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 September 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.)
11803
303 Sunnyside Blvd., Suite 70, Plainview, New York (zip code)
(Address of principal executive offices)
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 ___.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No __X__.
As of the close of business on November 4, 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 - September 30, 2002
(Unaudited) and March 31, 2002 3
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months and Six Months 4 Ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended September 5 30, 2000
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 25
Item 4. Controls and Procedures 26
PART II.
Other Information
- -----------------
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 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
Certification by Chief Executive Officer 29
Certification by Chief Financial Officer 30
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COINMACH CORPORATION AND SUBSIDIARIES
PART I.
FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands of dollars)
September 30, 2002 March 31, 2002
------------------ --------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 30,155 $ 27,820
Receivables, net 11,272 11,883
Inventories 14,043 13,109
Prepaid expenses 6,808 7,166
Advance location payments 69,113 69,257
Land, property and equipment, net of accumulated
depreciation of $149,659 and $116,361 288,980 284,413
Contract rights, net of accumulated amortization
of $65,819 and $58,768 341,629 348,462
Goodwill 204,284 204,284
Other assets 21,810 22,927
--------- ---------
Total assets $ 988,094 $ 989,321
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable and accrued expenses $ 33,661 $ 31,775
Accrued rental payments 28,980 28,576
Accrued interest 7,369 7,540
Deferred income taxes 82,442 81,850
9% Senior Notes due 2010 450,000 450,000
Credit facility indebtedness 276,250 280,000
Other long-term debt 6,961 7,305
Due to Parent 51,123 51,852
Stockholder's equity:
Common stock and capital in excess of par value 117,391 117,391
Accumulated deficit (66,083) (66,968)
--------- ---------
Total stockholder's equity 51,308 50,423
--------- ---------
Total liabilities and stockholder's equity $ 988,094 $ 989,321
========= =========
See accompanying notes.
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 Six Months Ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES $ 131,871 $ 131,287 $ 268,165 $ 267,110
COSTS AND EXPENSES:
Operating 89,286 87,889 181,804 179,293
General and administrative 2,026 2,090 4,068 4,207
Depreciation and amortization 25,974 31,542 51,868 64,965
------------- ------------- ------------- -------------
117,286 121,521 237,740 248,465
------------- ------------- ------------- -------------
OPERATING INCOME 14,585 9,766 30,425 18,645
INTEREST EXPENSE, NET 14,477 16,926 28,948 34,017
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 108 (7,160) 1,477 (15,372)
PROVISION (BENEFIT) FOR INCOME TAXES 44 (1,296) 592 (3,140)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 64 $ (5,864) $ 885 $ (12,232)
============= ============= ============= =============
See accompanying notes.
-4-
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
(In thousands of dollars)
Six Months Ended
----------------------------
September 30, September 30,
2002 2001
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 885 $(12,232)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 33,467 30,311
Amortization of advance location payments 10,948 11,882
Amortization of intangibles 7,453 22,772
Deferred income taxes 592 (3,140)
Amortization of debt discount and deferred
issue costs 1,220 955
Amortization of premium on 11 3/4% Senior Notes - (618)
Change in operating assets and liabilities:
Other assets (663) 162
Receivables, net 611 264
Inventories and prepaid expenses (576) 500
Accounts payable and accrued expenses, net 1,030 (1,998)
Accrued interest (171) (1,100)
------------- -------------
Net cash provided by operating activities 54,796 47,758
------------- -------------
INVESTING ACTIVITIES:
Additions to property and equipment (36,739) (32,094)
Advance location payments to location owners (9,544) (8,219)
Acquisition of assets - (2,684)
Proceeds from sale of property and equipment 326 439
------------- -------------
Net cash used in investing activities (45,957) (42,558)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from credit facility 6,000 19,700
Repayments to credit facility (9,750) (21,339)
Net repayments to parent (729) (538)
Repayments of bank and other borrowings (8) (134)
Principal payments on capitalized lease obligations (2,017) (1,792)
------------- -------------
Net cash used in financing activities (6,504) (4,103)
------------- -------------
Net increase in cash and cash equivalents 2,335 1,097
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,820 25,859
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,155 $ 26,956
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 27,963 $ 34,800
============= =============
Income taxes paid $ 177 $ 335
============= =============
NON-CASH FINANCING ACTIVITIES:
Acquisition of fixed assets through capital leases $ 1,681 $ 3,402
============= =============
-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 September 30, 2002, the Company owned and
operated approximately 850,000 laundry machines in approximately 80,000
locations throughout North America and in 163 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.
