COINMACH CORPORATION AND SUBSIDIARIES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2002
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO ____________________.
COMMISSION FILE NUMBER 0-7694
COINMACH CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 53-0188589
(State or other jurisdiction of (I.R.S. EMPLOYER
incorporation or organization) Identification No.)
303 SUNNYSIDE BLVD., SUITE 70, PLAINVIEW, NEW YORK 11803
(Address of principal executive offices) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 349-8555
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [__].
AS OF THE CLOSE OF BUSINESS ON AUGUST 8, 2002, COINMACH CORPORATION HAD
OUTSTANDING 100 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "COMMON
STOCK"), ALL OF WHICH SHARES WERE HELD BY COINMACH LAUNDRY CORPORATION.
COINMACH CORPORATION AND SUBSIDIARIES
INDEX
PART I.
FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2002 (Unaudited) and March 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURE PAGE 28
-2-
COINMACH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
June 30, 2002 March 31, 2002(1)
------------- -----------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 39,439 $ 27,820
Receivables, net 10,981 11,883
Inventories 13,836 13,109
Prepaid expenses 7,818 7,166
Advance location payments 69,900 69,257
Land, property and equipment, net of accumulated
depreciation of $132,968 and $116,361 285,698 284,413
Contract rights, net of accumulated amortization of
$62,236 and $58,768 345,173 348,462
Goodwill, net of accumulated amortization of $30,910
and $30,910 204,284 204,284
Other assets 21,242 22,927
---------- ----------
Total assets $ 998,371 $ 989,321
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable and accrued expenses $ 32,520 $ 31,775
Accrued rental payments 28,440 28,576
Accrued interest 18,311 7,540
Deferred income taxes 82,398 81,850
9% Senior Notes due 2010 450,000 450,000
Credit facility indebtedness 277,500 280,000
Other long-term debt 6,580 7,305
Due to Parent 51,378 51,852
Stockholder's equity:
Common stock and capital in excess of par value 117,391 117,391
Accumulated deficit (66,147) (66,968)
---------- ----------
Total stockholder's equity 51,244 50,423
---------- ----------
Total liabilities and stockholder's equity $ 998,371 $ 989,321
========== ==========
See accompanying notes.
______
1. The March 31, 2002 balance sheet has been derived from the audited
consolidated financial statements as of that date.
-3-
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands of dollars)
Three Months Ended
-----------------------
June 30, June 30,
2002 2001
-------- --------
REVENUES $136,294 $135,823
COSTS AND EXPENSES:
Laundry operating expenses 92,518 91,404
General and administrative 2,042 2,117
Depreciation and amortization 25,894 33,423
-------- --------
120,454 126,944
-------- --------
OPERATING INCOME 15,840 8,879
INTEREST EXPENSE, NET 14,471 17,091
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,369 (8,212)
PROVISION (BENEFIT) FOR
INCOME TAXES 548 (1,844)
-------- --------
NET INCOME (LOSS) $ 821 $(6,368)
======== ========
See accompanying notes.
-4-
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
Three Months Ended
---------------------------
June 30, June 30,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 821 $ (6,368)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 16,733 15,121
Amortization of advance location payments 5,492 5,941
Amortization of intangibles 3,669 12,361
Deferred income taxes 548 (1,844)
Amortization of debt discount and deferred issue costs 610 477
Amortization of premium on 113/4% Senior Notes - (309)
Change in operating assets and liabilities:
Other assets 753 (48)
Receivables, net 902 354
Inventories and prepaid expenses (1,379) (2,085)
Accounts payable and accrued expenses, net 59 (2,986)
Accrued interest 10,771 (9,061)
--------- ---------
Net cash provided by operating activities 38,979 11,553
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (18,047) (14,920)
Advance location payments to location owners (5,585) (4,994)
Proceeds from sale of property and equipment 223 439
--------- ---------
Net cash used in investing activities (23,409) (19,475)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from credit facility - 17,000
Repayments to credit facility (2,500) (10,114)
Net repayments to parent (474) (376)
Repayments of bank and other borrowings (4) (130)
Principal payments on capitalized lease obligations (973) (870)
--------- ---------
Net cash (used in) provided by financing activities (3,951) 5,510
--------- ---------
Net increase (decrease) in cash and cash equivalents 11,619 (2,412)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,820 25,859
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 39,439 $ 23,447
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 3,100 $ 25,998
========= =========
Income taxes paid $ 79 $ 78
========= =========
NON-CASH FINANCING ACTIVITIES:
Acquisition of fixed assets through capital leases $ 252 $ 1,360
========= =========
-5-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Coinmach Corporation, a Delaware corporation (the "Company"), is the
leading supplier of outsourced laundry services for multi-family housing
properties in North America. The Company's core business (which the Company
refers to as the "route" business) involves leasing laundry rooms from building
owners and property management companies, installing and servicing laundry
equipment, collecting revenues generated from washers and dryers (hereinafter
referred to as "laundry machines" or "machines") and operating retail
laundromats. The Company also leases laundry machines and other household
appliances (through its Appliance Warehouse division) to property owners,
managers of multi-family housing properties, and to a lesser extent, individuals
and corporate relocation entities. At June 30, 2002, the Company owned and
operated approximately 837,000 laundry machines in approximately 80,000
locations throughout North America and in 166 retail laundromats located
throughout Texas and Arizona. The Company provides laundromat services at all
such retail locations. Super Laundry Equipment Corp. ("Super Laundry"), a
wholly-owned subsidiary of the Company, constructs, designs and retrofits retail
laundromats and distributes laundromat equipment. The Company is a wholly-owned
subsidiary of Coinmach Laundry Corporation, a Delaware Corporation ("CLC").
