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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2003
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
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(Exact name of registrant as specified in its charter)
DELAWARE 53-0188589
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(State of incorporation) (I.R.S. Employer Identification No.)
303 SUNNYSIDE BLVD., SUITE 70, PLAINVIEW, NEW YORK 11803
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 349-8555
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No |X|
As of June 24, 2003, the registrant had outstanding 100 shares of
common stock, par value $.01 per share.
No market value can be determined for the Company's common stock. See
Item 5 of this Form 10-K Report.
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PART I
ITEM 1. BUSINESS
Unless otherwise expressly indicated herein, the descriptions of the
Company contained herein are as of March 31, 2003.
DESCRIPTION OF THE BUSINESS
GENERAL
Coinmach Corporation, a Delaware corporation (the "Company") is the
leading supplier of outsourced laundry equipment 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 laundry machines, and
operating retail laundromats. For the fiscal year ended March 31, 2003, the
Company's route business represented approximately 90% of its total revenues and
approximately 95% of its total EBITDA. The existing customer base for the
Company's route business is comprised of landlords, property management
companies, owners of rental apartment buildings, condominiums and cooperatives,
university and institutional housing and other multi-family housing properties.
The Company typically sets pricing for the use of laundry machines on location,
and the owner or property manager maintains the premises and provides utilities
such as gas, electricity and water. The Company's size and scale offer
significant advantages over its competitors in terms of marketing, operating
efficiencies and the quality of service the Company provides its customers.
The Company has selectively acquired certain related businesses in
order to expand and diversify the types of services it provides. Through
Appliance Warehouse of America, Inc. ("AWA"), a recently formed subsidiary of
the Company jointly-owned by the Company and Coinmach Holdings, LLC, a Delaware
limited liability company and the Company's ultimate parent ("Holdings"), the
Company 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"), a wholly-owned
subsidiary of the Company, constructs, designs and retrofits retail laundromats
and distributes laundromat equipment. In addition, Super Laundry, commencing in
September 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 believes that these non-core businesses
provide a platform for expansion and diversification of the Company's services.
The Company is a wholly-owned subsidiary of Coinmach Laundry
Corporation, a Delaware corporation ("Coinmach Laundry"), which in turn is a
wholly-owned subsidiary of Holdings. Unless otherwise specified herein,
references to the Company shall mean Coinmach Corporation and its subsidiaries.
See "--Description of Business - Complementary Operations."
The Company maintains its headquarters in Plainview, New York, a
corporate office in Charlotte, North Carolina and regional offices throughout
the United States through which it conducts operating activities, including
sales, service and collections.
At March, 31, 2003, the Company owned and operated approximately
856,000 washers and dryers in approximately 80,000 locations throughout North
America of which (i) approximately 664,000 are located in leased laundry rooms
in approximately 70,000 locations, (ii) approximately 11,000 are located in 163
retail laundromats in Texas and Arizona, and (iii) approximately 181,000 are
installed with its rental customers through AWA.
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BUSINESS AND GROWTH STRATEGY
The Company's business strategy is to maintain its market leadership
position as the leading supplier of outsourced laundry equipment services for
multi-family housing properties in North America. The Company's growth strategy
is to increase its cash flow from operations and profitability through a
combination of internal expansion and selective acquisitions designed to achieve
economies of scale and increase its operating efficiencies. From time to time,
management may also consider other opportunities involving collections-based
core businesses to take advantage of potential synergies with the Company's
existing sales, service, collections and security infrastructure.
INTERNAL EXPANSION
Internal expansion is comprised of: (i) increasing the installed
machine base by adding new customers in existing regions and increasing the
number of locations with existing customers; (ii) converting owner-operated
facilities to Company-managed facilities; and (iii) improving the net
contribution per machine through operating efficiencies and selective price
increases.
New Customers and Locations. The Company's sales and marketing efforts
focus on adding new customers and increasing the number of locations from
existing customers within existing operating regions. The Company's primary
means of internal expansion is by marketing the Company's products and
services to building managers and property owners whose leases with other
laundry equipment services providers are near expiration. The Company's
integrated computer systems track information on the lease expirations of
its competitors. The Company believes that its leading market position and
expanding geographic presence enhance its ability to gain new customers and
additional locations from its existing customers.
Conversions. According to information provided by the Multi-housing
Laundry Association, there are approximately 1.2 million machines installed
in locations that continue to be managed by owner-operators. Building
owners or managers can forego significant cash outlays and servicing costs
by contracting with the Company to purchase, service and maintain laundry
equipment. Accordingly, the Company markets its services to building owners
and managers, encouraging them to outsource their laundry facilities. The
Company offers a full range of services from the design, construction and
installation of new laundry facilities to the refurbishment of existing
facilities. Management believes these services provide a competitive
advantage in securing new customers.
Operating Efficiencies and Price Increases. The Company focuses on
improving its net contribution per machine by increasing operating
efficiencies and implementing selective price increases. With respect to
operating efficiencies, each additional route added to its existing base
provides the Company the ability to further leverage its well-developed
operating infrastructure and positions the Company to achieve higher
returns on its established base. In terms of pricing, management actively
monitors its installed base to identify those locations in which to
implement selective price increases. Due to local competition and other
factors beyond the Company's control, however, there can be no assurance
that such efficiencies or price increases will occur.
SELECTIVE ACQUISITIONS
From January 1995 to June 1998, the Company pursued a strategy of rapid
growth through acquisitions of local, regional and multi-regional route
operators. As a result, the Company has become the leading provider of
outsourced laundry equipment services in North America. As the number of
significant acquisition opportunities has diminished over the past several
years, due in part to the Company's successful execution of its acquisition
strategy, the Company has focused its efforts on selectively acquiring smaller
routes within its fragmented industry. The Company believes that there are
numerous private, family-owned businesses that often lack the financial
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resources to compete effectively with larger independent operators such as
Coinmach to secure new or existing contracts. Consequently, such independent
operators, especially those that are undergoing generational ownership changes,
continue to represent potential acquisition opportunities. The Company evaluates
potential acquisitions based on the size of the business (in terms of revenues,
cash flow and machine base), the geographic concentration of the business,
market penetration, service history, customer relations, existing contract terms
and potential operating efficiencies and cost savings. There can be no
assurance, however, that the Company will be able to consummate any such
acquisitions on commercially reasonable terms, if at all.
DEVELOP COMPLEMENTARY LINES OF BUSINESS
While the Company intends to focus on increasing its installed machine
base, the Company believes that its leading market position and access to over
six million housing units provide the Company with additional growth and
diversification opportunities within its existing laundry business. These
opportunities include the distribution of laundry equipment to the retail
coin-operated laundromat segment (through its distribution operations of Super
Laundry) and the rental of laundry equipment to various end customers (through
its rental operations of AWA). Furthermore, the Company believes that its
existing sales, service, collections and security infrastructure could
potentially be extended into other collections-based core businesses. The
Company regularly explores strategic alliances with other companies in an effort
to develop these ancillary revenue streams. There can be no assurance, however,
that the Company will be able to take advantage of these opportunities on
commercially reasonable terms, if at all.
