have been reduced to $2,684 in 1997, or $0.28
per share compared to reported net income of $3,056, or $0.32 per share and
$0.31 per share-assuming dilution.
<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.
F-20
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
14. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net Income................................... $3,056
Less: Accretion and dividends on redeemable
preferred stock............................. (320)
------
Net income available to common stockhold-
ers....................................... $2,736 8,449 $0.32
====== ===== =====
Effect of dilutive securities:
Stock options.............................. 128
Contingent shares.......................... 132
-----
Net income available to common stockholders--
assuming dilution........................... $2,736 8,709 $0.31
====== ===== =====
<CAPTION>
FOR THE YEAR ENDED 1996
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net Income................................... $5,666
Less: Accretion and dividends on redeemable
preferred stock............................. (240)
------
Net income available to common
stockholders.............................. $5,426 7,554 $0.72
====== ===== =====
Effect of dilutive securities:
Stock options.............................. --
Contingent shares.......................... 132
-----
Net income available to common stockholders--
assuming dilution........................... $5,426 7,686 $0.71
====== ===== =====
<CAPTION>
FOR THE YEAR ENDED 1995
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net Income................................... $5,370
Less: Accretion and dividends on redeemable
preferred stock............................. (240)
------
Net income available to common
stockholders.............................. $5,130 7,554 $0.68
====== ===== =====
Effect of dilutive securities:
Stock options.............................. --
Contingent shares.......................... 132
-----
Net income available to common stockholders--
assuming dilution........................... $5,130 7,686 $0.67
====== ===== =====
</TABLE>
F-21
<PAGE>
MAC-GRAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(INFORMATION SUBSEQUENT TO JANUARY 30, 1998 IS UNAUDITED, EXCEPT AS TO THE
POOLING OF INTERESTS WITH INTIRION WHICH IS AS OF MARCH 12, 1998)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1998
(UNAUDITED)
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net Income................................... $3,027
Less: Accretion and dividends on redeemable
preferred stock............................. (62)
------
Net income available to common
stockholders.............................. $2,965 12,390 $0.24
====== ====== =====
Effect of dilutive securities:
Stock options.............................. 289
Contingent shares.......................... 159
------
Net income available to common stockholders--
assuming dilution........................... $2,965 12,838 $0.23
====== ====== =====
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
--------------------------------
PER-
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net Income................................... $3,643
Less: Accretion and dividends on redeemable
preferred stock............................. (160)
------
Net income available to common
stockholders.............................. $3,483 7,554 $0.46
====== ====== =====
Effect of dilutive securities:
Stock options.............................. 111
Contingent shares.......................... 132
------
Net income available to common stockholders--
assuming dilution........................... $3,483 7,797 $0.45
====== ====== =====
</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, as if the Company was subject to income taxation
as a C corporation during the entire year.
F-22
<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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 2, 1997
F-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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.
11. RELATED PARTY
Periodically, the Companies make loans to their sole shareholder. The
balance of these shareholder loans is included on the accompanying balance
sheet as due from shareholder. The due from shareholder balance at December
31, 1996 included approximately $36 of interest imputed at 6%.
12. SUBSEQUENT EVENT (UNAUDITED)
On April 17, 1997, Mac-Gray Corporation acquired all of the outstanding
common stock of Sun Services of America, Inc. and R. Bodden Coin-Op-Laundry,
Inc., in exchange for 612,026 shares of its common stock ($7,797 approximate
value), approximately $2,170 in cash, $850 of a deferred obligation and the
assumption of outstanding indebtedness of the Companies of approximately
$2,787.