Unless otherwise specified herein, references to the Company shall mean Coinmach
Corporation and its subsidiaries.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with accounting principles
generally accepted in the United States ("GAAP") for interim financial reporting
and pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, such financial statements do not include all of the
information and footnotes required by GAAP for complete financial statements.
GAAP requires the Company's management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from such estimates. The interim results presented herein are not
necessarily indicative of the results to be expected for the entire year.
In the opinion of management of the Company, these unaudited condensed
consolidated financial statements contain all adjustments of a normal recurring
nature necessary for a fair presentation of the financial statements for the
interim periods presented. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2002. Certain amounts in the financial statements have been
reclassified for presentation purposes.
-6-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
2. GOODWILL AND CONTRACT RIGHTS
Goodwill, under purchase accounting, represents the excess of cost over
fair values of net assets acquired and had been amortized on a straight-line
basis over a period of 15 years. In June 2001, the Financial Accounting
Standards Board ("FASB") issued two statements: Statement of Financial
Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives are no longer amortized but instead are subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company applied the new
rules on accounting for goodwill and other intangible assets on April 1, 2002.
The Company performed the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of April 1, 2002, and determined that
there was no effect on the Company's financial position or results of
operations.
Contract rights represent amounts expended for location contracts
arising from the acquisition of laundry machines on location. These amounts,
which arose solely from purchase price allocations pursuant to acquisitions
based on independent appraisals, have been amortized on a straight-line basis
over approximately 15 years. The Company does not record contract rights
relating to new locations signed in the ordinary course of business. In
connection with adopting SFAS No. 142, the Company reassessed the useful
economic life of contract rights and determined that such contract rights should
be amortized using accelerated methods over periods ranging from 30-35 years.
This change took effect with the quarter ended June 30, 2002 and is expected to
result in an increase in operating income of approximately $12.4 million for the
year ended March 31, 2003. Amortization expense for contract rights for each of
the next five years is estimated to be as follows (in millions of dollars):
Years ending
March 31,
------------
2003 $ 14.2
2004 $ 13.9
2005 $ 13.6
2006 $ 13.3
2007 $ 13.0
Had the Company adopted the non amortization provisions of SFAS No. 142
and reassessed the useful economic life of contract rights on April 1, 2001, the
adjusted net income for the three months ended June 30, 2001 would have been
approximately $250,000.
Management evaluates the realizability of goodwill and contract rights
balances (if there are indicators of impairment) based upon the Company's
forecasted undiscounted cash flows and operating income. Based upon present
operations and strategic plans, management believes that no impairment of
goodwill or contract rights has occurred.
-7-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
3. DEBT
On January 25, 2002, the Company issued $450 million of 9% Senior Notes
due 2010 (the "9% Senior Notes") and entered into a new $355 million senior
secured credit facility (the "Senior Credit Facility") comprised of: (i) $280
million in aggregate principal amount of term loans and (ii) a revolving credit
facility with a maximum borrowing limit of $75 million. The Company used the net
proceeds from the 9% Senior Notes, together with borrowings under the Senior
Credit Facility, to (i) redeem all of its outstanding 11 3/4% Senior Notes due
2005 (the "11 3/4% Senior Notes") (including accrued interest and the related
call premium), (ii) repay outstanding indebtedness under its prior senior credit
facility, and (iii) pay related fees and expenses. The 11 3/4% Senior Notes were
redeemed on February 25, 2002.
At June 30, 2002, the Company had outstanding debt consisting of (a)
$450 million of its 9% Senior Notes and (b) $277.5 million of term loans with
interest rates ranging from 4.69% to 5.13%. The term loans represent
indebtedness pursuant to the Senior Credit Facility, which is secured by all of
the Company's real and personal property and is guaranteed by the Company's
domestic subsidiaries. Under the Senior Credit Facility, CLC and the Company
pledged to Bankers Trust Company, as Collateral Agent, their interests in all of
the issued and outstanding shares of capital stock of the Company and the
Company's domestic subsidiaries. In addition to certain customary terms and
provisions, including events of default and customary representations, covenants
and agreements, the Senior Credit Facility contains certain restrictive
covenants including, but not limited to, a maximum leverage ratio, a minimum
consolidated interest coverage ratio and limitations on indebtedness, capital
expenditures, advances, investments and loans, mergers and acquisitions,
dividends, stock issuances and transactions with affiliates. Also, the indenture
governing the 9% Senior Notes and the Senior Credit Facility limit the Company's
ability to pay dividends. At June 30, 2002, the Company was in compliance with
the covenants under the Senior Credit Facility.