CONTINUE DEVELOPMENT OF INTEGRATED COMPUTER SYSTEMS
The Company's business strategy also includes the continued development
of its integrated computer systems. As the industry leader, the Company works
closely with its equipment vendors to assess ongoing technological changes and
implement those that the Company believes are beneficial to its customers and to
its operating efficiencies and financial performance. The Company's integrated
computer systems are capable of being tailored to a specific region's needs
while continuing to communicate with central management systems at its
headquarters.
INDUSTRY
The outsourced laundry equipment services industry is characterized by
stable operating cash flows generated by long-term, renewable lease contracts
with multi-family housing property owners and management companies. Based upon
industry estimates, management believes there are approximately 3.5 million
installed machines in multi-family properties throughout the United States,
approximately 2.3 million of which have been outsourced to independent operators
such as the Company and approximately 1.2 million of which continue to be
operated by the owners of such locations. The outsourced laundry equipment
services industry remains highly fragmented, with many small, private and
family-owned core businesses operating throughout all major metropolitan areas
in the United States. According to information provided by the Multi-housing
Laundry Association, the industry consists of over 280 independent operators.
Industry participants often incur significant capital costs upon the
procurement of new leases and the renewal of existing leases. Initial costs may
include replacing existing washers and dryers, refurbishing laundry rooms and
making advance location payments to secure long-term, renewable leases. After
the initial expenditures, ongoing working capital requirements are minimal. In
addition, the useful life of the Company's equipment typically extends
throughout the term of the contract under which it is installed. Furthermore,
maintenance of the facilities where the laundry machines are located is
typically performed by the property manager or landlord.
Historically, the industry has been characterized by stable demand and
has been resistant to changing market conditions and general economic cycles.
The Company believes that the industry's consistent and predictable revenue and
operating cash flows are primarily due to: (i) the long-term nature of location
leases; (ii) the stable demand for laundry services; and (iii) minimal ongoing
working capital requirements.
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DESCRIPTION OF PRINCIPAL OPERATIONS
The primary aspects of the Company's route business operations include:
(i) sales and marketing; (ii) location leasing; (iii) service; (iv) information
management; (v) remanufacturing and (vi) revenue collection and security.
SALES AND MARKETING
The Company markets its products and services through a sales staff
with an average industry experience of over ten years. The principal
responsibility of the sales staff is to solicit customers and negotiate lease
arrangements with building owners and managers. Sales personnel are paid
commissions that comprise 50% or more of their annual compensation. Selling
commissions are based on a percentage of a location's annualized earnings before
interest and taxes. Sales personnel must be proficient with the application of
sophisticated financial analyses, which calculate minimum returns on investments
to achieve the Company's targeted goals in securing location contracts and
renewals. The Company believes that its sales staff is among the most competent
and effective in the industry.
The Company's marketing strategy emphasizes excellent service offered
by its experienced, highly-skilled personnel and quality equipment that
maximizes efficiency and revenue and minimizes machine down-time. The Company's
sales staff targets potential new and renewal lease locations by utilizing the
integrated computer systems' extensive database to provide information on the
Company's, as well as its competitors', locations. Additionally, the integrated
computer systems monitor performance, repairs and maintenance, as well as the
profitability of locations on a daily basis. All sales, service and installation
data is recorded and monitored daily on a custom-designed, computerized sales
planner.
No single customer represents more than 2% of the Company's gross
revenues, and the Company's ten largest customers taken together account for
less than 10% of the Company's gross revenue.
LOCATION LEASING
The Company's leases provide it the exclusive right to operate and
service the installed laundry machines, including repairs, revenue collection
and maintenance. The Company typically sets pricing for the use of the machines
on location, and the property owner or property manager maintains the premises
and provides utilities such as gas, electricity and water.
In return for the exclusive right to provide laundry equipment
services, most of the Company's leases provide for monthly commission payments
to the location owners. Under the majority of leases, these commissions are
based on a percentage of the cash collected from the laundry machines. Many of
the Company's leases require the Company to make advance location payments to
the location owner in addition to commissions. The Company's leases typically
include provisions that allow for unrestricted price increases, a right of first
refusal (an opportunity to match competitive bids at the expiration of the lease
term) and termination rights if the Company does not receive minimum net
revenues from a lease. The Company has some flexibility in negotiating its
leases and, subject to local and regional competitive factors, may vary the
terms and conditions of a lease, including commission rates and advance location
payments. The Company evaluates each lease opportunity through its integrated
computer systems to achieve a desired level of return on investments.
The Company estimates that approximately 90% of its locations are under
long-term leases with initial terms of five to ten years. Of the remaining
locations not subject to long-term leases, the Company believes that it has
retained a majority of such customers through long-standing relationships and
expects to continue to service such customers. Most of the Company's leases
renew automatically or have a right of first refusal provision. The Company's
automatic renewal clause typically provides that, if the building owner fails to
take any action prior to the end of the original lease term or any renewal term,
the lease will automatically renew on substantially similar
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terms. As of March 31, 2003, the Company's leases had an average remaining life
to maturity of approximately 51 months (without giving effect to automatic
renewals).
SERVICE
The Company's employees deliver, install, service and collect revenue
from washers and dryers in laundry facilities at the Company's leased locations.
The Company's integrated computer systems allow for the quick dispatch
of service technicians in response to both computer-generated (for preventive
maintenance) and customer-generated service calls. On a daily basis, the Company
receives and responds to approximately 3,000 service calls. The Company
estimates that less than 1% of its machines are out of service on any given day.
The ability to reduce machine down-time, especially during peak usage, enhances
revenue and improves the Company's reputation with its customers.
In a business that emphasizes prompt and efficient service, the Company
believes that its integrated computer systems provide a significant competitive
advantage in terms of responding promptly to customer needs. Computer-generated
service calls for preventive maintenance are based on previous service history,
repeat service call analysis and monitoring of service areas. These systems
coordinate the Company's radio-equipped service vehicles and allow it to address
customer needs quickly and efficiently.
INFORMATION MANAGEMENT
The Company's integrated computer systems serve three major functions:
(i) tracing the service cycle of equipment; (ii) monitoring revenues and costs
by location, customer and salesperson; and (iii) providing information on
competitors' and the Company's lease renewal schedules.
The Company's integrated computer systems provide speed and accuracy
throughout the entire service cycle by integrating the functions of service call
entry, dispatching service personnel, parts and equipment purchasing,
installation, distribution and collection. In addition to coordinating all
aspects of the service cycle, the Company's integrated computer systems track
contract performance, which indicate potential machine problems or pilferage and
provide data to forecast future equipment servicing requirements.
Data on machine performance is used by the Company's sales staff to
forecast revenue by location. The Company is able to obtain daily, monthly,
quarterly and annual reports on location performance, coin collection, service
and sales activity by salesperson.
The Company's integrated computer systems also provide the Company's
sales staff with an extensive database essential to the Company's marketing
strategy to obtain new business through competitive bidding or owner-operator
conversion opportunities.
The Company also believes that its integrated computer systems enhance
its ability to successfully integrate acquired businesses into its existing
operations. Regional or certain multi-regional acquisitions have typically been
substantially integrated within 90 to 120 days, while a local acquisition can be
integrated almost immediately.