F-32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Amerivend Corporation
We have audited the accompanying balance sheet of Amerivend Corporation as
of December 31, 1997 and the related statements of income and stockholder's
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amerivend Corporation as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Morrison, Brown, Argiz & Company
Certified Public Accountants
Miami, Florida
February 17, 1998
F-33
<PAGE>
AMERIVEND CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents........................................ $ 1,058,332
Accounts receivable.............................................. 83,970
Inventory........................................................ 715,094
Current portion of notes receivable.............................. 48,991
Prepaid expenses................................................. 62,842
-----------
Total Current Assets........................................... 1,969,229
Property And Equipment--Net........................................ 11,723,833
Due From Stockholder............................................... 401,944
Notes Receivable, Less Current Portion............................. 94,308
Other Assets....................................................... 263,323
-----------
$14,452,637
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt and revolving line of cred-
it.............................................................. $ 2,095,461
Accounts payable--trade.......................................... 87,432
Other payables and accrued liabilities........................... 1,118,265
-----------
Total Current Liabilities...................................... 3,301,158
Long-term Debt, Less Current Maturities............................ 5,061,279
Due To Related Party............................................... 401,481
-----------
Total Liabilities.............................................. 8,763,918
-----------
Commitments And Contingencies
Stockholder's Equity
Common stock, $1.00 par value; 500 shares authorized, issued and
outstanding..................................................... 500
Additional paid-in capital....................................... 859,062
Retained earnings................................................ 4,829,157
-----------
5,688,719
-----------
$14,452,637
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
AMERIVEND CORPORATION
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues
Vending income................................................... $15,736,569
Sales of stores.................................................. 119,779
Sales of parts and equipment..................................... 1,677,575
Other income....................................................... 93,216
-----------
Total Revenues................................................. 17,627,139
-----------
Costs And Expenses
Rent for vending locations....................................... 6,812,998
Costs of stores sold............................................. 87,424
Costs of parts and equipment sold................................ 648,013
Operating costs.................................................. 2,463,889
Depreciation and amortization.................................... 2,598,138
Selling, general and administrative.............................. 2,880,728
Interest......................................................... 676,410
Loss on disposal of property and equipment, net.................. 264,823
-----------
Total Expenses................................................. 16,432,423
-----------
Net Income..................................................... $ 1,194,716
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
AMERIVEND CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances--January 1, 1997..... 500 $500 $784,062 $3,906,941 $4,691,503
Additional paid-in capital.... -- -- 75,000 -- 75,000
Net income.................... -- -- -- 1,194,716 1,194,716
Distribution of income........ -- -- -- (272,500) (272,500)
--- ---- -------- ---------- ----------
Balances--December 31, 1997... 500 $500 $859,062 $4,829,157 $5,688,719
=== ==== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
AMERIVEND CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,194,716
Adjustments to reconcile net income to net cash provided by op-
erating activities:
Depreciation and amortization................................. 2,598,138
Loss on disposal of property and equipment.................... 264,824
Increase (decrease) in allowance for doubtful accounts........ 26,238
Inventory reserve............................................. 11,607
(Increase) decrease in assets:
Accounts receivable......................................... (9,601)
Inventory................................................... 20,558
Notes receivable............................................ 48,945
Prepaid expenses and other current assets................... (21,481)
Other assets................................................ 6,966
Increase (decrease) in liabilities:
Accounts payable and accrued expenses....................... 32,180
Accrued interest payable.................................... (24,126)
-----------
Net cash provided by operating activities................. 4,148,964
-----------
Cash flows from investing activities:
Redemption of certificate of deposit............................ 50,000
Purchases of property and equipment............................. (2,094,206)
Proceeds from the sale of property and equipment................ 35,634
-----------
Net cash used in investing activities..................... (2,008,572)
-----------
Cash flows from financing activities:
Distributions to shareholder.................................... (272,500)
Additional capital contribution................................. 75,000
Principal payments on long-term debt and notes payable.......... (1,420,011)
Proceeds from issuance of notes payable......................... --
Borrowings under the line of credit............................. 250,000
Repayments on the line of credit................................ (700,000)
Advances to stockholder......................................... (388,295)
Advances from related party..................................... 155,261
-----------
Net cash used in financing activities..................... (2,300,545)
-----------
Net decrease in cash.............................................. (160,153)
Cash and cash equivalents-beginning of year 1,218,485
-----------
Cash and cash equivalents-end of year $ 1,058,332
===========
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 700,536
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
AMERIVEND CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Business Operations
Amerivend Corporation (the "Company") is engaged primarily in the ownership
and operation of coin-operated machines at various third-party property
locations throughout Florida, Georgia and Alabama. Vending income accounts for
approximately 89% of the Company's revenue. In addition, the Company
distributes coin- operated laundry equipment for Maytag Corporation ("Maytag")
in Florida. Most of the Company's customers are in Florida, and that state
accounts for approximately 93% of the Company's revenue. No single customer
accounted for a significant amount of the Company's revenue, and there were no
significant trade accounts receivable from any single customer. The Company
estimates an allowance for doubtful accounts based on the creditworthiness of
its customers, as well as general economic conditions. Consequently, an
adverse change in those factors could affect the Company's estimate of its bad
debt allowance.
B) Major Supplier
The Company purchases substantially all of its new equipment and parts
inventory from Maytag at the prevailing prices charged by the manufacturer to
all authorized dealers. The loss of this supplier could have an impact on the
operations of the Company; however, management does not foresee the loss of
this supplier in the near future. In addition, management has a good
relationship with other potential suppliers.
C) Inventories
Inventories are stated at the lower of cost or market with costs being
determined using the first-in, first-out ("FIFO") method.
D) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets. Costs of additions and major improvements are capitalized, and
expenditures for maintenance and repairs which do not extend the life of the
asset are expensed.
