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 quarterly period ended December 31, 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 [_]
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 February 14, 2003, Coinmach Corporation had
outstanding 100 shares of common stock, par value $.01 per share, 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 - December 31, 2002
(Unaudited) and March 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months and Nine Months Ended December 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended December 31, 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 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature Page 30
Certification by Chief Executive Officer 31
Certification by Chief Financial Officer 32
2
COINMACH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
December 31, 2002 March 31, 2002(1)
----------------- --------------
(Unaudited)
ASSETS:
Cash and cash equivalents $ 32,719 $ 27,820
Receivables, net 11,574 11,883
Inventories 14,600 13,109
Prepaid expenses 7,325 7,166
Advance location payments 71,227 69,257
Land, property and equipment, net of accumulated
depreciation of $166,353 and $116,361 287,863 284,413
Contract rights, net of accumulated amortization
of $69,375 and $58,768 338,591 348,462
Goodwill 205,128 204,284
Other assets 20,968 22,927
---------- ----------
Total assets $ 989,995 $ 989,321
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable and accrued expenses $ 32,389 $ 31,775
Accrued rental payments 30,870 28,576
Accrued interest 18,171 7,540
Interest rate swap liability 2,485 --
Deferred income taxes 82,522 81,850
9% Senior Notes due 2010 450,000 450,000
Credit facility indebtedness 261,250 280,000
Other long-term debt 7,254 7,305
Due to parent 51,083 51,852
Stockholder's equity:
Common stock and capital in excess of par value 120,065 117,391
Accumulated other comprehensive loss, net of tax (1,491) --
Accumulated deficit (64,603) (66,968)
---------- ----------
Total stockholder's equity 53,971 50,423
---------- ----------
Total liabilities and stockholder's equity $ 989,995 $ 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 Nine Months Ended
-------------------------- --------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES $ 134,923 $ 135,836 $ 403,088 $ 402,946
COSTS AND EXPENSES:
Operating 91,638 91,910 273,442 271,203
General and administrative 2,228 2,339 6,296 6,546
Depreciation and amortization 25,982 31,584 77,850 96,549
Nonrecurring items, net (2,507) -- (2,507) --
---------- ---------- ---------- ----------
117,341 125,833 355,081 374,298
---------- ---------- ---------- ----------
OPERATING INCOME 17,582 10,003 48,007 28,648
INTEREST EXPENSE, NET 14,717 16,545 43,665 50,562
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 2,865 (6,542) 4,342 (21,914)
PROVISION (BENEFIT) FOR INCOME TAXES 1,385 (1,260) 1,977 (4,400)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,480 $ (5,282) $ 2,365 $ (17,514)
========== ========== ========== ==========
See accompanying notes.
4
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
Nine Months Ended
--------------------------
December 31, December 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,365 $(17,514)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 50,201 45,597
Amortization of advance location payments 16,439 17,816
Amortization of intangibles 11,210 33,136
Gain on sale of investment and equipment (3,525) (104)
Deferred income taxes 1,666 (4,400)
Amortization of debt discount and deferred issue
costs 1,829 1,433
Amortization of premium on 11 3/4% Senior Notes -- (926)
Change in operating assets and liabilities:
Other assets (414) 161
Receivables, net 309 (699)
Inventories and prepaid expenses (1,475) 1,072
Accounts payable and accrued expenses, net 189 (3,400)
Accrued interest 10,631 (8,600)
--------- ---------
Net cash provided by operating activities 89,425 63,572
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (51,127) (49,225)
Advance location payments to location owners (16,290) (12,218)
Acquisition of assets (1,841) (2,684)
Proceeds from sale of investment 6,585 --
Proceeds from sale of property and equipment 727 1,141
--------- ---------
Net cash used in investing activities (61,946) (62,986)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from credit facility 6,000 37,700
Repayments to credit facility (24,750) (33,114)
Net repayments to parent (769) (981)
Repayments of bank and other borrowings (12) (139)
Principal payments on capitalized lease obligations (3,049) (2,778)
--------- ---------
Net cash (used in) provided by financing activities (22,580) 688
--------- ---------
Net increase in cash and cash equivalents 4,899 1,274
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,820 25,859
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,719 $ 27,133
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 31,301 $ 58,679
========= =========
Income taxes paid $ 349 $ 505
========= =========
NON-CASH FINANCING ACTIVITIES:
Acquisition of fixed assets through capital leases $ 3,010 $ 4,499
========= =========
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. At December 31, 2002, the Company owned and operated approximately
855,000 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.