REMANUFACTURING
The Company rebuilds and reinstalls a portion of its machines at
approximately one-third the cost of acquiring new machines, providing cost
savings. Remanufactured machines are restored to virtually new condition with
the same estimated average life and service requirements as new machines.
Machines that can no longer be remanufactured are added to the Company's
inventory of spare parts.
The Company maintains three regional remanufacturing facilities,
strategically located to service its operating regions, which provide for
consistent machine quality and efficient operations.
6
REVENUE COLLECTION AND SECURITY
The Company believes that it provides the highest level of security for
revenue collection control in the outsourced laundry equipment services
industry. The Company utilizes numerous precautionary procedures with respect to
cash collection, including frequent alteration of collection patterns and
extensive monitoring of collections and personnel. The Company enforces
stringent employee standards and screening procedures for prospective employees.
Employees responsible for, or who have access to, the collection of funds are
tested randomly and frequently. Additionally, the Company's security department
performs trend and variance analyses of daily collections by location. Security
personnel monitor locations, conduct investigations, and implement additional
security procedures as necessary.
DESCRIPTION OF COMPLEMENTARY OPERATIONS
In addition to its route business, the Company has expanded its breadth
of operations to related, complementary lines of businesses:
RENTAL OPERATIONS
AWA, a subsidiary jointly-owned by the Company and Holdings, is
involved in the business of leasing laundry equipment and other household
appliances and electronic items to corporate relocation entities, property
owners, managers of multi-family housing properties and individuals. With access
to approximately six million individual housing units, the Company believes this
business line represents an opportunity for growth in a new market segment which
is complementary to its route business.
DISTRIBUTION OPERATIONS
Super Laundry, a wholly-owned subsidiary of the Company, is a
laundromat equipment distribution company. Super Laundry's business consists of
constructing complete turnkey retail laundromats, retrofitting existing retail
laundromats, distributing exclusive and non-exclusive lines of commercial coin
and non-coin operated machines and parts, and selling service contracts. Super
Laundry's customers generally enter into sales contracts pursuant to which Super
Laundry constructs and equips a complete laundromat operation, including
location identification, construction, plumbing, electrical wiring and all
required permits. In addition, Super Laundry, through its wholly-owned
subsidiary, ALFC, builds and develops laundromat facilities for sale as
franchise locations.
COMPETITION
The outsourced laundry equipment services industry is highly
competitive, capital intensive and requires reliable, quality service. Despite
the overall fragmentation of the industry, the Company believes there are
currently three multi-regional route operators, including the Company, with
significant operations throughout the United States. The two other major
multi-regional competitors are Web Service Company, Inc. and Mac-Gray Corp.
EMPLOYEES
As of March 31, 2003, the Company employed 2,015 employees (including
300 laundromat attendants in the Company's retail laundromats in Texas and
Arizona). In the Northeast region, 124 hourly workers are represented by Local
966, affiliated with the International Brotherhood of Teamsters (the "Union").
The Company believes that it has maintained a good relationship with the Union
employees and has never experienced a work stoppage since its inception.
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GENERAL DEVELOPMENT OF BUSINESS
Coinmach Laundry was incorporated on March 31, 1995 under the name SAS
Acquisitions Inc. in the State of Delaware and is the sole shareholder of all of
the common stock of the Company, its primary operating subsidiary. In November
1995, The Coinmach Corporation ("TCC"), a Delaware corporation and predecessor
of the Company, merged (the "Solon Merger") with and into Solon Automated
Services, Inc. ("Solon"). In connection with the Solon Merger, Coinmach Laundry
changed its name from SAS Acquisitions Inc., and Solon, the surviving
corporation in the Solon Merger, to Coinmach Corporation.
On May 12, 2000, Coinmach Laundry entered into an Agreement and Plan of
Merger (the "Merger Agreement") with CLC Acquisition Corporation ("CLC
Acquisition"), a newly-formed Delaware corporation formed by Bruce V. Rauner, a
director of Coinmach Laundry and a principal of the indirect general partner of
GTCR Fund IV, Coinmach Laundry's then-largest stockholder. Pursuant to the
Merger Agreement, CLC Acquisition acquired all of Coinmach Laundry's outstanding
common stock and non-voting common stock for $14.25 per share in a two-step
going-private transaction consisting of a tender offer followed by a merger
transaction of CLC Acquisition with and into Coinmach Laundry. Effective July
13, 2000, CLC Acquisition was merged with and into Coinmach Laundry pursuant to
the terms of the Merger Agreement. Coinmach Laundry's Class A common stock was
subsequently delisted from The Nasdaq Stock Market, and Coinmach Laundry no
longer was subject to the reporting requirements of the Securities Exchange Act
of 1934 (the "Exchange Act"). The foregoing transactions are collectively
referred to herein as the "Going Private Transaction."
In order to effect the Restructuring Transactions (as defined herein),
AWA was incorporated on September 25, 2002 and Holdings was formed on November
15, 2002. On November 29, 2002, all of the assets of the Appliance Warehouse
division of the Company were transferred to AWA in exchange for certain
consideration, including all of the capital stock of AWA. On March 6, 2003,
Holdings acquired all of the non-voting common stock of AWA, par value $0.01 per
share (the "AWA Common Stock") and all of the outstanding capital stock of
Coinmach Laundry (collectively, the "CLC Capital Stock"). As a result of the
Restructuring Transactions, (i) Coinmach Laundry became a wholly-owned
subsidiary of Holdings and (ii) AWA became a jointly-owned subsidiary of the
Company and Holdings, of which the Company is the owner of all the outstanding
voting preferred stock of AWA, par value $0.01 per share (the "AWA Preferred
Stock") and Holdings is the owner of all of the outstanding AWA Common Stock.
See Item 7"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Operating and Investing
Activities."
The Company's headquarters are located at 303 Sunnyside Blvd., Suite
70, Plainview, New York 11803, and its telephone number is (516) 349-8555. The
Company's mailing address is the same as that of its headquarters. The Company
also maintains a corporate office in Charlotte, North Carolina. The Company's
website address is http://www.coinmach.com.
SENIOR NOTES AND CREDIT FACILITY
On January 25, 2002, the Company issued $450 million of 9% Senior Notes
due 2010 (the "Private 9% Senior Notes"). The Private 9% Senior Notes were
exchanged for registered notes otherwise identical in all respects to the
Private 9% Senior Notes (the "Registered 9% Senior Notes", and together with the
Private 9% Senior Notes, the "9% Senior Notes") pursuant to a registration
statement filed by the Company with the Securities and Exchange Commission,
which registration statement was declared effective on July 15, 2003. The
exchange of the Private 9% Senior Notes for the Registered 9% Senior Notes was
completed on August 14, 2003.
On January 25, 2002, the Company also entered into a new $355 million
senior secured credit facility (the "Senior Secured 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
Senior Secured 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 term loans under the Senior Secured Credit Facility, in aggregate
principal amounts outstanding of $18.3 million and $243.0 million as of March
31, 2003, are scheduled to be fully repaid by January 25, 2008 and
8
July 25, 2009, respectively. As of March 31, 2003, the Company had no amounts
outstanding under its revolving credit facility, which is scheduled to expire on
January 25, 2008.