4. ACCOUNTING CHANGE
On April 1, 2001, the Company adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
These statements established accounting and reporting standards for derivative
instruments and for hedging activities. In accordance with SFAS No. 133, all
derivative instruments are recognized in the balance sheet at their fair values.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. For a derivative
designated as a hedge of future cash flows, the effective portion of the
derivative's gain or loss is initially reported as a component of "Other
Comprehensive Income" and subsequently reclassified into "Earnings" along with
the related effects of the hedged item. The ineffective portion of the gain or
loss is reported in "Earnings" immediately. At June 30, 2002, the Company had no
exposure to derivative instruments and was not involved in hedging activities.
-8-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In April 2002, FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 62, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under SFAS No. 4. Gains or losses
from extinguishments of debt for fiscal years beginning after May 15, 2002 are
not being reported as extraordinary items unless the extinguishment qualifies as
an extraordinary item under the provisions of APB Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS -- REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS. Upon adoption, any gain or loss on extinguishments of debt
previously classified as an extraordinary item in prior periods presented that
does not meet the criteria of APB Opinion No. 30 for such classification will be
reclassified to conform to the provisions of SFAS No. 145.
-9-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. GUARANTOR SUBSIDIARY
The Company's domestic subsidiaries (collectively, the "Guarantor
Subsidiaries") have guaranteed the Company's 9% Senior Notes and Senior Credit
Facility referred to in Note 3. The Company has not included separate financial
statements of the Guarantor Subsidiaries because they are wholly-owned by the
Company and the guarantees issued are full and unconditional. Condensed
consolidating financial information for the Company and its Guarantor
Subsidiaries is as follows:
CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands of dollars)
JUNE 30, 2002
-------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------
ASSETS
Cash, receivables, inventory and prepaid expenses $ 57,425 $ 14,649 $ - $ 72,074
Advance location payments 69,900 - - 69,900
Land, property and equipment, net 284,669 1,029 - 285,698
Intangible assets, net 547,424 2,033 - 549,457
Investment in subsidiaries 4,973 (2,021) (2,952) -
Other assets 20,358 884 - 21,242
------------------------------------------------------------
Total assets $ 984,749 $ 16,574 $ (2,952) $ 998,371
============================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 72,738 $ 6,533 $ - $ 79,271
Deferred income taxes 82,584 (186) - 82,398
Debt 726,805 7,275 - 734,080
Due to parent 51,378 - - 51,378
Total stockholder's equity 51,244 2,952 (2,952) 51,244
------------------------------------------------------------
Total liabilities and stockholder's equity $ 984,749 $ 16,574 $ (2,952) $ 998,371
============================================================
-10-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. GUARANTOR SUBSIDIARY (continued)
CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands of dollars)
(continued)
MARCH 31, 2002
-------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------
ASSETS
Cash, receivables, inventory and prepaid expenses $ 44,666 $ 15,312 $ - $ 59,978
Advance location payments 69,257 - - 69,257
Land, property and equipment, net 283,268 1,145 - 284,413
Intangible assets, net 550,743 2,003 - 552,746
Investment in subsidiaries 4,252 (1,300) (2,952) -
Other assets 22,261 666 - 22,927
------------------------------------------------------------
Total assets $ 974,447 $ 17,826 $ (2,952) $ 989,321
============================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 60,131 $ 7,760 $ - $ 67,891
Deferred income taxes 82,036 (186) - 81,850
Debt 730,005 7,300 - 737,305
Due to parent 51,852 - - 51,852
Total stockholder's equity 50,423 2,952 (2,952) 50,423
------------------------------------------------------------
Total liabilities and stockholder's equity $ 974,447 $ 17,826 $ (2,952) $ 989,321
============================================================
-11-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. GUARANTOR SUBSIDIARY (continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (in thousands of dollars)
THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------
Revenues $ 125,717 $ 10,577 $ - $ 136,294
Costs and expenses 110,020 10,434 - 120,454
-------------------------------------------------------------
Operating income (loss) 15,697 143 - 15,840
Interest expense 14,328 143 - 14,471
-------------------------------------------------------------
1,369 - - 1,369
Income taxes 548 - - 548
-------------------------------------------------------------
821 - - 821
Equity in loss of subsidiaries - - - -
-------------------------------------------------------------
Net income $ 821 $ - $ - $ 821
=============================================================
THREE MONTHS ENDED JUNE 30, 2001
-------------------------------------------------------------
Revenues $ 126,399 $ 9,424 $ - $ 135,823
Costs and expenses 117,359 9,585 - 126,944
-------------------------------------------------------------
Operating income 9,040 (161) - 8,879
Interest expense 16,922 169 - 17,091
-------------------------------------------------------------
(7,882) (330) - (8,212)
Income taxes (1,769) (75) - (1,844)
-------------------------------------------------------------
(6,113) (255) - (6,368)
Equity in earnings of subsidiaries (255) - 255 -
-------------------------------------------------------------
Net (loss) income $ (6,368) $ (255) $ 255 $ (6,368)
=============================================================
-12-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. GUARANTOR SUBSIDIARY (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (in thousands of dollars)
THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 821 $ - $ - $ 821
Noncash adjustments 26,901 151 - 27,052
Change in operating assets and liabilities 11,109 (3) - 11,106
------------------------------------------------------------
Net cash provided by operating activities 38,831 148 - 38,979
------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (23,379) (30) - (23,409)
------------------------------------------------------------
Net cash used in investing activities (23,379) (30) - (23,409)
------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of debt (2,475) (25) - (2,500)
Other financing items (1,849) 398 - (1,451)
------------------------------------------------------------
Net cash (used in) provided by financing
activities (4,324) 373 - (3,951)
------------------------------------------------------------
Net increase in cash and cash equivalents 11,128 491 - 11,619
Cash and cash equivalents, beginning of period 27,562 258 - 27,820
------------------------------------------------------------
Cash and cash equivalents, end of period $ 38,690 $ 749 $ - $ 39,439
============================================================
-13-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. GUARANTOR SUBSIDIARY (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (in thousands of dollars)
(continued)
THREE MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $ (6,368) $ (255) $ 255 $ (6,368)
Noncash adjustments 31,626 121 - 31,747
Change in operating assets and liabilities (11,789) (2,037) - (13,826)
----------------------------------------------------------------------
Net cash provided by (used in) operating
activities 13,469 (2,171) 255 11,553
----------------------------------------------------------------------
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 255 - (255) -
Capital expenditures (19,461) (14) - (19,475)
----------------------------------------------------------------------
Net cash used in investing activities (19,206) (14) (255) (19,475)
----------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from debt 16,830 170 - 17,000
Repayment of debt (10,013) (101) - (10,114)
Other financing items (3,520) 2,144 - (1,376)
----------------------------------------------------------------------
Net cash provided by financing activities 3,297 2,213 - 5,510
----------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (2,440) 28 - (2,412)
Cash and cash equivalents, beginning of period 25,418 441 - 25,859
---------------------------------------------------------------------
Cash and cash equivalents, end of period $ 22,978 $ 469 $ - $ 23,447
=====================================================================
-14-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
7. SEGMENT INFORMATION
The Company reports segment information only for its route business,
its only reportable segment, and provides information for its non-reportable
segments as "All other." The route business, which comprises the Company's core
business, involves leasing laundry rooms from building owners and property
management companies typically on a long-term, renewal basis, installing and
servicing the laundry equipment, collecting revenues generated from laundry
machines, and operating retail laundromats. The "All other" segment includes the
aggregation of the Company's equipment distribution and rental businesses. The
rental business involves the leasing of laundry machines and other household
appliances to property owners, managers of multi-family housing properties and
to a lesser extent, individuals and corporate relocation entities, through its
Appliance Warehouse division. The distribution business involves constructing
complete turnkey retail laundromats, retrofitting existing retail laundromats,
distributing exclusive lines of coin and non-coin machines and parts and selling
service contracts through the Company's wholly-owned subsidiary, Super Laundry.
Prior to the quarter ended September 30, 2001, the "All other" segment included
the operations of the Company's retail laundromats. The Company's segment
information for all periods presented has been restated to combine the Company's
operation of the retail laundromats with its route business. The Company
evaluates performance and allocates resources based on EBITDA (earnings before
interest, taxes, depreciation and amortization), cash flow and growth
opportunity. The accounting policies of the segments are the same as those
described in the Company's Annual Report on Form 10-K for the year ended March
31, 2002.
-15-
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
7. SEGMENT INFORMATION (continued)
The table below presents information about the Company's segments (in thousands
of dollars):
THREE MONTHS ENDED JUNE 30,
2002 2001
---------------- ----------------
Revenue:
Route $119,111 $121,228
All other:
Distribution 10,577 9,424
Rental 6,606 5,171
---------------- ----------------
Subtotal All other 17,183 14,595
---------------- ----------------
Total $136,294 $135,823
================ ================
EBITDA:
Route $ 40,900 $ 42,418
All other 2,876 2,001
Reconciling items:
Corporate expenses (2,042) (2,117)
---------------- ----------------
Total $ 41,734 $ 42,302
================ ================
Income before taxes:
Route $17,184 $14,809
All other 1,119 359
---------------- ----------------
Subtotal 18,303 15,168
Reconciling items:
Corporate expenses (2,463) (6,289)
Interest expense (14,471) (17,091)
---------------- ----------------
Income (loss) before taxes $ 1,369 $(8,212)
================ ================
-16-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Except for the historical information contained herein, certain matters
discussed in this document are forward-looking statements based on the beliefs
of the Company's management and are subject to certain risks and uncertainties,
including the risks and uncertainties discussed below, as well as other risks
set forth in the Company's Annual Report on Form 10-K for the year ended March
31, 2002. Should any of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's future performance and
actual results of operations may differ materially from those expected or
intended.