On November 29, 2002, as permitted by the indenture governing the 9%
Senior Notes (as defined in Note 3 below) and the Senior Credit Facility (as
defined in Note 3 below), all of the assets of the Appliance Warehouse division
of the Company were transferred to Appliance Warehouse of America, Inc. ("AWA"),
a newly formed wholly-owned subsidiary of the Company. AWA leases 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.
Super Laundry Equipment Corp. ("Super Laundry"), also a wholly-owned
subsidiary of the Company, constructs, designs and retrofits retail laundromats
and distributes laundromat equipment. In addition, Super Laundry, commencing in
2002 and through its wholly-owned subsidiary, American Laundry Franchising Corp.
("ALFC"), builds and develops laundromat facilities for sale as franchise
locations. For each franchise laundromat facility, ALFC enters into a purchase
agreement and a license agreement with the buyer whereby the buyer may use
certain systems created by ALFC to operate such facility. ALFC receives revenue
primarily from the sale price of the laundromat facility and, to a lesser
extent, from an initial franchise fee and certain other fees based on the sales
from such facility.
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.
6
COINMACH CORPORATION AND SUBSIDIARIES
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
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 nine months ended December 31, 2001 would have been
approximately $9.7 million.
7
COINMACH CORPORATION AND SUBSIDIARIES
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 revolving credit portion of
the Senior Credit Facility includes 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 and is guaranteed by the Company's domestic subsidiaries. In
addition, 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. At December 31,
2002, the Company had outstanding debt consisting of (a) $450 million of 9%
Senior Notes and (b) $261.3 million of term loans with interest rates ranging
from 4.13% to 4.88%. The term loans under the Senior Credit Facility, in
aggregate principal amounts outstanding of $18.3 million and $243.0 million as
of December 31, 2002, are scheduled to be fully repaid by January 25, 2008 and
July 25, 2009, respectively. As of December 31, 2002, the Company had no amounts
outstanding under its revolving credit facility, which is scheduled to expire on
January 25, 2008.
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
December 31, 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 to
account for derivative instruments. 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 term
8
COINMACH CORPORATION AND SUBSIDIARIES
loans pursuant to the Senior Credit Facility to a fixed rate basis, thus
reducing the impact of interest-rate changes on future interest expense. At
December 31, 2002, $150 million of the Company's term loans existing under the
Senior Credit Facility was 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. The Company recognized an
accumulated other comprehensive loss in the stockholder's equity section
included in the Unaudited Condensed Consolidated Balance Sheet at December 31,
2002 of approximately $1.5 million, net of tax, relating to the interest rate
swaps that qualify as cash flow hedges under SFAS No. 133.
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. 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. APPLIANCE WAREHOUSE SPIN-OFF
On November 29, 2002 (the "Transfer Date"), all of the assets of the
Appliance Warehouse division of the Company were transferred to AWA. The value
of the assets transferred as determined by an independent appraiser was $34.7
million as of the Transfer Date. In exchange for the transfer of such assets,
AWA issued to the Company on the Transfer Date (i) an unsecured promissory note
payable on demand in the amount of $19.6 million which accrues interest at a
rate of 8% per annum, (ii) 1,000 shares of preferred stock of AWA, par value
$0.01 per share (the "Preferred Stock"), with a liquidation value of $14.6
million, and (iii) 10,000 shares of common stock of AWA, par value $0.01 per
share. The Preferred Stock is not redeemable and is vested with all of the
voting rights of AWA. Dividends on the Preferred Stock accrue quarterly at a
rate of 11% per annum and are payable in cash, in kind in the form of additional
shares of Preferred Stock, or a combination thereof, at the option of AWA.
The Company intends to effect a spin-off of AWA before March 31, 2003
(the "Spin-off"), as permitted by the indenture governing the 9% Senior Notes
and the Senior Credit Facility. Upon consummation of the Spin-off, AWA will
continue to be a guarantor under, and subject to the covenants contained in, the
indenture governing the 9% Senior Notes and the Senior Credit Facility.