The useful life for each asset type is summarized below:
<TABLE>
<S> <C>
Laundry vending equipment......................................... 8-10 years
Leasehold improvements............................................ 10 years
Office furniture and equipment.................................... 5-12 years
Vehicles.......................................................... 5 years
Tools and equipment............................................... 5-12 years
Facility.......................................................... 20 years
</TABLE>
E) Revenue Recognition
Vending income is recognized at the time the service is provided to the
customer. Income from the sale of parts and equipment is recognized upon
transfer of title to the customer, generally at the time of delivery.
F) Installation Costs
Installation costs consist primarily of direct labor which is expensed as
incurred. The Company uses the same work force to install the machines as it
uses to perform repairs and maintenance.
F-38
<PAGE>
AMERIVEND CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
G) Income Taxes
The Company has elected for tax purposes to be treated as a "Small Business
Corporation" under Subchapter "S" of the Internal Revenue Code. In accordance
with the provisions of such election, the Company's income or loss passes
through to its stockholder; accordingly, no provision for income taxes has
been made.
H) Management 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 at
December 31, 1997, and revenues and expenses during the year then ended. The
actual outcome could differ from those estimates made in the preparation of
the financial statements.
I) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits in excess
of FDIC-insured limits. The Company generally limits its exposure by placing
its deposits with high credit, quality financial institutions. In addition,
the Company invests excess funds in an overnight investment account with the
same financial institution. While the funds in the overnight investment
account are not federally insured, the account selected by the Company invests
only in government backed securities.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.
J) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents.
NOTE 2 RESTRICTED CASH
In accordance with a coin-operated laundry contract with a third party, the
Company was required to provide an irrevocable standby letter of credit, which
was collateralized by a certificate of deposit of $50,000 shown in other
assets through March, 1997.
NOTE 3 ACCOUNTS RECEIVABLE
<TABLE>
<S> <C>
Trade.............................................................. $147,597
Due from employees................................................. 28,373
--------
175,970
Less allowance for doubtful accounts............................... 92,000
--------
Accounts receivable, net........................................... $ 83,970
========
</TABLE>
NOTE 4 INVENTORY
<TABLE>
<CAPTION>
<S> <C>
Equipment held for sale............................................ $282,568
Parts and other.................................................... 432,526
--------
Inventory.......................................................... $715,094
========
</TABLE>
F-39
<PAGE>
AMERIVEND CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Parts and other inventory are primarily used to service and maintain laundry
vending equipment and are charged to expense when used.
NOTE 5 PROPERTY AND EQUIPMENT NET
<TABLE>
<S> <C>
Laundry vending equipment....................................... $19,656,940
Leasehold improvements.......................................... 1,958,309
Office furniture and equipment.................................. 517,804
Vehicles........................................................ 860,269
Tools and equipment............................................. 102,031
Facility........................................................ 64,976
-----------
23,160,329
Less accumulated depreciation and amortization.................. 11,436,496
-----------
Property and equipment, net..................................... $11,723,833
===========
</TABLE>
Depreciation on property and equipment approximated $2,531,000 for 1997.
At December 31, 1997, the Company had approximately 30,000 laundry machines
generating revenue under various lease agreements with location owners. The
lease agreements primarily require the sharing of vending income based upon
fixed percentages (approximately 26,400 machines in 1997) and, in limited
cases, fixed monthly amounts over the lease life, generally from five to ten
years (approximately 3,400 machines in 1997). Historically, the majority of
the customers extend their agreements with the Company beyond the original
agreement term.
NOTE 6 NOTES RECEIVABLE
<TABLE>
<S> <C>
Notes receivable.................................................... $143,299
Less current portion................................................ 48,991
--------
Long-term receivable................................................ $ 94,308
========
</TABLE>
Notes receivable include amounts due from customers for laundry facilities
constructed by the Company. Interest rates range from 10% to 13% and mature
from June, 1998 through March, 2001. Principal payments are due as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998.............................................................. $ 48,991
1999.............................................................. 45,521
2000.............................................................. 36,300
2001.............................................................. 12,487
--------
$143,299
========
</TABLE>
F-40
<PAGE>
AMERIVEND CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31 1997
NOTE 7 OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<S> <C>
Interest......................................................... $ 49,581
Rent............................................................. 863,470
Customers' deposits.............................................. 81,126
Payroll and sales taxes.......................................... 61,640
Profit sharing................................................... 56,907
Other accrued.................................................... 5,541
----------
$1,118,265
==========
</TABLE>
NOTE 8 LONG-TERM DEBT AND LINE OF CREDIT
<TABLE>
<S> <C>
Term note payable (A)............................................ $7,108,065
Other notes payable (B).......................................... 48,675
----------
7,156,740
Less current maturities.......................................... 2,095,461
----------
$5,061,279
==========
</TABLE>
(A) On September 10, 1997, the Company entered into a new credit facility
with a commercial bank consisting of a $7,315,269 term loan, and a $750,000
revolving-credit facility which expires September 10, 1998. The principal
balance is to be paid in forty-eight equal monthly principal payments of
$152,401, plus interest, at prime (8.5% at December 31, 1997) from October,
1997 through September, 2001. At December 31, 1997, the Company had $250,000
outstanding on the revolving-credit facility. The interest rate of the
revolving-credit facility is at prime. This revolving-credit facility replaces
and cancels the revolving-credit facility obtained in November, 1994. The note
is secured by all of the Company's assets and is guaranteed by the
stockholder.