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
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COINMACH CORPORATION AND SUBSIDIARIES
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 for the quarter ended June 30, 2002 and is expected to result in an
increase in operating income of approximately $12.3 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 loss for the six months ended September 30, 2001 would have been
approximately $6.5 million.
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.
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 $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
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COINMACH CORPORATION AND SUBSIDIARIES
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 September 30, 2002, the Company had outstanding debt consisting of (a)
$450 million of 9% Senior Notes and (b) $276.3 million of term loans with
interest rates ranging from 4.63% 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 September 30, 2002, the Company was in compliance
with the covenants under the indenture governing the 9% Senior Notes and the
Senior Credit Facility.
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.
On September 23, 2002, the Company entered into three separate interest
rate swap agreements, each for $50 million, that effectively converts a portion
of its floating-rate loans to a fixed rate basis, thus reducing the impact of
interest-rate changes on future interest income. At September 30, 2002,
approximately $150 million of the Company's loans were designated as hedged
items. These interest rate swaps used to hedge the variability of forecasted
cash flows attributable to interest rate risk were designated as cash flow
hedges.
4. 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.
-8-
COINMACH CORPORATION AND SUBSIDIARIES
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.
5. 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)
September 30, 2002
------------------------------------------------------------
Coinmach
and Non-
Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
ASSETS
Cash, receivables, inventory and prepaid expenses $ 48,308 $ 13,970 $ - $ 62,278
Advance location payments 69,113 - - 69,113
Land, property and equipment, net 288,096 884 - 288,980
Intangible assets, net 543,870 2,043 - 545,913
Investment in subsidiaries 4,928 (1,430) (3,498) -
Other assets 20,844 966 - 21,810
------------ ------------ ------------ ------------
Total assets $975,159 $ 16,433 $ (3,498) $988,094
============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 64,250 $ 5,760 $ - $ 70,010
Deferred income taxes 82,530 (88) - 82,442
Debt 725,948 7,263 - 733,211
Due to parent 51,123 - - 51,123
Total stockholder's equity 51,308 3,498 (3,498) 51,308
------------ ------------ ------------ ------------
Total liabilities and stockholder's equity $975,159 $ 16,433 $ (3,498) $988,094
============ ============ ============ ============
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COINMACH CORPORATION AND SUBSIDIARIES
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
============ ============ ============ ============
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COINMACH CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Operations (in thousands of dollars)
Six months ended September 30, 2002
--------------------------------------------------------------------
Coinmach
and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ -------------
Revenues $ 248,472 $ 19,693 $ - $ 268,165
Costs and expenses 218,123 19,617 - 237,740
------------- ------------ ------------ -------------
Operating income 30,349 76 - 30,425
Interest expense 28,654 294 - 28,948
------------- ------------ ------------ -------------
1,695 (218) - 1,477
Income taxes 680 (88) - 592
------------- ------------ ------------ -------------
1,015 (130) - 885
Equity in loss of subsidiaries (130) - 130 -
------------- ------------ ------------ -------------
Net income (loss) $ 885 $ (130) $ 130 $ 885
============= ============ ============ =============
Six months ended September 30, 2001
--------------------------------------------------------------------
Revenues $ 249,588 $ 17,522 $ - $ 267,110
Costs and expenses 230,568 17,897 - 248,465
------------- ------------ ------------ -------------
Operating income (loss) 19,020 (375) - 18,645
Interest expense 33,676 341 - 34,017
------------- ------------ ------------ -------------
(14,656) (716) - (15,372)
Income taxes (2,993) (147) - (3,140)
------------- ------------ ------------ -------------
(11,663) (569) - (12,232)
Equity in loss of subsidiaries (569) - 569 -
------------- ------------ ------------ -------------
Net loss $ (12,232) $ (569) $ 569 $ (12,232)
============= ============ ============ =============