The Company used the net proceeds from the Private 9% Senior Notes,
together with borrowings under the Senior Secured Credit Facility, to (i) redeem
all of its outstanding 11 3/4% Senior Notes (including accrued interest and the
resulting 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 with the funds that were set
aside in escrow on January 25, 2002. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Financing Activities" for more information about the 9%
Senior Notes and the Senior Secured Credit Facility.
ITEM 2. PROPERTIES
As of March 31, 2003, the Company leased 68 offices throughout its
operating regions serving various operational purposes, including sales and
service activities, revenue collection and warehousing. A significant portion of
the Company's leased properties service the Company's core route operations.
The Company presently maintains its headquarters in Plainview, New
York, leasing approximately 11,600 square feet pursuant to a ten-year lease
scheduled to terminate September 30, 2011. The Company's Plainview facility is
used for general and administrative purposes.
The Company also maintains a corporate office in Charlotte, North
Carolina, leasing approximately 3,000 square feet pursuant to a five-year lease
scheduled to terminate September 30, 2006.
ITEM 3. LEGAL PROCEEDINGS
On November 18, 1999, K. Reed Hinrichs v. Stephen R. Kerrigan, et al.,
a purported class action lawsuit, was filed in the Delaware Court of Chancery,
Newcastle County naming Coinmach Laundry, GTCR Fund IV, GTCR Golder Rauner,
L.L.C. and certain of its executive officers as defendants. Plaintiffs alleged
that the defendants' proposal to acquire between 80% and 90% of Coinmach
Laundry's common stock for $13.00 per share was inadequate and that the
defendants breached their fiduciary duty to Coinmach Laundry's public
shareholders. This matter was stayed by mutual agreement of the parties due to
the subsequent consummation of the Going Private Transaction. This class action
lawsuit was dismissed pursuant to a Notice and Order of Dismissal filed by the
plaintiff with the Delaware County Chancery Court on October 20, 2000.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 6, 2003, Coinmach Laundry, as the sole stockholder of the
Company, took certain actions by written consent in connection with the
Restructuring Transactions pursuant to which, among other things, the Company's
board of directors (the "Company Board") authorized the increase in the size of
the Company Board from three to five members in order to mirror the composition
of the CLC Board. In this regard, Coinmach Laundry replaced Mitchell Blatt and
Robert M. Doyle and elected Bruce V. Rauner, Vincent J. Hemmer, David A. Donnini
and James N. Chapman as new directors of the Company. Stephen R. Kerrigan
maintained his position as Chairman of the Company Board.
9
MBR&M DRAFT OF 6/__/03
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There currently exists no established public trading market for the
Company's common stock, all of which is held beneficially and of record by
Coinmach Laundry.
HOLDERS
As of March 31, 2003, there was one holder of record of the Company's
common stock.
DIVIDENDS
The Company has not declared or paid any cash dividends on its common
stock during the past two fiscal years and does not intend to pay dividends on
its common stock in the foreseeable future. On March 4, 2003, in order to effect
the Restructuring Transactions, the Company declared and paid a dividend on its
common stock in the form of all of the outstanding AWA Common Stock. The Company
was not required to obtain the consent of its lenders under the Senior Secured
Credit Facility or of the holders of the 9% Senior Notes to effect the
Restructuring Transactions. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Operating and Investing Activities."
Dividend payments by the Company are subject to restrictions contained
in certain of its outstanding debt and financing agreements relating to the
payment of cash dividends on its common stock. The Company may in the future
enter into loan or other agreements or issue debt securities or preferred stock
that restrict the payment of cash dividends or certain other distributions. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Liquidity and Capital Resources."
EQUITY PARTICIPATION PURCHASE PROGRAM
Pursuant to the Company's equity participation purchase program,
certain employees of the Company were eligible to acquire common stock of
Coinmach Laundry at a fixed price per share determined by the CLC Board. Such
shares were paid for by each participating employee and subject to vesting over
a specified period, typically over 4 years. Additionally, in connection with the
Going Private Transaction, certain members of senior management of the Company
were eligible to acquire preferred stock of Coinmach Laundry. Pursuant to the
Restructuring Transactions, on March 6, 2003, all the outstanding capital stock
of Coinmach Laundry, including shares of capital stock issued under the equity
participation purchase program, was contributed to Holdings in exchange for
substantially equivalent equity interests in Holdings. As of March 31, 2003,
Holdings had issued and outstanding (i) 167,147,065 common units the ("Common
Units") of which 16,244,394 are issued to certain employees of the Company under
the Company's equity participation purchase program, (ii) no Class A preferred
units (the "Class A Preferred Units"), (iii) 51,923 Class B preferred units (the
"Class B Preferred Units"), none of which are issued to employees of the
Company, and (iv) 135,295 Class C preferred units (the "Class C Preferred
Units", and collectively with the Class A Preferred Units and the Class B
Preferred Units, the "Preferred Units"), 693 of which are issued to certain
members of senior management of the Company under the Company's equity
participation purchase program.
10
ITEM 6.
SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios)
The following table presents summary historical consolidated financial
data of the Company. Such table includes the consolidated financial data for the
year ended March 31, 2003 ("2003 Fiscal Year"), the year ended March 31, 2002
("2002 Fiscal Year"), the period from July 1, 2000 to March 31, 2001
("Post-Transaction") and the period from April 1, 2000 to June 30, 2000
("Pre-Transaction"), and the years ended March 31, 2000 ("2000 Fiscal Year") and
March 31, 1999 ("1999 Fiscal Year"). The financial data set forth below should
be read in conjunction with the Company's audited historical consolidated
financial statements and the related notes thereto included in Item 8 "Financial
Statements and Supplementary Data" and with the information presented in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K.