During 1996, the Company had a credit facility with a commercial bank
consisting of a $12,300,000 term loan, and a $1,000,000 revolving-credit
facility. The principal balance was to be paid in fifty-nine equal monthly
principal payments of $170,833, plus interest, at prime (8.25% at December 31,
1996) from December, 1994 through November, 1999, with a final balloon payment
of $2,220,833 due November, 1999. The note was secured by all of the Company's
assets and was guaranteed by the stockholder. At December 31, 1996, the
Company had $700,000 outstanding on the revolving-credit facility. The
interest rate of the revolving-credit facility was at prime.
These credit facilities are collateralized by a $3 million life insurance
policy on the Company's stockholder. In addition, the credit facilities
contain certain restrictive covenants which, among others, require the Company
to maintain certain financial ratios and places restrictions on additional
indebtedness, capital expenditures and
possible distributions to the shareholder. The Company obtained waivers
covering periods of non-compliance with certain restrictions in the November,
1994 credit facility. The waivers enabled the Company to comply with the
aforementioned covenants as of December 31, 1997.
(B) Various promissory notes with original principal balances of
approximately $400,000 obtained to finance purchases of laundry routes and
vehicles, payable in monthly installments, ranging from $748 to $1,536, from
November, 1995 to November, 2000; interest at 8.25% and 10%; secured by
laundry vending equipment and vehicles.
F-41
<PAGE>
AMERIVEND CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31 1997
The aggregate maturities of long-term debt including the revolving-credit
facility subsequent to December 31, 1997 are as follows:
Year ending December 31,
<TABLE>
<S> <C>
1998.............................................................. $2,095,461
1999.............................................................. 1,844,766
2000.............................................................. 1,844,900
2001.............................................................. 1,371,613
----------
$7,156,740
==========
</TABLE>
The carrying value of long-term debt approximates fair value at December 31,
1997.
NOTE 9 PROFIT SHARING PLAN
The Company maintains a profit-sharing plan (the "Plan") Established Under
the provisions of Section 401(k) of the Internal Revenue Code, which covers
substantially all employees. The Company's contributions to the Plan are
discretionary. Eligible employees ratably vest in the Plan over seven years.
Plan expense amounted to approximately $57,000 for the year ended December 31,
1997.
NOTE 10 RELATED-PARTY TRANSACTIONS
In the ordinary course of business, the Company engages in loans and other
transactions with an affiliate related through common ownership and/or
management.
A summary of these transactions during the year ended December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Management fees.................................................... $234,000
Vending machine acquisitions....................................... $ 66,649
Vending machine transfers to affiliate............................. $ 12,256
</TABLE>
Rent expense paid to the Company's stockholder for the years ended December
31, 1997 amounted to approximately $212,000.
Amounts due from stockholder are for expenses paid on behalf of the
stockholder and have no fixed repayment terms.
Amounts due to related party are for transactions conducted with Amerivend
Southeast Corporation. There are no fixed payment terms for these liabilities.
NOTE 11 LEASES
The Company leases warehouse and office space from its stockholder under an
operating lease through 2003. At December 31, 1997, the Company is also a
party to noncancelable operating leases with third parties for vehicles.
Rent expense amounted to approximately $239,000 for the year ended December
31, 1997.
F-42
<PAGE>
AMERIVEND CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31 1997
Future minimum annual rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as
of December 31, 1997 are as follows:
Year ended December 31,
<TABLE>
<S> <C>
1998.............................................................. $ 238,181
1999.............................................................. 212,448
2000.............................................................. 212,448
2001.............................................................. 212,448
2002.............................................................. 212,448
Thereafter........................................................ 108,767
----------
$1,196,740
==========
</TABLE>
The Company leases the majority of the locations in which it has installed
equipment. The leases have terms ranging from five to ten years with renewal
options. Future rents are generally based on a percentage of collections at
the respective locations, generally ranging from 40% to 50%. For the year
ended December 31, 1997, rent for vending locations was approximately
$6,813,000.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and legal actions that arise in the
ordinary course of its business. Management believes that the ultimate
liability, if any, with respect to these claims and legal actions will not
have a material effect on the financial position or results of operations of
the Company.