-11-
COINMACH CORPORATION AND SUBSIDIARIES
Three months ended September 30, 2002
--------------------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ -------------
Revenues $ 122,755 $ 9,116 $ - $ 131,871
Costs and expenses 108,103 9,183 - 117,286
------------- ------------ ------------ -------------
Operating income (loss) 14,652 (67) - 14,585
Interest expense 14,326 151 - 14,477
------------- ------------ ------------ -------------
326 (218) - 108
Income taxes 132 (88) - 44
------------- ------------ ------------ -------------
194 (130) - 64
Equity in loss of subsidiaries (130) - 130 -
------------- ------------ ------------ -------------
Net income (loss) $ 64 $ (130) $ 130 $ 64
============= ============ ============ =============
Three months ended September 30, 2001
--------------------------------------------------------------------
Revenues $ 123,189 $ 8,098 $ - $ 131,287
Costs and expenses 113,209 8,312 - 121,521
------------- ------------ ------------ -------------
Operating income (loss) 9,980 (214) - 9,766
Interest expense 16,754 172 - 16,926
------------- ------------ ------------ -------------
(6,774) (386) - (7,160)
Income taxes (1,224) (72) - (1,296)
------------- ------------ ------------ -------------
(5,550) (314) - (5,864)
Equity in loss of subsidiaries (314) - 314 -
------------- ------------ ------------ -------------
Net loss $ (5,864) $ (314) $ 314 $ (5,864)
============= ============ ============ =============
-12-
COINMACH CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows (in thousands of dollars)
Six months ended September 30, 2002
-------------------------------------------------------------------
Coinmach
and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ -------------
OPERATING ACTIVITIES
Net income (loss) $ 885 $ (130) $ 130 $ 885
Noncash adjustments 53,311 369 - 53,680
Change in operating assets and liabilities 1,024 (793) - 231
------------- ------------ ------------ -------------
Net cash provided by (used in) operating
activities 55,220 (554) 130 54,796
------------- ------------ ------------ -------------
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 130 - (130) -
Capital expenditures (45,927) (30) - (45,957)
------------- ------------ ------------ -------------
Net cash used in investing activities (45,797) (30) (130) (45,957)
------------- ------------ ------------ -------------
FINANCING ACTIVITIES
Proceeds from debt 5,940 60 - 6,000
Repayment of debt (9,652) (98) - (9,750)
Other financing items (3,242) 488 - (2,754)
------------- ------------ ------------ -------------
Net cash (used in) provided by financing
activities (6,954) 450 - (6,504)
------------- ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents 2,469 (134) - 2,335
Cash and cash equivalents, beginning of period 27,562 258 - 27,820
------------- ------------ ------------ -------------
Cash and cash equivalents, end of period $ 30,031 $ 124 $ - $ 30,155
============= ============ ============ =============
-13-
COINMACH CORPORATION AND SUBSIDIARIES
Six months ended September 30, 2001
-------------------------------------------------------------------
Coinmach
and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------ -------------
OPERATING ACTIVITIES
Net loss $ (12,232) $ (569) $ 569 $ (12,232)
Noncash adjustments 61,922 240 - 62,162
Change in operating assets and liabilities 694 (2,866) - (2,172)
------------- ------------ ------------ -------------
Net cash provided by (used in) operating
activities 50,384 (3,195) 569 47,758
------------- ------------ ------------ -------------
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 569 - (569) -
Acquisition of assets (2,684) - - (2,684)
Capital expenditures (39,830) (44) - (39,874)
------------- ------------ ------------ -------------
Net cash used in investing activities (41,945) (44) (569) (42,558)
------------- ------------ ------------ -------------
FINANCING ACTIVITIES
Proceeds from debt 19,503 197 - 19,700
Repayment of debt (21,126) (213) - (21,339)
Other financing items (5,132) 2,668 - (2,464)
------------- ------------ ------------ -------------
Net cash (used in) provided by financing
activities (6,755) 2,652 - (4,103)
------------- ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents 1,684 (587) - 1,097
Cash and cash equivalents, beginning of period 25,418 441 - 25,859
------------- ------------ ------------ -------------
Cash and cash equivalents, end of period $ 27,102 $ (146) $ - $ 26,956
============= ============ ============ =============
6. 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,
-14-
COINMACH CORPORATION AND SUBSIDIARIES
distributing exclusive lines of coin and non-coin machines and parts and selling
service contracts through the Company's wholly-owned subsidiary, Super Laundry.