The Company's primary financial objective is to increase its cash flow
from operations. Cash flow from operations represents a source of funds
available to service indebtedness and for investment in both internal growth and
growth through acquisitions. The Company has experienced net losses during the
past three fiscal years. Such net losses were attributable in part to
significant non-cash charges associated with the Company's acquisitions and the
related amortization of contract rights and goodwill accounted for under the
purchase method of accounting.
The Company is principally engaged in the business of supplying
outsourced laundry services to multi-family housing properties. The Company's
most significant revenue source is its route business, which over the last three
fiscal years has accounted for approximately 90% of its revenue. Through its
route operations, the Company provides outsourced laundry equipment services to
locations by leasing laundry rooms from building owners and property management
companies, typically on a long-term, renewable basis. In return for the
exclusive right to provide these services, most of the Company's contracts
provide for commission payments to the location owners. Commission expense (also
referred to as rent expense), the Company's single largest expense item, is
included in laundry operating expenses and represents payments to location
owners. Commissions may be fixed amounts or percentages of revenues and are
generally paid monthly. In addition to commission payments, many of the
Company's leases require it to make advance location payments to location
owners, which are capitalized and amortized over the life of the applicable
leases. Through the Company's route business, the Company also currently
operates 166 retail laundromats throughout Texas and Arizona. The operation of
retail laundromats involves leasing store locations in desirable geographic
areas, maintaining an appropriate mix of washers and dryers at each store
location and servicing the washers and dryers at such locations. Laundry
operating expenses include, in addition to commission payments, (i) the cost of
machine maintenance and revenue collection in the route business, including
payroll, parts, insurance and other related expenses, (ii) costs and expenses
incurred in maintaining the Company's retail laundromats, including utilities
and related expenses, (iii) the cost of sales associated with the equipment
distribution business and (iv) certain expenses related to the operation of the
Company's rental business.
In addition to its route business, the Company operates an equipment
distribution business through Super Laundry Equipment Corporation ("Super
Laundry"), its wholly-owned subsidiary. Super Laundry's business consists of
constructing and designing complete turnkey retail laundromats, retrofitting
existing retail laundromats, distributing exclusive lines of commercial coin and
non-coin operated machines and parts, and selling service contracts.
-17-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (continued)
The Company also operates an equipment rental business through its
Appliance Warehouse division, which rents laundry equipment and other household
appliances and electronic items to corporate relocation entities, owners and
managers of multi-family housing properties as well as to individuals.
The Company's discussion and analysis of segment information for the
route, distribution and rental businesses for the period ended June 30, 2001 has
been restated to combine its operations of the retail laundromats with the route
businesses. Prior to the quarter ended September 30, 2001, the operations of the
Company's retail laundromats were separately discussed and analyzed. The Company
believes that aggregating its retail operations with its route business is more
representative of the Company's core business.
ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
The Company's financial statements are based on the selection and
application of significant accounting policies, which require management to make
significant estimates and assumptions. The Company believes that the following
are some of the more critical judgment areas in the application of its
accounting policies that currently affect its financial condition and results of
operations.
Revenue and cash and cash equivalents include an estimate of cash not
yet collected at the end of a reporting period which remained at laundry room
locations.
The Company is required to estimate the collectibility of its
receivables. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables including the current
credit-worthiness of each customer. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Allowance for doubtful accounts
at June 30, 2002 was approximately $1.2 million.
The Company currently has significant deferred tax assets, which are
subject to periodic recoverability assessments. Realization of the Company's
deferred tax assets is principally dependent upon its achievement of projected
future taxable income. Management's judgments regarding future profitability may
change due to future market conditions and other factors. These changes, if any,
may require possible material adjustments to these deferred tax asset balances.
The Company has significant intangible assets related to goodwill and
other acquired intangibles. The determination of related estimated useful lives
and whether or not these assets are impaired involves significant judgments.
Changes in strategy and/or market conditions, including estimated future cash
flows, could significantly impact these judgments and require adjustments to
recorded asset balances.
-18-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
attached unaudited condensed consolidated financial statements and notes thereto
and with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2002.
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2002 AND
JUNE 30, 2001
The following table sets forth the Company's revenues for the periods
indicated (in millions of dollars):
Three months ended June 30,
------------------------------------
2002 2001 Change
-------- -------- --------
Route $ 119.1 $ 121.2 $ (2.1)
Distribution 10.6 9.4 1.2
Rental 6.6 5.2 1.4
-------- -------- --------
$ 136.3 $ 135.8 $ 0.5
======== ======== ========
Revenue increased by approximately $0.5 million or less than 1% for the
three-month period ended June 30, 2002, as compared to the prior year's
corresponding period.
Route revenue for the three months ended June 30, 2002 decreased
by approximately $2.1 million or 2% over the prior year's corresponding
period. Management believes that the decrease in route revenue for the
current quarter as compared to the prior year's corresponding period
was the result of increased vacancies related to locations in certain
regions. This decrease was slightly offset by an improvement in revenue
from the timing of price changes and internal growth in machine count
during the prior and current year.