In connection with examinations of the Company's tax returns for the years
1993 and 1994, the Internal Revenue Service has proposed certain adjustments
that will increase taxable income. The proposed adjustments to the Company
flow through as adjustments to the stockholder's individual returns. The
central issue relates to the allocation of the purchase price to certain
equipment in a 1991 transactions.
F-43
<PAGE>
AMERIVEND CORPORATION
CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................ $ 1,441
Account and notes receivables, net of allowance for doubtful ac-
counts.............................................................. 163
Inventory............................................................ 823
Other current assets................................................. 72
-------
Total current assets............................................... 2,499
-------
Property and equipment, net............................................ 11,430
Other assets........................................................... 384
-------
Total assets....................................................... $14,313
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt and revolving line of credit....... $ 2,094
Accounts payable..................................................... 22
Accrued commissions.................................................. 987
Accrued expenses..................................................... 66
Deferred revenues and deposits....................................... 241
-------
Total current liabilities.......................................... 3,410
-------
Long-term debt......................................................... 4,599
Due to related party................................................... 488
Stockholders' equity:
Common stock ($1 par value, 500 shares authorized issued and out-
standing)........................................................... 1
Additional capital................................................... 859
Retained earnings.................................................... 4,956
-------
Total stockholders' equity......................................... 5,816
-------
Total liabilities and stockholders' equity....................... $14,313
=======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-44
<PAGE>
AMERIVEND CORPORATION
CONDENSED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenue.................................................... $ 4,914 $ 4,886
Cost of revenue
Commissions.............................................. 1,905 1,993
Route expenditures....................................... 1,181 1,050
Depreciation and amortization............................ 673 616
Cost of equipment sales.................................. 196 183
--------- ---------
Total cost of revenue.................................. 3,955 3,842
--------- ---------
Operating expenses......................................... 339 361
--------- ---------
Income from operations..................................... 620 683
Interest expense, net.................................... 151 126
Other (income) expense, net.............................. 15 29
--------- ---------
Income before provision for income taxes................. 454 528
Provision for income taxes............................... -- --
--------- ---------
Net income................................................. $ 454 $ 528
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-45
<PAGE>
AMERIVEND CORPORATION
STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 454 $ 528
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization......................... 673 616
Loss on sale of assets................................ 45 33
Increase in accounts and notes receivable.............. (25) (79)
Increase in inventory.................................. 145 (108)
Decrease in prepaid expenses and other assets.......... 35 477
Decrease in accounts payable and accrued expenses...... 144 131
--------- ---------
Net cash flows provided by operating activities...... 1,471 1,598
--------- ---------
Cash flows from investing activities:
Capital expenditures................................... (565) (352)
Proceeds from sales of property and equipment.......... 5 3
--------- ---------
Net cash flows used in investing activities.......... (560) (349)
--------- ---------
Cash flows from financing activities:
Distributions to shareholder........................... -- (402)
Principal payments on long-term debt................... (685) (464)
--------- ---------
Net cash flows used in financing activities.......... (685) (866)
--------- ---------
Net increase in cash and cash equivalents................ 226 383
Cash and cash equivalents, beginning of period........... 1,268 1,058
--------- ---------
Cash and cash equivalents, end of period................. $ 1,494 $ 1,441
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-46
<PAGE>
AMERIVEND CORPORATION
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
MARCH 31, 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Amerivend Corporation (the "Company") is engaged primarily in the ownership
and operation of coin-operated machines at various third-party property
locations throughout Florida, Georgia and Alabama.
Interim Financial Statements
The balance sheet at March 31, 1998 and statements of income and cash flows
for the three months ended March 31, 1997 and March 31, 1998 are unaudited
and, in the opinion of management, include all adjustments (consisting of
normal and recurring adjustments) necessary for a fair presentation of results
for these interim periods. Certain information and footnote disclosures
normally included in the Company's annual financial statements have been
condensed or omitted. The results of operations for the interim period ended
March 31, 1998 are not necessarily indicative of the results to be expected
for future quarters or the entire year. These interim financial statements
should be read in conjunction with the audited financial statements for the
Company.
2. SUBSEQUENT EVENTS
On April 24, 1998, Mac-Gray Corporation, acquired all of the outstanding
stock of the Company for approximately $33.1 million in cash and assumed
liabilities.