6. GUARANTOR SUBSIDIARIES
The Company's domestic 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
9
COINMACH CORPORATION AND SUBSIDIARIES
Company and the guarantees issued by them are full and unconditional. The
condensed consolidating balance sheet as of December 31, 2002, the condensed
consolidating statements of operations for the three and nine months ended
December 31, 2002, and the condensed consolidating statement of cash flows for
the nine months ended December 31, 2002 include AWA as a Guarantor Subsidiary,
however, any prior corresponding period does not include AWA as a Guarantor
Subsidiary. Condensed consolidating financial information for the Company and
its Guarantor Subsidiaries are as follows:
CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands of dollars)
DECEMBER 31, 2002
------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
ASSETS
Cash, receivables, inventory and prepaid expenses $ 47,303 $ 18,915 $ -- $ 66,218
Advance location payments 71,098 129 -- 71,227
Land, property and equipment, net 256,878 30,985 -- 287,863
Intangible assets, net 535,514 8,205 -- 543,719
Intercompany loans and advances 18,501 -- (18,501) --
Investment in subsidiaries (3,295) (7,326) 10,621 --
Investment in preferred stock 14,741 -- (14,741) --
Other assets 39,643 1,062 (19,737) 20,968
------------ ------------ ------------ ------------
Total assets $ 980,383 $ 51,970 $ (42,358) $ 989,995
============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 74,940 $ 8,985 $ (10) $ 83,915
Deferred income taxes 82,285 289 (52) 82,522
Debt 718,025 20,216 (19,737) 718,504
Due to parent 51,083 -- -- 51,083
Preferred stock and dividends payable -- 14,741 (14,741) --
Total stockholder's equity 54,050 7,739 (7,818) 53,971
------------ ------------ ------------ ------------
Total liabilities and stockholder's equity $ 980,383 $ 51,970 $ (42,358) $ 989,995
=========== =========== ============ ============
10
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 550,744 2,002 - 552,746
Investment in subsidiaries 11,858 (1,291) (10,567) -
Other assets 22,132 795 - 22,927
------------ ------------ ------------ ------------
Total assets $ 981,925 $ 17,963 $ (10,567) $ 989,321
============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 60,308 $ 7,583 $ - $ 67,891
Deferred income taxes 82,037 (187) - 81,850
Debt 737,305 - - 737,305
Due to parent 51,852 - - 51,852
Total stockholder's equity 50,423 10,567 (10,567) 50,423
------------ ------------ ------------ ------------
Total liabilities and stockholder's equity $ 981,925 $ 17,963 $ (10,567) $ 989,321
============ =========== ============ ============
11
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (in thousands of dollars)
NINE MONTHS ENDED DECEMBER 31, 2002
---------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues $ 354,656 $ 48,432 $ -- $ 403,088
Costs and expenses, net 309,303 45,778 -- 355,081
---------- ---------- ---------- ----------
Operating income 45,353 2,654 -- 48,007
Interest expense, net 41,763 1,902 -- 43,665
---------- ---------- ---------- ----------
3,590 752 -- 4,342
Income taxes 1,696 343 (62) 1,977
---------- ---------- ---------- ---------
1,894 409 62 2,365
Equity in income of subsidiaries 409 -- (409) --
---------- ---------- ---------- ---------
Net income before preferred
stock dividends 2,303 409 (347) 2,365
Preferred stock dividends (141) -- 141 --
---------- ---------- ---------- ----------
Net income $ 2,444 $ 409 $ (488) $ 2,365
========== ========== ========== ==========
NINE MONTHS ENDED DECEMBER 31, 2001
---------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues $ 375,914 $ 27,032 $ -- $ 402,946
Costs and expenses 347,004 27,294 -- 374,298
---------- ---------- ---------- ----------
Operating income (loss) 28,910 (262) -- 28,648
Interest expense 50,050 512 -- 50,562
---------- ---------- ---------- ----------
(21,140) (774) -- (21,914)
Income taxes (4,245) (155) -- (4,400)
---------- ---------- ---------- ----------
(16,895) (619) -- (17,514)
Equity in loss of subsidiaries (619) -- 619 --
---------- ---------- ---------- ----------
Net loss $ (17,514) $ (619) $ 619 $ (17,514)
========== ========== ========== ==========
12
COINMACH CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED DECEMBER 31, 2002
---------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues $ 119,926 $ 14,997 $ -- $ 134,923