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.
The table below presents information about the Company's segments (in
thousands of dollars):
Three Months ended September 30, Six Months ended September 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
Revenue:
Route $115,619 $117,599 $234,730 $238,827
All other:
Distribution 9,116 8,098 19,693 17,522
Rental 7,136 5,590 13,742 10,761
------------- ------------ ------------ ------------
Subtotal All other 16,252 13,688 33,435 28,283
------------- ------------ ------------ ------------
Total $131,871 $131,287 $268,165 $267,110
============= ============ ============ ============
EBITDA:
Route $ 39,583 $ 41,439 $ 80,483 $ 83,857
All other 3,002 1,959 5,878 3,960
Reconciling items:
Corporate expenses (2,026) (2,090) (4,068) (4,207)
------------- ------------ ------------ ------------
Total $ 40,559 $ 41,308 $ 82,293 $ 83,610
============= ============ ============ ============
Income before taxes:
Route $15,786 $15,714 $32,970 $30,525
All other 1,246 316 2,365 674
------------- ------------ ------------ ------------
Subtotal 17,032 16,030 35,335 31,199
Reconciling items:
Corporate expenses (2,026) (2,090) (4,068) (4,207)
Amortization of goodwill and
depreciation (421) (4,174) (842) (8,347)
Interest expense (14,477) (16,926) (28,948) (34,017)
------------- ------------ ------------ ------------
Income (loss) before taxes $ 108 $ (7,160) $ 1,477 $(15,372)
============= ============ ============ ============
-15-
COINMACH CORPORATION AND SUBSIDIARIES
7. Income Taxes
The components of the Company's deferred tax liabilities and assets are as
follows (in thousands):
September 30, 2002 March 31, 2002
------------------ --------------
Deferred tax liabilities:
Accelerated tax depreciation and contract rights $ 110,531 $ 110,864
Other, net 1,129 925
------------------ --------------
111,660 111,789
------------------ --------------
Deferred tax assets:
Net operating loss carryforwards 28,038 28,906
Covenant not to compete 1,180 1,033
------------------ --------------
29,218 29,939
------------------ --------------
Net deferred tax liability $ 82,442 $ 81,850
================== ==============
The net operating loss carryforwards of approximately $69.4 million, after
a reduction to reflect the limitation imposed under the provisions of the
Internal Revenue Code regarding change of ownership, expire between fiscal years
2003 through 2022. The majority of the Company's net operating loss
carryforwards begin to expire after five years. In addition, the net operating
losses are subject to annual limitations imposed under the provisions of the
Internal Revenue Code regarding changes in ownership.
The provision (benefit) for income taxes consists of (in thousands):
Three Months ended September 30, Six Months ended September 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------ ----------- ------------
Federal $ 35 $(1,010) $ 462 $(2,448)
State 9 (286) 130 (692)
------------- ------------ ----------- ------------
$ 44 $(1,296) $ 592 $(3,140)
============= ============ =========== ============
The effective income tax rate differs from the amount computed by applying
the U.S. federal statutory rate to loss before taxes as a result of state taxes
and permanent book/tax differences as follows (in thousands):
Three Months ended September 30, Six Months ended September 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------ ----------- ------------
Expected tax provision (benefit) $ 38 $(2,506) $ 517 $(5,380)
State tax provision (benefit), net of
federal taxes 5 (103) 84 (385)
Permanent book/tax differences 1 1,313 (9) 2,625
------------- ------------ ----------- ------------
Tax provision (benefit) $ 44 $(1,296) $ 592 $(3,140)
============= ============ =========== ============
-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 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 163 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. 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
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.
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 September 30,
2002 was approximately $1.3 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.