F-47
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the Shares, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Commission's
registration fee, the NASD filing fee and the NYSE listing fee:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ------
<S> <C>
Commission registration fees....................................... +
NYSE listing fee................................................... +
Legal fees and expenses............................................ +
Accounting fees and expenses....................................... +
Printing expenses.................................................. +
Miscellaneous...................................................... +
---
Total.......................................................... +
===
</TABLE>
--------
+Previously filed.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with Section 145 of the DGCL, Article VII of the Mac-Gray
Charter provides that no director of Mac-Gray shall be personally liable to
Mac-Gray or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to Mac-Gray or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases, or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, the Mac-Gray
Charter provides that if the DGCL is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of
a director of Mac-Gray shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Article V of the Mac-Gray By-laws provides for indemnification by Mac-Gray
of its directors and officers and certain non-officer employees under certain
circumstances against expenses (including attorneys fees, judgments,
penalties, fines and amounts paid in settlement) reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceeding in which any such person is involved by reason of
the fact that such person is or was an officer or employee of Mac-Gray unless
it is determined that such person did not act in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of
Mac-Gray, and, with respect to criminal actions or proceedings, such person
had no reasonable cause to believe his or her conduct was unlawful.
Mac-Gray has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of the Mac-Gray By-laws and
requiring the advancement of expenses in proceedings involving directors in
most circumstances and also intends to purchase directors' and officers'
insurance to provide additional protections to the directors and officers of
Mac-Gray in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Mac-Gray has issued unregistered securities to
a limited number of persons, as described below. No underwriters or
underwriting discounts or commissions were involved. There was no public
II-1
<PAGE>
offering in any such transaction, and Mac-Gray believes that each transaction
was exempt from registration requirements of the Securities Act, by reason of
Section 4(2) thereof or Rule 701 thereunder.
(1) In April 1997, pursuant to a Limited Partner Assignment and Exchange
Agreement, Mac-Gray issued an aggregate 1,367,800 shares of Mac-Gray Common
Stock to Stewart Gray MacDonald, Jr., Chairman and Chief Executive Officer of
Mac-Gray, Sandra E. MacDonald and Daniel W. MacDonald in partial consideration
for the assignment and transfer of their respective interest in Mac-Gray, L.P.
(2) In April 1997, pursuant to a Stock Exchange Agreement, Mac-Gray issued
an aggregate 5,000,000 shares of Mac-Gray Common Stock to The Evelyn C.
MacDonald Family Trust f/b/o Stewart G. MacDonald, Jr., The Evelyn C.
MacDonald Family Trust f/b/o Sandra E. MacDonald, The Evelyn C. MacDonald
Family Trust f/b/o Daniel W. MacDonald, Stewart G. MacDonald, Jr. 1984 Trust,
Daniel W. MacDonald Trust 1988 and Sandra E. MacDonald in consideration of the
transfer of such parties' respective interest in Mac-Gray Co., Inc.
(3) In April 1997, pursuant to an Agreement and Plan of Merger, Mac-Gray
issued an aggregate 612,026 shares of Mac-Gray Common Stock to Jeffrey C.
Huenink, a Director of Mac-Gray, in partial consideration of the sale of his
laundry businesses.
(4) In April 1997, pursuant to Addendums to certain Stock Option Agreements,
Mac-Gray assumed Mac-Gray Co.'s obligations with respect to options to
purchase an aggregate 556,350 shares of Mac-Gray Common Stock to certain
officers and employees of Mac-Gray, including Stewart Gray MacDonald, Jr.,
Chairman and Chief Executive Officer of Mac-Gray, Patrick A. Flanagan,
Executive Vice President, Mergers and Acquisitions and a Director of Mac-Gray,
Neil F. MacLellan, III, Executive Vice President, Sales and Marketing of Mac-
Gray, and John S. Olbrych, Chief Financial Officer and Treasurer of Mac-Gray.
(5) In August 1997, pursuant to certain Stock Option Agreements, Mac-Gray
granted options to purchase an aggregate of 89,490 shares of Mac-Gray Common
Stock to certain officers and employees of Mac-Gray.