Costs and expenses, net 103,076 14,265 -- 117,341
---------- ---------- ---------- ----------
Operating income 16,850 732 -- 17,582
Interest expense, net 13,992 725 -- 14,717
---------- ---------- ---------- ----------
2,858 7 -- 2,865
Income taxes 1,444 3 (62) 1,385
---------- ---------- ---------- ----------
1,414 4 62 1,480
Equity in loss of subsidiaries (138) -- 138 --
---------- ---------- ---------- ----------
Net income (loss) before
preferred stock dividend 1,276 4 200 1,480
Preferred stock dividend (141) -- 141 --
---------- ---------- ---------- ----------
Net income (loss) $ 1,417 $ 4 $ 59 $ 1,480
========== ========== ========== ==========
THREE MONTHS ENDED DECEMBER 31, 2001
---------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues $ 126,326 $ 9,510 $ -- $ 135,836
Costs and expenses 116,436 9,397 -- 125,833
---------- ---------- ---------- ----------
Operating income 9,890 113 -- 10,003
Interest expense 16,374 171 -- 16,545
---------- ---------- ---------- ----------
(6,484) (58) -- (6,542)
Income taxes (1,252) (8) -- (1,260)
---------- ---------- ---------- ----------
(5,232) (50) -- (5,282)
Equity in loss of subsidiaries (50) -- 50 --
---------- ---------- ---------- ----------
Net income (loss) $ (5,282) $ (50) $ 50 $ (5,282)
========== ========== ========== ==========
13
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (in thousands of dollars)
NINE MONTHS ENDED DECEMBER 31, 2002
--------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 2,444 $ 409 $ (488) $ 2,365
Noncash adjustments 71,398 6,422 -- 77,820
Change in operating assets and liabilities 12,893 (3,653) -- 9,240
--------- --------- --------- ---------
Net cash provided by operating activities 86,735 3,178 (488) 89,425
--------- --------- --------- ---------
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (488) -- 488 --
Capital expenditures (59,967) (7,450) -- (67,417)
Acquisition of assets (1,641) (200) -- (1,841)
Sale of investment 6,585 -- -- 6,585
Sale of property and equipment -- 727 -- 727
--------- --------- --------- ---------
Net cash used in investing activities (55,511) (6,923) 488 (61,946)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from debt 6,000 -- -- 6,000
Repayment of debt (24,750) -- -- (24,750)
Other financing items (8,146) 4,316 -- (3,830)
--------- --------- --------- ---------
Net cash (used in) provided by financing
activities (26,896) 4,316 -- (22,580)
--------- --------- --------- ---------
Net increase in cash and cash equivalents 4,328 571 -- 4,899
Cash and cash equivalents, beginning of period 27,703 117 -- 27,820
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 32,031 $ 688 $ -- $ 32,719
========= ========= ========= =========
14
COINMACH CORPORATION AND SUBSIDIARIES
NINE MONTHS ENDED DECEMBER 31, 2001
-------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $(17,514) $ (619) $ 619 $(17,514)
Noncash adjustments 92,138 414 -- 92,552
Change in operating assets and liabilities (8,888) (2,578) -- (11,466)
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities 65,736 (2,783) 619 63,572
--------- --------- --------- ---------
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 619 -- (619) --
Capital expenditures (61,398) (45) -- (61,443)
Acquisition of assets (2,684) -- -- (2,684)
Sale of property and equipment 1,141 -- -- 1,141
--------- --------- --------- ---------
Net cash used in investing activities (62,322) (45) (619) (62,986)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from debt 37,323 377 -- 37,700
Repayment of debt (32,783) (331) -- (33,114)
Other financing items (6,917) 3,019 -- (3,898)
--------- --------- --------- ---------
Net cash (used in) provided by financing
activities (2,377) 3,065 -- 688
--------- --------- --------- ---------
Net increase in cash and cash equivalents 1,037 237 -- 1,274
Cash and cash equivalents, beginning of period 25,418 441 -- 25,859
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 26,455 $ 678 $ -- $ 27,133
========= ========= ========= =========
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 the
Company's wholly-owned subsidiary, AWA. 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
15
COINMACH CORPORATION AND SUBSIDIARIES
service contracts through the Company's wholly-owned subsidiary, Super Laundry.