JULY 1, 2000 APRIL 1, 2000
TO MARCH 31, TO JUNE 30,
YEAR ENDED MARCH 31, 2001 2000 YEAR ENDED MARCH 31,
-------------------- ------------- ------------ ----------------------
POST- PRE-
2003 2002 TRANSACTION(8) TRANSACTION(9) 2000 1999
--------- --------- -------------- -------------- --------- ---------
OPERATIONS DATA:
Revenues $535,179 $538,895 $393,608 $134,042 $527,079 $505,323
Operating, general and administrative
expenses 375,108 371,830 271,298 91,805 358,733 340,671
Depreciation and amortization 104,178 129,529 102,727 31,557 123,002 113,448
Other items, net (1) (454) -- -- -- -- --
Operating income 56,347 37,536 19,583 10,680 45,344 51,204
Interest expense 58,167 73,036 52,391 16,661 67,232 65,901
Loss before extraordinary item (2,288) (34,620) (25,603) (4,652) (16,079) (11,618)
Extraordinary loss, net of income taxes (2) -- (6,745) -- -- -- --
Net loss (2,288) (41,365) (25,603) (4,652) (16,079) (11,618)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $27,428 $27,820 $25,859 -- $23,174 $26,515
Property and equipment, net 286,686 284,413 276,004 -- 237,160 223,610
Contract rights, net 335,327 348,462 373,352 -- 380,964 409,009
Advance location payments 70,911 69,257 74,233 -- 77,212 79,705
Goodwill, net 203,860 204,284 218,744 -- 104,969 113,030
Total assets 976,161 989,321 1,014,074 -- 875,625 900,660
Total debt (3) 718,112 737,305 697,969 -- 683,819 685,741
Stockholder's equity (deficit) 49,802 50,423 91,788 -- (30,143) (14,128)
FINANCIAL INFORMATION AND OTHER DATA:
Cash flow provided by operating activities $104,674 $78,411 $71,955 $17,407 $90,743 $103,041
Cash flow used in investing activities (81,330) (82,011) (66,202) (24,273) (88,404) (181,665)
Cash flow (used in) provided by
financing activities (23,736) 5,561 (4,471) 8,269 (5,680) 82,688
EBITDA (4) 160,071 167,065 122,310 42,237 168,346 164,652
EBITDA margin (5) 29.9% 31.0% 31.1% 31.5% 31.9% 32.6%
Operating margin (6) 10.5% 7.0% 5.0% 8.0% 8.6% 10.1%
Capital expenditures (7)
Capital expenditures $86,685 $79,464 $60,620 $24,273 $88,404 $84,134
Acquisition capital expenditures 1,976 3,723 5,582 -- -- 97,531
--------- --------- --------- --------- --------- ---------
Total capital expenditures $88,661 $83,187 $66,202 $24,273 $88,404 $181,665
========= ======== ========= ========= ========= =========
- ------------
(1) Other items, net, in the 2003 Fiscal Year consists of a gain of
approximately $3.3 million from the sale of an investment offset by
various expenses relating to (i) the Restructuring Transactions, (ii) the
formation of ALFC and (iii) the consolidation of certain Super Laundry
offices.
11
(2) The extraordinary loss, net of income taxes, in the 2002 Fiscal Year
consists of costs related to the early extinguishments of debt in
connection with the Company's refinancing on January 25, 2002.
(3) Total debt at March 31, 2001, March 31, 2000 and March 31, 1999 does not
include the unamortized premium on the 11 3/4% Series C Senior Notes of
$5,555, $6,789 and $8,023, respectively, recorded as a result of the
issuance by the Company of $100 million aggregate principal amount of 11
3/4% Series C Senior Notes due 2005 in October 1997. The 11 3/4% Series C
Senior Notes were redeemed on February 25, 2002 and the unamortized
premium on such date was included in the determination of the
extraordinary loss.
(4) EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization, and other
items, net. Management believes that EBITDA is useful as a means to
evaluate the Company's ability to service existing debt, to sustain
potential future increases in debt and to satisfy capital requirements.
Additionally, because the Company has historically provided EBITDA to
investors, it believes that presenting this non-GAAP financial measure
provides consistency in its financial reporting. EBITDA is also used to
determine the Company's compliance with key financial covenants under its
financing agreements, which, among other things, impacts the amount of
indebtedness the Company is permitted to incur. Management's use of
EBITDA, however, 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) as an indicator of operating performance or (b) cash flows from
operating, investing and financing activities (as determined by accounting
principles generally accepted in the United States) as a measure of
liquidity. Given that EBITDA is not a measurement determined in accordance
with accounting principles generally accepted in the United States and is
thus susceptible to varying calculations, EBITDA may not be comparable to
other similarly titled measures of other companies. The following table
reconciles the Company's EBITDA to net loss for each period presented (in
thousands).
JULY 1, APRIL 1,
2000 TO 2000 TO
MARCH 31, JUNE 30,
YEAR ENDED 2001 2000 YEAR ENDED
---------------------- ----------- ----------- -------------------------
MARCH 31, MARCH 31, POST- PRE MARCH 31, MARCH 31,
2003 2002 TRANSACTION TRANSACTION 2000 1999
--------- --------- ------------ ----------- ----------- -----------
Net loss ($2,288) ($41,365) ($25,603) ($4,652) ($16,079) ($11,618)
Provision (benefit) for income taxes 468 (880) (7,205) (1,329) (5,809) (3,079)
Extraordinary loss, net of income
taxes -- 6,745 -- -- -- --
Interest expense 58,167 73,036 52,391 16,661 67,232 65,901
Other items, net (454) -- -- -- -- --
Depreciation and amortization 104,178 129,529 102,727 31,557 123,002 113,448
-------- --------- --------- --------- --------- ---------
EBITDA $160,071 $167,065 $122,310 $42,237 $168,346 $164,652
======== ========= ========= ========= ========= =========
- ------------
(5) EBITDA margin represents EBITDA as a percentage of revenues. Management
believes that EBITDA margin is a useful measure to evaluate the Company's
performance over various sales levels. EBITDA margin should not be
considered as an alternative for measurements determined in accordance
with accounting principles generally accepted in the United States.
(6) Operating margin represents operating income as a percentage of revenues.
(7) Capital expenditures represent amounts expended for property and
equipment, for advance location payments to location owners and for
acquisitions. Acquisition capital expenditures represent the amounts
expended to acquire local, regional and multi-regional route operators, as
well as complementary businesses.
12
(8) Includes the results of operations for the period July 1, 2000 to March
31, 2001, representing the results subsequent to the Going Private
Transaction.
(9) As a result of the Going Private Transaction that was accounted for using
the purchase method of accounting and, due to a practice known as "push
down" accounting, as of July 1, 2000 (the beginning of the accounting
period closest to the date on which control was effective), the Company
adjusted its consolidated assets and liabilities to their estimated fair
values, based on valuations, estimations and other studies. Therefore, the
financial statements presented for the Post-Transaction period are not
comparable to the financial statements presented for the Pre-Transaction
period. Had the Going Private Transaction taken place at April 1, 2000, on
an unaudited pro-forma basis, depreciation and amortization and net loss
would have been $3.5 million higher than reported for the Pre-Transaction
period ended June 30, 2000. This includes the results of operations for
the period April 1, 2000 to June 30, 2000, representing the results prior
to the Going Private Transaction.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis pertains to the results of
operations and financial position of the Company for the 2003 Fiscal Year, the
2002 Fiscal Year, and the period from April 1, 2000 to March 31, 2001 (the "2001
12-Month Period") and should be read in conjunction with the consolidated
financial statements and related notes thereto included in Item 8. The 2001
12-Month Period is comprised of the Pre-Transaction period combined with the
Post-Transaction period, and is not adjusted for the pro-forma effect that
additional depreciation and amortization would have on the Pre-Transaction
period had the Going Private Transaction occurred at the beginning of the 2001
12-Month Period.
GENERAL
The Company is principally engaged in the business of supplying
outsourced laundry equipment services to multi-family housing properties. The
Company's route business involves leasing laundry rooms from building owners and
property management companies, installing and servicing the laundry equipment,
collecting revenues generated from laundry machines and operating retail
laundromats. The Company, through AWA, a subsidiary jointly-owned with Holdings,
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. At March 31, 2003, the Company owned and
operated approximately 856,000 washers and dryers in approximately 80,000
locations throughout North America, including in 163 retail laundromats located
throughout Texas and Arizona. The Company, through its wholly-owned subsidiary,
Super Laundry, is also a laundromat equipment distribution company.