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.
-18-
COINMACH CORPORATION AND SUBSIDIARIES
Comparison of the three- and six-month periods ended September 30, 2002 and
September 30, 2001
The following table sets forth the Company's revenues for the periods
indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30,
----------------------------------------- -----------------------------------------
2002 2001 Change 2002 2001 Change
---------- ---------- ---------- ---------- ----------- ----------
Route $ 115.6 $ 117.6 $ (2.0) $ 234.7 $ 238.8 $ (4.1)
Distribution 9.1 8.1 1.0 19.7 17.5 2.2
Rental 7.2 5.6 1.6 13.8 10.8 3.0
---------- ---------- ---------- ---------- ----------- ----------
$ 131.9 $ 131.3 $ 0.6 $ 268.2 $ 267.1 $ 1.1
========== ========== ========== ========== =========== ==========
Revenue increased by approximately $0.6 million or less than 1% for the
three-month period ended September 30, 2002, as compared to the prior year's
corresponding period. Revenue increased by approximately $1.1 million or less
than 1% for the six-month period ended September 30, 2002, as compared to the
prior year's corresponding period.
Route revenue for the three months ended September 30, 2002 decreased
by approximately $2.0 million or 2% over the prior year's corresponding
period. Route revenue for the six months ended September 30, 2002 decreased
by approximately $4.1 million or 2% over the prior year's corresponding
period. Management believes that the decrease in route revenue for the
current periods as compared to the prior year's corresponding periods was
primarily 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 September 30, 2002
increased by approximately $1.0 million or 12% from the prior year's
corresponding period. Distribution revenue for the six months ended
September 30, 2002 increased by approximately $2.2 million or 13% 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 September 30, 2002 increased
by approximately $1.6 million or 28% over the prior year's corresponding
period. Rental revenue for the six months ended September 30, 2002
increased by approximately $3.0 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.
Operating expenses increased by approximately $1.4 million or 2% for the
three-month period ended September 30, 2002, as compared to the prior year's
corresponding period. Operating expenses increased by approximately $2.5 million
or 1% for the six-month period ended September 30, 2002, as compared to the
prior year's corresponding period. This increase in operating expenses was due
primarily to (i) an increase in cost of sales resulting from increased sales in
-19-
COINMACH CORPORATION AND SUBSIDIARIES
the distribution business and (ii) costs associated with expansion into new
markets in the rental business. As a percentage of revenues, operating expenses
were approximately 68% for both the three and six-month periods ended September
30, 2002, as compared to approximately 67% for both the three and six-month
periods ended September 30, 2001.
General and administrative expenses decreased slightly for each of the
three and six-month periods ended September 30, 2002, as compared to the prior
year's corresponding periods. As a percentage of revenues, general and
administrative expenses were approximately 1.5% for both the three and six-month
periods ended September 30, 2002, as compared to approximately 1.6% for both the
three and six-month periods ended September 30, 2001.
Depreciation and amortization expense decreased by approximately 18% for
the three-month period ended September 30, 2002, as compared to the prior year's
corresponding period. Depreciation and amortization decreased by approximately
20% for the six-month period ended September 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 $7.6 million and the reduction of amortization expense on
contract rights of approximately $7.2 million as a result of the application of
Statements of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets. This decrease was 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 $12.3 million for the
year ended March 31, 2003.
Operating income margins were approximately 11.1% for the three-month
period ended September 30, 2002, as compared to approximately 7.4% for the prior
year's corresponding period. Operating income margins were approximately 11.3%
for the six-month period ended September 30, 2002, as compared to approximately
7.0% 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
periods.
Interest expense, net, decreased by approximately 14% for the three-month
period ended September 30, 2002, as compared to the prior year's corresponding
period. Interest expense, net, decreased by approximately 15% for the six-month
period ended September 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 $355 million senior
-20-
COINMACH CORPORATION AND SUBSIDIARIES
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.