The Company evaluates performance and allocates resources based on EBITDA
(earnings before nonrecurring items, 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 DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Revenue:
Route $ 119,926 $ 120,581 $ 354,656 $ 359,408
All other:
Distribution 7,551 9,510 27,244 27,032
Rental 7,446 5,745 21,188 16,506
----------- ---------- ----------- -----------
Subtotal All other 14,997 15,255 48,432 43,538
----------- ---------- ----------- -----------
Total $ 134,923 $ 135,836 $ 403,088 $ 402,946
=========== ========== =========== ===========
EBITDA:
Route $ 40,441 $ 41,154 $ 120,924 $ 125,011
All other 2,844 2,772 8,722 6,732
Reconciling items:
Corporate expenses (2,228) (2,339) (6,296) (6,546)
----------- ---------- ----------- -----------
Total $ 41,057 $ 41,587 $ 123,350 $ 125,197
=========== ========== =========== ===========
Income before taxes:
Route $ 16,637 $ 15,399 $ 49,607 $ 45,924
All other 1,087 1,117 3,452 1,790
----------- ---------- ----------- -----------
Subtotal 17,724 16,516 53,059 47,714
Reconciling items:
Corporate expenses (2,228) (2,339) (6,296) (6,546)
Amortization of goodwill and
depreciation (421) (4,174) (1,263) (12,520)
Nonrecurring items, net 2,507 - 2,507 -
Interest expense (14,717) (16,545) (43,665) (50,562)
----------- ---------- ----------- -----------
Income (loss) before taxes $ 2,865 $ (6,542) $ 4,342 $ (21,914)
=========== ========== =========== ===========
8. NONRECURRING ITEMS
In October 2002, CLC contributed its ownership interest in Residential
Data, Inc. ("RDI"), valued at approximately $2.7 million, to the Company.
Subsequently, the Company sold its interest in RDI, pursuant to an agreement and
plan of merger between RDI and unrelated third parties, for cash proceeds of
approximately $6.6 million before estimated expenses directly related to such
sale resulting in a gain of approximately $3.3 million.
16
COINMACH CORPORATION AND SUBSIDIARIES
Offsetting this gain was approximately $0.8 million of various
nonrecurring expenses related to (i) professional fees incurred in connection
with the transfer of the Appliance Warehouse division to AWA and the intended
Spin-off, (ii) certain organizational costs related to the formation of ALFC and
(iii) certain expenses associated with the consolidation of certain offices of
the Super Laundry business.
9. INCOME TAXES
The components of the Company's deferred tax liabilities and assets are
as follows (in thousands):
December 31, 2002 March 31, 2002
----------------- --------------
Deferred tax liabilities:
Accelerated tax depreciation and contract rights $ 110,303 $ 110,864
Other, net 250 925
--------- ---------
110,553 111,789
--------- ---------
Deferred tax assets:
Net operating loss carryforwards 26,778 28,906
Covenant not to compete 1,253 1,033
--------- ---------
28,031 29,939
--------- ---------
Net deferred tax liability $ 82,522 $ 81,850
========= =========
The net operating loss carryforwards of approximately $65.6 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 December 31, Nine Months ended December 31,
------------------------------- ------------------------------
2002 2001 2002 2001
------- -------- ------- --------
Federal $ 887 $ (982) $ 1,349 $(3,430)
State 498 (278) 628 (970)
------- -------- ------- --------
$ 1,385 $(1,260) $ 1,977 $(4,400)
======= ======== ======= ========
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 Nine Months ended
December 31, December 31,
---------------------- --------------------
2002 2001 2002 2001
------ ------ ------ ------
Expected tax provision (benefit) $ 1,003 $(2,400) $ 1,520 $(7,780)
State tax provision (benefit), net of federal taxes 324 (172) 408 (557)
Permanent book/tax differences 58 1,312 49 3,937
------- -------- ------- --------
Tax provision (benefit) $ 1,385 $(1,260) $ 1,977 $(4,400)
======= ======== ======= ========
17
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
18
COINMACH CORPORATION AND SUBSIDIARIES
commercial coin and non-coin operated machines and parts, and selling service
contracts. In addition, Super Laundry, commencing in 2002 and through its
wholly-owned subsidiary, American Laundry Franchising Corp. ("ALFC"), builds and
develops laundromat facilities for sale as franchise locations. For each
franchise laundromat facility, ALFC enters into a purchase agreement and a
license agreement with the buyer whereby the buyer may use certain systems
created by ALFC to operate such facility. ALFC receives revenue primarily from
the sale price of the laundromat facility and, to a lesser extent, from an
initial franchise fee and certain other fees based on the sales from such
facility.