SOURCES OF REVENUE
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 are 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's most significant revenue source is its route business,
which over the last three fiscal years has accounted for approximately 90% of
its revenue. Through its route operations, the Company provides outsourced
laundry equipment services to locations by leasing laundry rooms from building
owners and property management companies, typically on a long-term, renewable
basis. In return for the exclusive right to provide these services, most of the
Company's contracts provide for commission payments to the location owners.
Commission expense (also referred to as rent expense), the Company's single
largest expense item, is included in laundry operating expenses and represents
payments to location owners. Commissions may be fixed amounts or percentages of
revenues and are generally paid monthly. In addition to commission payments,
many of the Company's leases require it to make advance location payments to
location owners, which are capitalized and amortized over the life of the
applicable leases. Through the Company's route business, the Company also
currently operates 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. Laundry
operating expenses include, in addition to commission payments, (i) the cost of
machine maintenance and revenue collection in the route and retail laundromat
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 also operates an
equipment rental business through AWA which 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.
14
The Company also operates an equipment distribution business through
Super Laundry. 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. In addition, Super Laundry, through
its wholly-owned subsidiary, 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.
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 and
coin not yet collected at the end of a reporting period which remain 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 March 31, 2003 was approximately $1.6 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 table sets forth for the periods indicated, selected
statement of operations data and EBITDA, as percentages of revenue:
YEAR ENDED YEAR ENDED JULY 1, 2000 TO APRIL 1, 2000 TO
MARCH 31, 2003 MARCH 31, 2002 MARCH 31, 2001 JUNE 30, 2000
-------------- -------------- --------------- ----------------
(POST- (PRE-
TRANSACTION) TRANSACTION)
Revenues.................................. 100.0% 100.0% 100.0% 100.0%
Laundry operating expenses................ 68.5 67.4 67.2 66.9
General and administrative expenses....... 1.6 1.6 1.7 1.6
Depreciation and amortization............. 19.5 24.0 26.1 23.5
Other items, net.......................... (0.1) -- -- --
Operating income.......................... 10.5 7.0 5.0 8.0
Interest expense, net..................... 10.9 13.6 13.3 12.4
Net loss ................................. -- (7.7) (6.5) (3.5)
EBITDA margin(1).......................... 29.9 31.0 31.1 31.5
(1) See footnote 4 of the table contained under Item 6 "Selected
Financial Data--Selected Historical Financial Data" for a reconciliation of
EBITDA to net loss for the periods indicated in the table immediately above.
15
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO THE FISCAL YEAR
ENDED MARCH 31, 2002
The following table sets forth the Company's revenues for the years
indicated:
(dollars in millions)
YEAR ENDED MARCH, 31
-------------------------------
2003 2002 CHANGE
------ ------ ------
Route........................... $471.5 $478.1 $(6.6)
Distribution.................... 35.0 38.4 (3.4)
Rental.......................... 28.7 22.4 6.3
------ ------ ------
$535.2 $538.9 $(3.7)
====== ====== ======
Revenue decreased by approximately $3.7 million or less than 1% for the
2003 Fiscal Year as compared to the 2002 Fiscal Year.
Route revenue for the 2003 Fiscal Year decreased by approximately $6.6
million or 1% as compared to the prior year. Management believes that the
decline in route revenue for the 2003 Fiscal Year as compared to the 2002 Fiscal
Year was primarily the result of increased vacancies related to locations in
certain regions as well as, to a lesser extent, a transfer of approximately
9,000 rental machines to AWA during the 2003 Fiscal Year. 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.
Management believes that to the extent vacancy rates in certain of the Company's
operating regions, principally in the Southeast and Texas, increase in the
future, route revenue in these regions may continue to decrease. Any such
decrease, however, may be mitigated by the Company's geographic diversity.
Distribution revenue for the 2003 Fiscal Year decreased by
approximately $3.4 million or 9% as compared to the 2002 Fiscal Year. Sales from
the distribution business unit are sensitive to general market and economic
conditions and as a result have experienced fluctuations during such periods.
Rental revenue for the 2003 Fiscal Year increased by approximately $6.3
million or 28% over the 2002 Fiscal Year. The increase was primarily the result
of the internal growth of the machine base in existing areas of operations and
expansion into new territories, as well as, to a lesser extent, the transfer of
approximately 9,000 rental machines from the route business to AWA during the
2003 Fiscal Year.
Laundry operating expenses increased by approximately $3.4 million or
less than 1% for the 2003 Fiscal Year, as compared to the 2002 Fiscal Year. This
increase in laundry operating expenses 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, laundry operating expenses were
approximately 69% and 67% for the 2003 Fiscal Year and the 2002 Fiscal Year,
respectively.
General and administrative expenses decreased by approximately 2% for
the 2003 Fiscal Year, as compared to the 2002 Fiscal Year. The decrease in
general and administrative expenses was primarily due to a slight reduction in
various costs and expenses related to administrative functions. As a percentage
of revenues, general and administrative expenses were approximately 1.6% for
both the 2003 Fiscal Year and the 2002 Fiscal Year.
Depreciation and amortization expense decreased by approximately 20%
for the 2003 Fiscal Year as compared to the 2002 Fiscal Year. This decrease was
primarily due to the elimination of amortization expense on goodwill of
approximately $15.5 million and the reduction of amortization expense on
contract rights of approximately $12.3 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.
16
Other items, net, for the 2003 Fiscal Year is a gain of approximately
$0.5 million. In October 2002, Coinmach Laundry contributed its ownership
interest valued at approximately $2.7 million in Resident 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 $2.8 million of various expenses related
to (i) professional fees incurred in connection with the Restructuring
Transactions, including the transfer of the Appliance Warehouse division to AWA
and the formation of Holdings, (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, which was the result of
several actions taken by the Company to reduce operating costs in Super Laundry.
These actions included, among other things, the closing of operations in
Northern California, New Jersey and Maryland, the reassignment of various
responsibilities among its remaining management team, the write off of inventory
due to obsolescence and the write off of various receivable balances, none of
which are material individually, which the Company has chosen not to pursue.
Operating income margins were approximately 11% for the 2003 Fiscal
Year, as compared to approximately 7% for the 2002 Fiscal Year. The increase in
operating income margin for the 2003 Fiscal Year was primarily due to the
decrease in amortization expenses.
Interest expense, net, decreased by approximately 20% for the 2003
Fiscal Year, as compared to the 2002 Fiscal Year. On January 25, 2002, the
Company issued $450 million of its Private 9% Senior Notes and entered into the
$355 million Senior Secured Credit Facility. The decrease in interest expense
was primarily due to decreased borrowing levels under the Senior Secured Credit
Facility, a decrease in variable interest rates payable under such facility, as
well as a decrease in the fixed rate on interest rate swap agreements, resulting
from a market decline in interest rates. In addition, in the 2002 Fiscal Year,
interest expense included approximately $4.2 million relating to cost of
terminating the interest rate swap agreements that were entered into in
connection with its prior senior credit facility, which was partially offset by
a reduction in interest expense relating to the amortization of the premium on
the 11 3/4% Senior Notes due 2005. 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.