The provision for income taxes for the six-month period ended September 30,
2002 was approximately $0.6 million as compared to a benefit for income taxes of
approximately $3.1 million for the prior year's corresponding period. The change
for the six-month period is due to the corresponding decrease in pretax loss
from approximately $15.4 million for the six-month period ended September 30,
2001 to a pretax income of approximately $1.5 million for the six-month period
ended September 30, 2002. The effective tax rate for the six-month period ended
September 30, 2002 was 40% as compared to 20% for the prior year's corresponding
period. This increase in the effective tax rate was due to the elimination of
certain non-deductible expenses, primarily goodwill amortization, as a result of
the adoption of SFAS 142.
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 September 30, Six months ended September 30,
----------------------------------------- -----------------------------------------
2002 2001 Change 2002 2001 Change
---------- ---------- ---------- ---------- ----------- ----------
Route $ 39.6 $ 41.4 $ (1.8) $ 80.5 $ 83.8 $ (3.3)
Distribution 0.3 - 0.3 0.6 0.1 0.5
Rental 2.7 2.0 0.7 5.3 3.9 1.4
G&A (2.0) (2.1) 0.1 (4.1) (4.2) 0.1
---------- ---------- ---------- ---------- ----------- ----------
$ 40.6 $ 41.3 $ (0.7) $ 82.3 $ 83.6 $ (1.3)
========== ========== ========== ========== =========== ==========
EBITDA was approximately $40.6 million for the three months ended September
30, 2002, as compared to approximately $41.3 million for the three months ended
September 30, 2001. EBITDA margins declined to approximately 30.8% for the three
months ended September 30, 2002, as compared to approximately 31.5% for the
prior year's corresponding period. This decrease was primarily the result of
-21-
COINMACH CORPORATION AND SUBSIDIARIES
increased operating expenses in the distribution and rental businesses and
decreased revenues in the route business, as discussed above.
EBITDA was approximately $82.3 million for the six months ended September
30, 2002, as compared to approximately $83.6 million for the for the prior
year's corresponding period. EBITDA margins declined to approximately 30.7% for
the six months ended September 30, 2002, as compared to approximately 31.3% 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.
Liquidity and Capital Resources
- -------------------------------
The Company continues to have substantial indebtedness and debt service
requirements. At September 30, 2002, the Company had outstanding debt of
approximately $733.2 million, which included $450 million of the 9% Senior Notes
and $276.3 million of borrowings under the Senior Credit Facility. The Company's
stockholder's equity was approximately $51.3 million as of September 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 September 30, 2002 consisted of cash
and cash equivalents of $30.2 million and available borrowings under its Senior
Credit Facility of approximately $74.3 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 $246.3 million as of September 30, 2002,
are scheduled to be fully repaid by January 25, 2008 and July 25, 2009,
respectively. As of September 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
-22-
COINMACH CORPORATION AND SUBSIDIARIES
commencing on March 31, 2003 with respect to the $30 million term loan and
semi-annual amortization payments which commenced 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, which commenced on August 1,
2002.
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 September 30, 2002
were approximately $22.7 million (excluding approximately $1.0 million relating
to capital lease obligations). Capital expenditures for the six-month period
ended September 30, 2002 were approximately $46.3 million (excluding
approximately $2.0 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 2,500 machines for the six-month period ended September 30, 2002.
The growth in the rental business machine base was approximately 19,000 for the
six-month period ended September 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 and business acquisitions) for
the periods indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30,
----------------------------------------- -----------------------------------------
2002 2001 Change 2002 2001 Change
---------- ---------- ---------- ---------- ----------- ----------
Route $ 19.8 $ 17.6 $ (2.2) $ 40.1 $ 35.7 $ (4.4)
Distribution - - - - - -
Rental 2.9 2.8 (0.1) 6.2 4.6 (1.6)
---------- ---------- ---------- ---------- ----------- ----------
$ 22.7 $ 20.4 $ (2.3) $ 46.3 $ 40.3 $ (6.0)
========== ========== ========== ========== =========== ==========
-23-
COINMACH CORPORATION AND SUBSIDIARIES
The Company's future contractual obligations related to long-term debt,
capital leases and operating leases at September 30, 2002 were as follows (in
millions of dollars):
Payments Due by Period
----------------------------------------------------------------------------------
Less than
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------- --------------- -------------- --------------- --------------- ---------------
Long-term debt $ 726.3 $ 3.8 $ 24.4 $ 15.0 $ 683.1
Capital leases 7.0 2.8 4.2 - -
Operating leases 31.6 7.5 15.7 2.8 5.6
Total --------------- -------------- --------------- --------------- ---------------
$ 764.9 $ 14.1 $ 44.3 $ 17.8 $ 688.7
=============== ============== =============== =============== ===============
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.