Distribution revenue for the three months ended June 30, 2002
increased by approximately $1.2 million or 12% from the prior year's
corresponding period. Sales from the distribution business unit are
sensitive to general market conditions and economic conditions and as a
result have experienced fluctuations during such periods.
Rental revenue for the three months ended June 30, 2002 increased
by approximately $1.4 million or 28% over the prior year's
corresponding period. This increase was primarily the result of
internal growth of the machine base in existing areas of operations and
expansion into new territories within the United States.
-19-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(continued)
RESULTS OF OPERATIONS (continued)
Laundry operating expenses increased by approximately $1.1 million or
1% for the three-month period ended June 30, 2002, as compared to the prior
year's corresponding period. This increase in laundry operating expenses was due
primarily to (i) an increase in cost of sales resulting from increased sales in
the distribution business and (ii) costs associated with expansion into new
markets in the rental business. As a percentage of revenues, laundry operating
expenses were approximately 67.9% and 67.3% for the three-month period ended
June 30, 2002 and June 30, 2001, respectively.
General and administrative expenses decreased slightly for the
three-month period ended June 30, 2002, as compared to the prior year's
corresponding period. As a percentage of revenues, general and administrative
expenses were approximately 1.5% and 1.6% for the three-month period ended June
30, 2002 and June 30, 2001, respectively.
Depreciation and amortization expense decreased by approximately 23%
for the three-month period ended June 30, 2002, as compared to the prior year's
corresponding period. The decrease in depreciation and amortization expense was
primarily due to the elimination of amortization expense on goodwill of
approximately $3.8 million and the reduction of amortization expense on contract
rights of approximately $3.2 million as the result of the application of
Statements of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS, offset slightly by depreciation expense relating to
capital expenditures required by historical increases in the Company's installed
base of machines.
As a result of the issuance of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, in June 2001, effective for fiscal years beginning after
December 15, 2001, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but instead are subject to annual impairment tests
in accordance with such Statements. Other intangible assets will continue to be
amortized over their useful lives. The Company has applied the new rules on
accounting for goodwill and other intangible assets as of April 1, 2002. In
connection with SFAS No. 142, the Company also reassessed the useful lives of
contract rights and has determined that such contract rights should be amortized
using accelerated methods over periods ranging from 30 to 35 years. This change
took effect beginning with the quarter ended June 30, 2002 and is expected to
result in an increase in operating income of approximately $12.4 million for the
year ended March 31, 2003.
Operating income margins were approximately 11.6% for the three-month
period ended June 30, 2002, as compared to approximately 6.5% for the prior
year's corresponding period. The increase in operating income margin was
primarily due to the decrease in amortization expenses in the current period.
-20-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
Interest expense, net, decreased by approximately 15% for the
three-month period ended June 30, 2002, as compared to the prior year's
corresponding period. On January 25, 2002, the Company issued $450 million of
its 9% Senior Notes due 2010 (the "9% Senior Notes") and entered into a new $355
million senior secured credit facility (the "Senior Credit Facility"). The
decrease in interest expense was primarily due to decreased borrowing levels
under the Senior Credit Facility as well as a decrease in interest rates payable
under such facility resulting from a market decline in interest rates. This
decrease was partially offset by an increase in interest expense as the result
of (i) increased indebtedness outstanding under the 9% Senior Notes of $450
million as compared to approximately $296.7 million principal amount of 11 3/4%
Senior Notes due 2005, and (ii) an increase in amortization of deferred
financing costs relating to the issuance of the 9% Senior Notes and entering
into the Senior Credit Facility.
EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization and is used by certain
investors as an indication of a company's ability to service existing debt, to
sustain potential future increases in debt and to satisfy capital requirements.
However, EBITDA is not intended to represent cash flows for the period, nor has
it been presented as an alternative to either (a) operating income (as
determined by accounting principles generally accepted in the United States
("GAAP")) as an indicator of operating performance or (b) cash flows from
operating, investing and financing activities (as determined by GAAP) as a
measure of liquidity. Given that EBITDA is not a measurement determined in
accordance with GAAP and is thus susceptible to varying calculations, EBITDA as
presented may not be comparable to other similarly titled measures of other
companies.
The following table sets forth the Company's EBITDA for the periods
indicated (in millions of dollars):
Three months ended June 30,
----------------------------------------
2002 2001 Change
---------- ---------- ----------
Route $ 40.9 $ 42.4 $ (1.5)
Distribution 0.3 0.1 0.2
Rental 2.5 1.9 0.6
G&A (2.0) (2.1) 0.1
---------- ---------- ---------
$ 41.7 $ 42.3 $ (0.6)
========== ========== =========
EBITDA was approximately $41.7 million for the three months ended June
30, 2002, as compared to approximately $42.3 million for the three months ended
June 30, 2001. EBITDA margins declined to approximately 30.6% for the three
months ended June 30, 2002, as compared to approximately 31.1% for the prior
year's corresponding period. This decrease was primarily the result of increased
operating expenses in the distribution and rental businesses and decreased
revenues in the route business, as discussed above.