Net loss was approximately $2.3 million for the 2003 Fiscal Year, as
compared to approximately $41.4 million for the 2002 Fiscal Year. The decrease
in net loss was primarily the result of decreased depreciation and amortization
expense as well as decreased interest expense, as discussed above. In addition,
in the 2002 Fiscal Year the Company recognized an extraordinary loss on early
extinguishments of debt.
The following table sets forth the Company's EBITDA (before deducting
general and administrative expenses) for each of the route, distribution and
rental divisions for the years indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
----------------------------
2003 2002 CHANGE
------- ------ ------
Route................................... $158.9 $166.0 $(7.1)
Distribution............................ (1.6) 1.1 (2.7)
Rental.................................. 11.4 8.7 2.7
General and administrative expenses..... (8.6) (8.7) 0.1
EBITDA.................................. $160.1 $167.1 $(7.0)
======= ======= ======
EBITDA was approximately $160.1 million for the 2003 Fiscal Year, as
compared to approximately $167.1 million for the 2002 Fiscal Year, representing
a decrease of approximately 4%. EBITDA margins declined slightly to
approximately 29.9% for the 2003 Fiscal Year, as compared to approximately 31.0%
for the 2002 Fiscal Year. The decrease in EBITDA was primarily the result of
decreased revenues in the route and distribution businesses, as discussed above,
as well as increased insurance premium costs related to both medical and general
business insurance coverage.
17
EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization and other items, net.
Management believes that EBITDA is useful as a means to evaluate the Company's
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. Additionally, because the Company has
historically provided EBITDA to investors, it believes that presenting this
non-GAAP financial measure provides consistency in its financial reporting.
EBITDA is also used to determine the Company's compliance with key financial
covenants under its financing agreements, which, among other things, impacts the
amount of indebtedness the Company is permitted to incur. Management's use of
EBITDA, however, 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) as
an indicator of operating performance or (b) cash flows from operating,
investing and financing activities (as determined by accounting principles
generally accepted in the United States) as a measure of liquidity. Given that
EBITDA is not a measurement determined in accordance with accounting principles
generally accepted in the United States and is thus susceptible to varying
calculations, EBITDA may not be comparable to other similarly titled measures of
other companies. See footnote 4 of the table contained under Item 6 "Selected
Financial Data--Selected Historical Financial Data" for a reconciliation of
EBITDA to net loss for the years indicated in the table immediately above.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO 2001 12-MONTH PERIOD
The following table sets forth the Company's revenues for the years
indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
---------------------------------
2002 2001 CHANGE
------ ------ ------
Route...................... $478.1 $471.0 $ 7.1
Distribution............... 38.4 38.3 0.1
Rental..................... 22.4 18.3 4.1
------ ------ -----
$538.9 $527.6 $11.3
====== ====== =====
Revenue increased by approximately $11.3 million or 2% for the 2002
Fiscal Year as compared to the 2001 12-Month Period.
Route revenue for the 2002 Fiscal Year increased by approximately $7.1
million or 2% over the prior year. Management believes that the improvement in
route revenue for the 2002 Fiscal Year as compared to the 2001 12-Month Period
was the result of a combination of (i) increased revenue from the existing
machine base due primarily to price changes and machine installations, (ii) the
timing of price changes and internal growth in machine count during the 2002
Fiscal Year and the 2001 12-Month Period and (iii) greater same store revenues
due primarily to pricing strategies implemented to address increased competition
in retail laundromats.
Distribution revenue for the 2002 Fiscal Year increased slightly as
compared to the 2001 12-Month Period. Sales from the distribution business unit
are sensitive to general market and economic conditions and as a result have
experienced fluctuations during such periods.
Rental revenue for the 2002 Fiscal Year increased by approximately $4.1
million or 22% over the 2001 12-Month Period. The increase was primarily the
result of the internal growth of the machine base in existing areas of
operations and expansion into new territories.
Laundry operating expenses increased by approximately $8.9 million or
3% for the 2002 Fiscal Year, as compared to the 2001 12-Month Period. This
increase in laundry operating expenses was due primarily to (i) an increase in
commission expense related to increased route revenue, and (ii) costs associated
with expansion into new markets in the rental and distribution businesses. As a
percentage of revenues, laundry operating expenses were approximately 67% for
both the 2002 Fiscal Year and the 2001 12-Month Period.
18
General and administrative expenses decreased by approximately 2% for
the 2002 Fiscal Year, as compared to the 2001 12-Month Period. The decrease in
general and administrative expenses was primarily due to a slight reduction in
various costs and expenses related to administrative functions associated with
the Company's growth. As a percentage of revenues, general and administrative
expenses were approximately 1.6% and 1.7% for the 2002 Fiscal Year and the 2001
12-Month Period, respectively.
Depreciation and amortization expense decreased by approximately 4% for
the 2002 Fiscal Year as compared to the 2001 12-Month Period. This decrease was
due primarily to a write-off of contract rights values relating to certain
locations not renewed of approximately $5.9 million during the 2001 12-Month
Period.
Operating income margins were approximately 7% for the 2002 Fiscal
Year, as compared to approximately 6% for the 2001 12-Month Period. The increase
in operating income margin for the 2002 Fiscal Year was primarily due to
increased revenue in the route and rental businesses, as well as decreased
depreciation and amortization expense, which were partially offset by increased
commission expense and costs associated with the expansion into new rental and
distribution markets.
Interest expense, net, increased by approximately 6% for the 2002
Fiscal Year, as compared to the 2001 12-Month Period. The increase was primarily
due to (i) the cost of the termination of the interest rate swap agreements in
the amount of approximately $4.2 million, (ii) the combination of interest paid
on the 11 3/4% Senior Notes from January 25 to February 25, 2002 with the
interest expense on the 9% Senior Notes for the same period and (iii) an
increase in amortization of deferred financing costs relating to the issuance of
the 9% Senior Notes and the Senior Secured Credit Facility.
Net loss was approximately $41.4 million for the 2002 Fiscal Year, as
compared to approximately $30.2 million for the 2001 12-Month Period. The
increase in net loss was primarily the result of a decrease in the benefit from
taxes due to net operating loss carryforwards expiring and a decrease in net
taxable loss, as well as an extraordinary loss on early extinguishments of debt
recognized in the 2002 Fiscal Year, which also resulted in an increase in
interest expense in the 2002 Fiscal Year.
The following table sets forth the Company's EBITDA (before deducting
general and administrative expenses) for each of the route, distribution and
rental divisions for the years indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
------------------------------
2002 2001 CHANGE
------ ------ ------
Route................................. $166.0 $164.4 $1.6
Distribution.......................... 1.1 1.8 (0.7)
Rental................................ 8.7 7.2 1.5
General and administrative expenses... (8.7) (8.9) 0.2
------- ------- -----
EBITDA................................ $167.1 $164.5 $2.6
======= ======= =====
EBITDA was approximately $167.1 million for the 2002 Fiscal Year, as
compared to approximately $164.5 million for the 2001 12-Month Period,
representing an increase of approximately 2%. EBITDA margins declined slightly
to approximately 31.0% for the 2002 Fiscal Year, as compared to approximately
31.2% for the 2001 12-Month Period. The increase in EBITDA was primarily the
result of increased revenues in the route and rental businesses offset partially
by the increase in commission expense related to increased route revenue, as
well as an increase in the costs associated with the expansion into new rental
and distribution markets in the rental and distribution businesses.