An inability of the Company 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 outstanding 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.
Management expects the Company's principal uses of cash for the next
several years will be interest payments on the 9% Senior Notes and under the
Senior Credit Facility, capital expenditures related to acquisitions, renewal,
growth and working capital requirements. Management believes that cash from
operations will be sufficient to meet the Company's expected debt service
requirements, planned capital expenditures, and operating needs.
Certain Accounting Treatment
- ----------------------------
The Company's depreciation and amortization expense, which aggregated
approximately $51.9 million for the six months ended September 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.
-24-
COINMACH CORPORATION AND SUBSIDIARIES
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.
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 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.
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 September 30, 2002, the Company
had approximately $126.3 million outstanding relating to its variable rate debt
portfolio.
-25-
COINMACH CORPORATION AND SUBSIDIARIES
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 $2.5 million, assuming the amount outstanding was $126.3 million,
the balance as of September 30, 2002. Historically, the Company has utilized
interest rate swap agreements to manage its exposure to certain market rate
risks.
As of September 30, 2002, the Company had $150 million in aggregate
notional amount of interest rate swap agreements to manage its variable rate
debt liabilities consisting of: (i) a $50 million notional amount interest rate
swap transaction with JP Morgan effectively fixing the three-month LIBOR
interest rate (as determined therein) at 2.91% and expiring on February 1, 2006,
(ii) a $50 million notional amount interest rate swap transaction with Credit
Lyonnais effectively fixing the three-month LIBOR interest rate (as determined
therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50 million
notional amount interest rate swap transaction with Deutsche Bank AG effectively
fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and
expiring on February 1, 2006.
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.
ITEM 4. Controls and Procedures.
The Company's principal executive officer and principal financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a
date within ninety days prior to the filing date of this report, have concluded
that, as of such date, the Company's disclosure controls and procedures were
effective to ensure that material information relating to the Company would be
made known to them by others within the Company on a timely basis. In addition,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies or material weaknesses.
-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 and Use of Proceeds
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 entered into 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 offered to register 9% senior notes (otherwise identical in
all respects to its 9% Senior Notes) in exchange for its 9% Senior Notes (the
"Exchange Offer"). In the Exchange Offer, which expired at 5:00 p.m., New York
City time, on August 14, 2002, all the 9% Senior Notes were exchanged for
registered notes.
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)
99.1 Certificate of Chief Executive Officer and
Chief Financial Officer pursuant to 18
United States Code, Section 1350, as enacted
by Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
A Report on Form 8-K dated August 8, 2002 was filed on August 8, 2002.
-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: November 4, 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-
COINMACH CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Stephen R. Kerrigan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coinmach
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 day prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 4, 2002
/s/ Stephen R. Kerrigan
--------------------------
Stephen R. Kerrigan
Chairman of the Board and
Chief Executive Officer
-29-
COINMACH CORPORATION AND SUBSIDIARIES
CERTIFICATION
I, Robert M. Doyle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coinmach
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact necessary to make the statements
made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 day prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 4, 2002
/s/ Robert M. Doyle
-----------------------------------
Robert M. Doyle
Chief Financial Officer
-30-
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned certifies that the Form 10-Q for the period ended
September 30, 2002 fully complies with the requirements of Section 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information
contained in the Form 10-Q for the period ended September 30, 2002 fairly
presents, in all material respects, the financial condition and results of
operations of Coinmach Corporation.
/s/ Stephen R. Kerrigan /s/ Robert M. Doyle
- -------------------------------------- -----------------------------------
Stephen R. Kerrigan Robert M. Doyle
Chief Executive Officer Chief Financial Officer
Coinmach Corporation Coinmach Corporation