The Company also operates an equipment rental business through
Appliance Warehouse of America, Inc. ("AWA"), also a wholly-owned subsidiary of
the Company. AWA leases 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.
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 December 31, 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.
19
COINMACH CORPORATION AND SUBSIDIARIES
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- AND NINE-MONTH PERIODS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001
The following table sets forth the Company's revenues for the periods
indicated (in millions of dollars):
Three Months ended December 31, Nine Months ended December 31,
------------------------------- ------------------------------
2002 2001 Change 2002 2001 Change
------- ------- ------- ------- ------- -------
Route $ 119.9 $ 120.6 $ (0.7) $ 354.7 $ 359.4 $ (4.7)
Distribution 7.6 9.5 (1.9) 27.2 27.0 0.2
Rental 7.4 5.7 1.7 21.2 16.5 4.7
------- ------- ------- ------- ------- ------
$ 134.9 $ 135.8 $ (0.9) $ 403.1 $ 402.9 $ 0.2
======= ======= ======= ======= ======= ======
Revenue decreased by approximately $0.9 million or less than 1% for the
three-month period ended December 31, 2002, as compared to the prior year's
corresponding period. Revenue increased by approximately $0.2 million or less
than 1% for the nine-month period ended December 31, 2002, as compared to the
prior year's corresponding period.
Route revenue for the three months ended December 31, 2002
decreased by approximately $0.7 million or less than 1% over the prior
year's corresponding period. Route revenue for the nine months ended
December 31, 2002 decreased by approximately $4.7 million or 1% 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 December 31,
2002 decreased by approximately $1.9 million or 21% from the prior
year's corresponding period. Distribution revenue for the nine months
ended December 31, 2002 increased by approximately $0.2 million or less
than 1% 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 December 31, 2002
increased by approximately $1.7 million or 30% over the prior year's
corresponding period. Rental revenue for the nine months ended December
31, 2002 increased by approximately $4.7 million or 28% over the prior
year's corresponding period. This increase was primarily
20
COINMACH CORPORATION AND SUBSIDIARIES
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 for the three-month period ended December 31, 2002
decreased by approximately $0.3 million or less than 1% as compared to the prior
year's corresponding period. The decrease in operating expenses for the
three-month period was due to a decrease in the cost of sales resulting from
reduced sales in the distribution business offset by costs associated with
expansion into new markets in the rental business and increased insurance
premium costs related to both medical and general business insurance coverage.
Operating expenses increased by approximately $2.2 million or less than 1% for
the nine-month period ended December 31, 2002, as compared to the prior year's
corresponding period. This increase in operating expenses for the nine-month
period was due primarily to (i) costs associated with expansion into new markets
in the rental business and (ii) increased insurance premium costs related to
both medical and general business insurance coverage. As a percentage of
revenues, operating expenses were approximately 68% for both the three- and
nine-month periods ended December 31, 2002, as compared to approximately 68% for
the three-month period and 67% for the nine-month period ended December 31,
2001.
General and administrative expenses decreased by approximately 5% for
the three-month period ended December 31, 2002, as compared to the prior year's
corresponding period. General and administrative expenses decreased by
approximately 4% for the nine-month period ended December 31, 2002, as compared
to the prior year's corresponding period. As a percentage of revenues, general
and administrative expenses were approximately 1.7% for both the three-month
period ended December 31, 2002, as well as the prior year's corresponding
period. As a percentage of revenues, general and administrative expenses were
approximately 1.6% for both the nine-month period ended December 31, 2002, as
well as the prior year's corresponding period.
Nonrecurring items for the three months ended December 31, 2002 was
approximately $2.5 million. In October 2002, CLC contributed its ownership
interest valued at approximately $2.7 million in Residential Data, Inc. ("RDI")
to the Company. Subsequently, the Company sold its interest in RDI pursuant to
an agreement and plan of merger between RDI and unrelated third parties, for
cash proceeds of approximately $6.6 million before estimated expenses directly
related to such sale resulting in a gain of approximately $3.3 million.