(6) In March 1998, pursuant to a certain Stock Option Agreement, Mac-Gray
granted an option to purchase 90,000 shares of Mac-Gray Common Stock to Robert
P. Bennett, Senior Vice President, Sales of Mac-Gray.
(7) On April 23, 1998, Mac-Gray Services, Inc., a wholly-owned subsidiary of
Mac-Gray, acquired one hundred percent of the outstanding capital stock of
Copico, Inc., a Massachusetts corporation ("Copico"). In addition to cash
consideration (less the repayment of debt), Mac-Gray issued an aggregate of
250,000 shares of Mac-Gray Common Stock to the holders of Copico capital
stock. The holders of such Copico capital stock, together with the number of
shares of Mac-Gray Common Stock received by such holder (in parentheses),
were: Peter B. Finn (2,500), Edward J. Goulart (67,900), Ronald R. Jalbert
(58,200), Robert W. LaRoche (67,900), David Luongo (2,500), Joseph J. Tischler
(2,500), and Massachusetts Capital Resource Company (48,500).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Certain exhibits indicated below are incorporated by reference to documents
of Mac-Gray on file with the Commission: (i) 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; (ii)
each exhibit marked by an asterisk (*) was previously filed as an exhibit to
Mac-Gray's Registration Statement, as amended (No. 333-45899); (iii) each
exhibit marked by an (@) symbol was previously filed as an exhibit to this
Registration Statement; (iv) each exhibit marked by a Z was previously filed
as an exhibit to Mac-Gray's Current Report on Form 8-K dated April 23, 1998;
and (v) each exhibit marked by an X was previously filed as an exhibit to Mac-
Gray's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998.
II-2
<PAGE>
(a) Exhibits. The following is a complete list of exhibits filed or
incorporated by reference as part of this Registration Statement.
<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. Pursuant to Item 601(b)(2) of Regulation S-K,
the Schedules referred to in the Merger Agreement are omitted. The
Registrant hereby undertakes to furnish supplementally a copy of any
omitted Schedule to the Commission upon request. The Exhibits to the
Merger Agreement were included in Appendix A to the Prospectus/Proxy
Statement, which is a part of the Registrant's previously filed
Registration Statement on Form S-4, as amended (No. 333-45899).*
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).+
5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the
securities being offered.@
10.1 Stockholders' Agreement dated as of April 17, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.1).+
10.2 Stockholders' Agreement dated as of June 26, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.2).+
10.3 Agreement and Plan of Merger dated as of April 17, 1997 by and among the
Registrant and the other parties named therein (10.3).+
10.4 Credit Agreement dated April 23, 1998, by and among the Registrant, the
other Borrowers (as defined therein), the lenders named therein and
State Street Bank and Trust Company, as agent.*
10.5 Security Agreement dated as of April 23, 1998 by and among the
Registrant, the other Borrowers (as defined therein) and the Banks (as
defined therein).*
10.6 Revolving Line of Credit and Term Note dated April 23, 1998 issued by
the Registrant in favor of the Banks (as defined therein).*
10.7 Pledge Agreements dated as of April 23, 1998 by and among the
Registrant, Mac-Gray Services, Inc. and the Banks (as defined
therein).*
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).+
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.*
10.19 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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.20 Stock Purchase Agreement by and among Mac-Gray Services, Inc., Copico,
Inc. and Certain Stockholders, dated as of March 31, 1998. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules referred to in the
Stock Purchase Agreement are omitted. The Registrant hereby undertakes
to furnish supplementally a copy of any omitted Schedule to the
Commission upon request.@
10.21 Form of Noncompetition Agreement by and between the Registrant and
Robert P. Bennett.*
10.22 Distribution Agreement by and between Schlumberger Technologies, Inc.
and Mac-Gray Services, Inc., dated as of October 27, 1997 (certain
portions of this exhibit are being omitted pursuant to a request for
confidential treatment).*
10.23 Stock and Asset Purchase Agreement, dated as of March 4, 1998, by and
among Mac-Gray Services, Inc., Amerivend Corporation, Amerivend
Southeast Corporation and Certain Stockholders.z
21.1 Subsidiaries of the Registrant.@
23.1 Consent of Counsel (included in Exhibit 5.1 hereto).@
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Morrison, Brown, Argiz & Company.
24.1 Powers of Attorney.@
27.1 Financial Data Schedule.*X
</TABLE>
(b)Financial Statement Schedules
No Financial Statement Schedules are filed herewith.
ITEM 17. UNDERTAKINGS
(a) Mac-Gray hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
II-4
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Mac-Gray, Mac-Gray has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Mac-Gray in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Mac-Gray will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Mac-Gray
Corporation has duly caused this Post Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge, The Commonwealth of
Massachusetts, on August 20, 1998.
MAC-GRAY CORPORATION
/s/ Stewart Gray MacDonald, Jr.