-21-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have substantial indebtedness and debt service
requirements. At June 30, 2002, the Company had outstanding debt of
approximately $734.1 million, which included $450 million of the 9% Senior Notes
and $277.5 million of borrowings under the Senior Credit Facility. The Company's
stockholder's equity was approximately $51.2 million as of June 30, 2002.
The Company's liquidity requirements arise from capital expenditures,
interest expense and, to a lesser extent, principal payments on its indebtedness
and working capital requirements. The Company has met these requirements in each
fiscal year since 1995 primarily from cash flow generated from operations. The
Company's primary source of liquidity as of June 30, 2002 consisted of cash and
cash equivalents of $39.4 million and available borrowings under its Senior
Credit Facility of approximately $74 million.
On January 25, 2002, the Company issued the 9% Senior Notes and entered
into the Senior Credit Facility, which was comprised of: (i) $280 million in
aggregate principal amount of term loans and (ii) a revolving credit facility
with a maximum borrowing limit of $75 million. The Senior Credit Facility also
provides for up to $10 million of letter of credit financings and short term
borrowings under a swing line facility of up to $7.5 million. The Senior Credit
Facility is secured by substantially all of the Company's assets. The Company
used the net proceeds from the 9% Senior Notes, together with borrowings under
the Senior Credit Facility, to (i) redeem all of its outstanding 11 3/4% Senior
Notes (including accrued interest and the related call premium), (ii) repay
outstanding indebtedness under its prior senior credit facility, and (iii) pay
related fees and expenses. The 11 3/4% Senior Notes were redeemed on February
25, 2002.
The term loans under the Senior Credit Facility, in aggregate
principal amounts outstanding of $30 million and $247.5 million as of June 30,
2002, are scheduled to be fully repaid by January 25, 2008 and July 25, 2009,
respectively. As of June 30, 2002, the Company had no amounts outstanding under
its revolving credit facility, which is scheduled to expire on January 25, 2008.
The Company's working capital requirements are, and are expected to
continue to be, minimal since a significant portion of the Company's operating
expenses are not paid until after cash is collected from installed machines.
Under the Company's existing financing arrangements, the Company is required to
make (i) quarterly amortization payments under the Senior Credit Facility
commencing on March 31, 2003 with respect to the $30 million term loan and
semi-annual amortization payments commencing on June 30, 2002 with respect to
the $250 million term loan, and (ii) semi-annual cash interest payments under
the 9% Senior Notes on February 1 and August 1, commencing August 1, 2002.
-22-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
As the Company has focused on increasing its cash flow from operating
activities, it has made significant capital investments, primarily consisting of
capital expenditures related to acquisitions, renewal and growth. The Company
anticipates that it will continue to utilize cash flows from operations to
finance its capital expenditures and working capital needs, including interest
payments on its outstanding indebtedness.
Capital expenditures for the three month period ended June 30, 2002
were approximately $23.6 million (excluding approximately $1.0 million relating
to capital lease obligations). The primary components of the Company's capital
expenditures are (i) machine expenditures, (ii) advance location payments, and
(iii) laundry room improvements. The Company's installed base of machines for
the route business increased by approximately 900 machines for the three-month
period ended June 30, 2002. The growth in the rental business machine base was
approximately 8,700 for the three-month period ended June 30, 2002. The full
impact on revenues and cash flow generated from capital expended on the net
increase in the installed base of machines is not expected to be reflected in
the Company's financial results until subsequent reporting periods, depending on
certain factors, including the timing of the capital expended. While the Company
estimates that it will generate sufficient cash flows from operations to finance
anticipated capital expenditures, there can be no assurances that it will be
able to do so.
The following table sets forth the Company's capital expenditures
(excluding payments for capital lease obligations) for the periods indicated (in
millions of dollars):
Three months ended June 30,
------------------------------------
2002 2001 Change
--------- --------- ---------
Route $ 20.3 $ 18.0 $ (2.3)
Distribution - - -
Rental 3.3 1.9 (1.4)
-------- -------- --------
$ 23.6 $ 19.9 $ (3.7)
======== ======== ========
The Company's level of indebtedness will have several important effects
on its future operations including, but not limited to, the following: (i) a
significant portion of the Company's cash flow from operations will be required
to pay interest on its indebtedness; (ii) the financial covenants contained in
certain of the agreements governing the Company's indebtedness will require the
Company to meet certain financial tests and may limit its ability to borrow
additional funds or to dispose of assets; (iii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; and (iv) the
Company's ability to adapt to changes in the outsourced laundry equipment
services industry and to economic conditions in general could be limited.