Offsetting this gain was approximately $0.8 million of various nonrecurring
expenses related to (i) professional fees incurred in connection with the
transfer of the Appliance Warehouse division to AWA and the intended Spin-off,
(ii) certain organizational costs related to the formation of ALFC and (iii)
certain expenses associated with the consolidation of certain offices of the
Super Laundry business. There were no nonrecurring items incurred in the prior
year's corresponding periods.
Depreciation and amortization expense decreased by approximately 18%
for the three-month period ended December 31, 2002, as compared to the prior
year's corresponding period. Depreciation and amortization decreased by
approximately 19% for the nine-month period ended December 31, 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 $11.4 million and the reduction of
amortization expense on contract rights of approximately $9.8 million as a
result of the application of Statements of
21
COINMACH CORPORATION AND SUBSIDIARIES
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 13.0% for the three-month
period ended December 31, 2002, as compared to approximately 7.4% for the prior
year's corresponding period. Operating income margins were approximately 11.9%
for the nine-month period ended December 31, 2002, as compared to approximately
7.1% for the prior year's corresponding period. The increase in operating income
margin was primarily due to the decrease in amortization expenses, as well as
the gain recognized from the sale of the Company's interest in RDI, in the
current periods.
Interest expense, net, decreased by approximately 11% for the
three-month period ended December 31, 2002, as compared to the prior year's
corresponding period. Interest expense, net, decreased by approximately 14% for
the nine-month period ended December 31, 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 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 variable 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 nine-month period ended December
31, 2002 was approximately $2.0 million as compared to a benefit for income
taxes of approximately $4.4 million for the prior year's corresponding period.
The change for the nine-month period is due to the corresponding decrease in
pretax loss from approximately $21.9 million for the nine-month period ended
December 31, 2001 to a pretax income of approximately $4.3 million for the
nine-month period ended December 31, 2002. The effective tax rate for the
nine-month period ended December 31, 2002 was 46% 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.
22
COINMACH CORPORATION AND SUBSIDIARIES
EBITDA represents earnings from continuing operations before deductions
for nonrecurring items, 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 December 31, Nine Months ended December 31,
------------------------------- ------------------------------
2002 2001 Change 2002 2001 Change
------- ------- ------- ------- ------- -------
Route $ 40.4 $ 41.2 $ (0.8) $ 120.9 $ 125.0 $ (4.1)
Distribution (0.2) 0.3 (0.5) 0.4 0.4 --
Rental 3.0 2.4 0.6 8.3 6.4 1.9
G&A (2.2) (2.3) 0.1 (6.3) (6.6) 0.3
------- ------- ------- -------- -------- -------
$ 41.0 $ 41.6 $ (0.6) $ 123.3 $ 125.2 $ (1.9)
====== ====== ======= ======== ======== =======
EBITDA was approximately $41.0 million for the three months ended
December 31, 2002, as compared to approximately $41.6 million for the three
months ended December 31, 2001. EBITDA margins declined to approximately 30.4%
for the three months ended December 31, 2002, as compared to approximately 30.6%
for the prior year's corresponding period. This decrease was primarily the
result of increased insurance premium costs related to both medical and general
business insurance coverage, as well as decreased revenues in the route and
distribution businesses, as discussed above.
EBITDA was approximately $123.3 million for the nine months ended
December 31, 2002, as compared to approximately $125.2 million for the for the
prior year's corresponding period. EBITDA margins declined to approximately
30.6% for the nine months ended December 31, 2002, as compared to approximately
31.1% for the prior year's corresponding period. This decrease was primarily the
result of increased insurance premium costs related to both medical and general
business insurance coverage, as well as 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 December 31, 2002, the Company had outstanding debt of
approximately $718.5 million, which included $450 million of the 9% Senior Notes
and $261.3 million of borrowings under the Senior Credit Facility. The Company's
stockholder's equity was approximately $54.0 million as of December 31, 2002.
23
COINMACH CORPORATION AND SUBSIDIARIES
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 December 31, 2002 consisted of cash
and cash equivalents of $32.7 million and available borrowings under its Senior
Credit Facility of approximately $74.3 million.