By: _________________________________
Stewart Gray MacDonald, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Stewart Gray MacDonald, Jr. Chairman, Chief August 20, 1998
____________________________________ Executive Officer and
Stewart Gray MacDonald, Jr. Director (Principal
Executive Officer)
* Executive Vice President August 20, 1998
____________________________________ Mergers and
Patrick A. Flanagan Acquisitions, Secretary
and Director
/s/ John S. Olbrych Chief Financial Officer August 20, 1998
____________________________________ and Treasurer
John S. Olbrych (Principal Financial
and Accounting Officer)
* Director August 20, 1998
____________________________________
Jeffrey C. Huenink
* Director August 20, 1998
____________________________________
Jerry A. Schiller
* Director August 20, 1998
____________________________________
John P. Leydon
* Director August 20, 1998
____________________________________
Eugene B. Doggett
*/s/ Stewart Gray MacDonald, Jr.
____________________________________
Stewart Gray MacDonald, Jr.
Attorney-in-Fact
</TABLE>
II-6
<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. Pursuant to Item 601(b)(2) of
Regulation S-K, the Schedules referred to in the Merger Agreement are
omitted. The Registrant hereby undertakes to furnish supplementally a
copy of any omitted Schedule to the Commission upon request. The
Exhibits to the Merger Agreement were included in Appendix A to the
Prospectus/Proxy Statement, which is a part of the Registrant's
previously filed Registration Statement on Form S-4, as amended (No.
333-45899).*
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).+
5.1 Opinion of Goodwin, Procter & Hoar llp as to the legality of the
securities being offered.@
10.1 Stockholders' Agreement dated as of April 17, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.1).+
10.2 Stockholders' Agreement dated as of June 26, 1997 by and among the
Registrant and certain stockholders of the Registrant (10.2).+
10.3 Agreement and Plan of Merger dated as of April 17, 1997 by and among
the Registrant and the other parties named therein (10.3).+
10.4 Credit Agreement dated April 23, 1998, by and among the Registrant,
the other Borrowers (as defined therein), the lenders named therein
and State Street Bank and Trust Company, as agent.*
10.5 Security Agreement dated as of April 23, 1998 by and among the
Registrant, the other Borrowers (as defined therein) and the Banks
(as defined therein).*
10.6 Revolving Line of Credit and Term Note dated April 23, 1998 issued by
the Registrant in favor of the Banks (as defined therein).*
10.7 Pledge Agreements dated as of April 23, 1998 by and among the
Registrant, Mac-Gray Services, Inc. and the Banks (as defined
therein).*
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>
<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.*
10.19 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.*
10.20 Stock Purchase Agreement by and among Mac-Gray Services, Inc., Copico,
Inc. and Certain Stockholders, dated as of March 31, 1998. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules referred to in the
Stock Purchase Agreement are omitted. The Registrant hereby undertakes
to furnish supplementally a copy of any omitted Schedule to the
Commission upon request.@
10.21 Form of Noncompetition Agreement by and between the Registrant and
Robert P. Bennett.*
10.22 Distribution Agreement by and between Schlumberger Technologies, Inc.
and Mac-Gray Services, Inc., dated as of October 27, 1997 (certain
portions of this exhibit are being omitted pursuant to a request for
confidential treatment).*
10.23 Stock and Asset Purchase Agreement, dated as of March 4, 1998, by and
among Mac-Gray Services, Inc., Amerivend Corporation, Amerivend
Southeast Corporation and Certain Stockholders.Z
21.1 Subsidiaries of the Registrant.@
23.1 Consent of Counsel (included in Exhibit 5.1 hereto).@
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Morrison, Brown, Argiz & Company.
24.1 Powers of Attorney (contained in the Signature Page to this Registration
Statement).@
27.1 Financial Data Schedule.*X
</TABLE>
- --------
+ Previously filed as an exhibit to Mac-Gray's Registration Statement on Form
S-1 (No. 333-33669) and incorporated by reference herein. The number in
parentheses following the description of the exhibit refers to the exhibit
number in the Form S-1.
* Previously filed as an exhibit to Mac-Gray's Registration Statement, as
amended (No. 333-45899) and incorporated by reference herein.
@ Previously filed as an exhibit to Mac-Gray's Registration Statement on Form
S-1, as amended (No. 333-49795), of which this Post-Effective Amendment No.
1 amends.
Z Previously filed as an exhibit to Mac-Gray's Current Report on Form 8-K
dated April 23, 1998.
X Previously filed as an exhibit to Mac-Gray's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (No. 333-49795) of Mac-Gray Corporation of
our report dated January 30, 1998, except as to the pooling of interests with
Intirion which is as of March 12, 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., which appear in such Prospectus. We also consent
to the references to us under the headings "Experts" and "Selected Historical
Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Historical Financial Data."
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 20, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (File No. 333-49795) of Mac-Gray
Corporation of our report dated February 17, 1998, relating to the financial
statements of Amerivend Corporation, which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ Morrison, Brown, Argiz & Company
Miami, Florida
August 19, 1998