-24-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Management believes that the Company's future operating activities will
generate sufficient cash flow to repay indebtedness outstanding under the 9%
Senior Notes and borrowings under the Senior Credit Facility or to permit any
necessary refinancings thereof. An inability of the Company, however, to comply
with covenants or other conditions contained in the indenture governing the 9%
Senior Notes or in the Senior Credit Facility could result in an acceleration of
all amounts thereunder. If the Company is unable to meet its debt service
obligations, it could be required to take certain actions such as reducing or
delaying capital expenditures, selling assets, refinancing or restructuring its
indebtedness, selling additional equity capital or other actions. There is no
assurance that any of such actions could be effected on commercially reasonable
terms or on terms permitted under the Senior Credit Facility, or the indenture
governing the 9% Senior Notes.
CERTAIN ACCOUNTING TREATMENT
The Company's depreciation and amortization expense, which aggregated
approximately $25.9 million for the three months ended June 30, 2002, reduces
the Company's net income, but not its cash flow from operations. In accordance
with GAAP, a significant amount of the purchase price related to businesses
acquired by the Company is allocated to "contract rights". Management evaluates
the realizability of contract rights balances (if there are indicators of
impairment) based upon the Company's forecasted undiscounted cash flows and
operating income. Based upon present operations and strategic plans, management
believes that no impairment of contract rights has occurred.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 62, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under SFAS No. 4. Gains or losses from extinguishments of debt for fiscal years
beginning after May 15, 2002 are not to be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS -
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY,
UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS ("APB No. 30"). Upon
adoption, any gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented that does not meet the criteria of
APB No. 30 for such classification will be reclassified to conform to the
provisions of SFAS No. 145.
-24-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OUTLOOK
An integral component of the Company's business strategy has been the
expansion of its installed machine base through a combination of internal growth
and selective acquisitions. The Company's growth strategy is designed to achieve
economies of scale, increase operating efficiencies and improve financial
performance through the growth of its installed machine base. While the Company
continues to expand its machine base, at the present time, the Company believes
that the number of significant acquisition opportunities is limited due, in
part, to the Company's successful execution of its consolidation strategy over
the past several years. Additionally, the Company believes that present
valuations of prospective acquisitions need to more accurately reflect current
market conditions. As a result, while the Company may pursue opportunities to
selectively acquire additional route businesses, the Company believes that its
acquisition activity will be reduced for the foreseeable future, and will seek
to preserve capital and reduce its level of indebtedness through its cash flow
from operations. There can be no assurance, however, that the Company will be
able to take advantage of any such opportunities on commercially viable terms,
if at all.
INFLATION AND SEASONALITY
In general, the Company's laundry operating expenses and general and
administrative expenses are affected by inflation and the effects of inflation
may be experienced by the Company in future periods. Management believes such
effects will not be material to the Company. The Company's business generally is
not seasonal.
-25-
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal exposure to market risk relates to changes in
interest rates on its borrowings. The Company's cash flow would be adversely
affected by an increase in interest rates. As of June 30, 2002, the Company had
approximately $277.5 million outstanding relating to its variable rate debt
portfolio.
The Company's future earnings, cash flow and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market risk is
the risk of loss from adverse changes in market prices and interest rates. If
market rates of interest on the Company's variable rate debt increased by 2.0%
(or 200 basis points), the Company's annual interest expense would change by
approximately $5.6 million, assuming the amount outstanding was $277.5 million,
the balance as of June 30, 2002. Historically, the Company has utilized interest
rate swap agreements to manage its exposure to certain market rate risks.
The Company's fixed debt instruments are not generally affected by a
change in the market rates of interest, and therefore, such instruments
generally do not have an impact on future earnings. However, as fixed rate debt
matures, future earnings and cash flows may be impacted by changes in interest
rates related to debt acquired to fund repayments under maturing facilities.
The Company does not use derivative financial instruments for trading
purposes and is not exposed to foreign currency exchange risk.
-26-
COINMACH CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the
ordinary course of business. Although the ultimate disposition of such
proceedings is not presently determinable, management does not believe that
adverse determinations in any or all such proceedings would have a material
adverse effect upon the Company's financial condition, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Pursuant to a registration rights agreement in connection with the
issuance of the 9% Senior Notes, the Company filed a registration statement (the
"Registration Statement") with the Securities and Exchange Commission under
which the Company is offering registered notes (otherwise identical in all
respects to its 9% Senior Notes) in exchange for its 9% Senior Notes (the
"Exchange Offer"). The Registration Statement was declared effective on July 15,
2002, and the Exchange Offer will expire at 5:00 p.m., New York City time, on
August 14, 2002, unless otherwise extended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Restated Certificate of Incorporation of the
Company (incorporated by reference from
Exhibit 3.1 to the Company's Form 10-K for
the transition period from September 30,
1995 to March 29, 1996, file number 0-7694)
3.2 Bylaws of the Company (incorporated by
reference from Exhibit 3.2 to the Company's
Form 10-K for the transition period from
September 30, 1995 to March 29, 1996, file
number 0-7694)
(b) Reports on Form 8-K
None.
-27-
COINMACH CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COINMACH CORPORATION
Date: August 8, 2002 /s/ ROBERT M. DOYLE
--------------------------------------------
Robert M. Doyle
Senior Vice President and Chief Financial Officer
(On behalf of registrant and as Principal
Financial Officer)
-28-