The term loans under the Senior Credit Facility, in aggregate principal
amounts outstanding of $18.3 million and $243.0 million as of December 31, 2002,
are scheduled to be fully repaid by January 25, 2008 and July 25, 2009,
respectively. As of December 31, 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 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. In December 2002, the Company made a $15 million voluntary prepayment of
amounts owed under the term loans of its Senior Credit Facility.
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 December 31, 2002
were approximately $21.1 million (excluding approximately $1.0 million relating
to capital lease obligations and approximately $1.8 million relating to business
acquisitions). Capital expenditures for the nine-month period ended December 31,
2002 were approximately $67.4 million (excluding approximately $3.0 million
relating to capital lease obligations and approximately $1.8 million relating to
business acquisitions). 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 5,500 machines for the nine-month
period ended December 31, 2002. The growth in the rental business machine base
was approximately 21,000 for the nine-month period ended December 31, 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.
24
COINMACH CORPORATION AND SUBSIDIARIES
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 December 31, Nine Months ended December 31,
------------------------------- ------------------------------
2002 2001 Change 2002 2001 Change
------- ------- ------- ------ ------ -------
Route $ 19.9 $ 19.3 $ (0.6) $ 60.0 $ 55.0 $ (5.0)
Distribution -- -- -- -- -- --
Rental 1.2 1.8 0.6 7.4 6.4 (1.0)
------ ------ ------- ------ ------ -------
$ 21.1 $ 21.1 $ -- $ 67.4 $ 61.4 $ (6.0)
====== ====== ======= ====== ====== =======
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.
On November 29, 2002 (the "Transfer Date"), all of the assets of the
Appliance Warehouse division of the Company were transferred to AWA. The value
of the assets transferred as determined by an independent appraiser was $34.7
million as of the Transfer Date. In exchange for the transfer of such assets,
AWA issued to the Company on the Transfer Date (i) an unsecured promissory note
payable on demand in the amount of $19.6 million which accrues interest at a
rate of 8% per annum, (ii) 1,000 shares of preferred stock of AWA, par value
$0.01 per share (the "Preferred Stock"), with a liquidation value of $14.6
million, and (iii) 10,000 shares of common stock of AWA, par value $0.01 per
share. The Preferred Stock is not redeemable and is vested with all of the
voting rights of AWA. Dividends on the Preferred Stock accrue quarterly at a
rate of 11% per annum and are payable in cash, in kind in the form of additional
shares of Preferred Stock, or a combination thereof, at the option of AWA.
25
COINMACH CORPORATION AND SUBSIDIARIES
The Company intends to effect a spin-off of AWA before March 31, 2003
(the "Spin-off"), as permitted by the indenture governing the 9% Senior Notes
and the Senior Credit Facility. Upon consummation of the Spin-off, AWA will
continue to be a guarantor under, and subject to the covenants contained in, the
indenture governing the 9% Senior Notes and the Senior Credit Facility.
CERTAIN ACCOUNTING TREATMENT
The Company's depreciation and amortization expense, which aggregated
approximately $77.9 million for the nine months ended December 31, 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.
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
26
COINMACH CORPORATION AND SUBSIDIARIES
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.
27
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 December 31, 2002, the Company
had approximately $111.3 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 $2.2 million, assuming the amount outstanding was $111.3 million,
the balance as of December 31, 2002. Historically, the Company has utilized
interest rate swap agreements to manage its exposure to certain market rate
risks.
As of December 31, 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.
28
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
The Company intends to effect a spin-off of AWA before March 31, 2003
(the "Spin-off"), as permitted by the indenture governing the 9% Senior Notes
and the Senior Credit Facility. Upon consummation of the Spin-off, AWA will
continue to be a guarantor under, and subject to the covenants contained in, the
indenture governing the 9% Senior Notes and the Senior Credit Facility.
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
None.
29
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: February 14, 2003 /s/ ROBERT M. DOYLE
---------------------------------------------------
Robert M. Doyle
Senior Vice President and Chief Financial Officer
(On behalf of registrant and as Principal Financial
Officer)
30
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 days 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: February 14, 2003 /s/ STEPHEN R. KERRIGAN
---------------------------------
Stephen R. Kerrigan
Chairman of the Board and
Chief Executive Officer
31
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 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 days 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: February 14, 2003 /s/ ROBERT M. DOYLE
--------------------------------------
Robert M. Doyle
Chief Financial Officer
32
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 December 31, 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 December 31, 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