19
EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization and other items, net.
Management believes that EBITDA is useful as a means to evaluate the Company's
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. Additionally, because the Company has
historically provided EBITDA to investors, it believes that presenting this
non-GAAP financial measure provides consistency in its financial reporting.
EBITDA is also used to determine the Company's compliance with key financial
covenants under its financing agreements, which, among other things, impacts the
amount of indebtedness the Company is permitted to incur. Management's use of
EBITDA, however, 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) as
an indicator of operating performance or (b) cash flows from operating,
investing and financing activities (as determined by accounting principles
generally accepted in the United States) as a measure of liquidity. Given that
EBITDA is not a measurement determined in accordance with accounting principles
generally accepted in the United States and is thus susceptible to varying
calculations, EBITDA may not be comparable to other similarly titled measures of
other companies. See footnote 4 of the table contained under Item 6 "Selected
Financial Data--Selected Historical Financial Data" for a reconciliation of
EBITDA to net loss for the years indicated in the table immediately above.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have substantial indebtedness and debt service
requirements. At March 31, 2003, the Company had outstanding long-term debt of
approximately $718.1 million, which included $450.0 million of 9% Senior Notes
and approximately $261.3 million of borrowings under the Senior Secured Credit
Facility. The Company's stockholder's equity was approximately $49.8 million as
of March 31, 2003.
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 March 31, 2003 consisted of cash and
cash equivalents of approximately $27.4 million and available borrowings under
its Senior Secured Credit Facility of approximately $74.5 million.
FINANCING ACTIVITIES
SENIOR NOTES
On January 25, 2002, the Company issued $450 million of Private 9%
Senior Notes and entered into the $355 million Senior Secured Credit Facility
comprised of (i) $280 million in aggregate principal amount of term loans and
(ii) a revolving credit facility, which has a maximum borrowing limit of $75
million. The Company used the net proceeds from its sale of Private 9% Senior
Notes, together with borrowings under its Senior Secured Credit Facility, to (i)
redeem all of its outstanding 11 3/4% Senior Notes (including accrued interest
and the resulting 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 with the funds that were
set aside in escrow on January 25, 2002. As of March 31, 2002 the Company
recognized an extraordinary loss, net of income tax, of approximately $6.7
million as a result of the early extinguishment of debt relating to the
redemption of the 11 3/4% Senior Notes and the refinancing of its prior senior
credit facility (see Recently Issued Accounting Pronouncements relating to
Statement of Financial Accounting Standard No. 145). The Company also used a
portion of the net proceeds and borrowings to terminate interest rate swap
agreements entered into in connection with its prior senior credit facility. The
cost of terminating the interest rate swap agreements was approximately $4.2
million and was recorded as interest expense in the 2002 Fiscal Year.
The 9% Senior Notes, which are to mature on February 1, 2010, are
unsecured senior obligations of the Company and are redeemable, at the Company's
option, in whole or in part at any time or from time to time, on or after
February 1, 2006, upon not less than 30 nor more than 60 days' notice, at the
redemption prices set forth in that certain indenture, dated January 25, 2002,
by and between the Company and U.S. Bank, N.A. as Trustee (the
20
"Indenture") plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption. In addition, the Company has the option to redeem, on or
before February 1, 2005, up to 35% of the outstanding notes with money that the
Company raises in one or more equity offerings, provided that certain
requirements set forth in the Indenture are satisfied. The 9% Senior Notes are
guaranteed on an unsecured senior basis by the Company's domestic subsidiaries.
The Indenture contains a number of restrictive covenants and
agreements, including covenants with respect to the following matters: (i)
limitation on additional indebtedness; (ii) limitation on certain payments (in
the form of the declaration or payment of certain dividends or distributions on
the capital stock of the Company, the purchase, redemption or other acquisition
of any capital stock of the Company, the voluntary prepayment of subordinated
indebtedness, or an Investment (as defined in the Indenture) in any other person
or entity); (iii) limitation on transactions with affiliates; (iv) limitation on
liens; (v) limitation on sales of assets; (vi) limitation on the issuance of
preferred stock by non-guarantor subsidiaries; (vii) limitation on conduct of
business; (viii) limitation on dividends and other payment restrictions
affecting subsidiaries; and (ix) limitation on consolidations, mergers and sales
of substantially all of the assets of the Company.
The events of default under the Indenture include provisions that are
typical of senior unsecured debt financings. Upon the occurrence and continuance
of certain events of default, the trustee or the holders of not less than 25% in
aggregate principal amount of outstanding 9% Senior Notes may declare all unpaid
principal and accrued interest on all of the 9% Senior Notes to be immediately
due and payable.
Upon the occurrence of a Change of Control (as defined in the
Indenture), each holder of 9% Senior Notes will have the right to require that
the Company purchase all or a portion of such holder's 9% Senior Notes pursuant
to the offer described in the Indenture, at a purchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase.
SENIOR SECURED CREDIT FACILITY
The Senior Secured Credit Facility is comprised of an aggregate of $355
million of secured financing consisting 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 Secured 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 term loans
under the Senior Secured Credit Facility, in aggregate principal amounts
outstanding of approximately $18.3 million and $243.0 million, are scheduled to
be fully repaid by January 25, 2008 and July 25, 2009, respectively. As of March
31, 2003, there was no principal amount outstanding on the revolving portion of
the Senior Secured Credit Facility, which will expire on January 25, 2008.
Letters of credit outstanding at March 31, 2003 were approximately $0.5 million.
In December 2002, the Company made a $15 million voluntary prepayment
of amounts owed under the term loans of its Senior Secured Credit Facility. The
Company is required to make (i) adjusted quarterly amortization payments under
the Senior Secured Credit Facility commencing on March 31, 2004 with respect to
the $30 million term loan and adjusted semi-annual amortization payments
commencing on June 30, 2004 with respect to the $250 million term loan, and (ii)
semi-annual cash interest payments under the 9% Senior Notes on February 1 and
August 1, commencing August 1, 2002.
On September 23, 2002, the Company entered into three separate interest
rate swap agreements totaling $150 million in aggregate notional amount that
effectively converts a portion of its floating- rate term loans pursuant to the
Senior Secured Credit Facility to a fixed rate basis, thus reducing the impact
of interest-rate changes on future interest expense. The three swap agreements
consist 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
21
effectively fixing the three-month LIBOR interest rate (as determined therein)
at 2.90% and expiring on February 1, 2006. 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
Consolidated Balance Sheet at March 31, 2003 of approximately $2.0 million, net
of tax, relating to the interest rate swaps that qualify as cash flow hedges.
The Company's indebtedness under the Senior Secured Credit Facility is
secured by all of the Company's real and personal property and is guaranteed by
the Company's domestic subsidiaries. Under the Senior Secured Credit Facility,
the Company and Coinmach Laundry 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.
The Senior Secured Credit Facility contains a number of restrictive
covenants and agreements, including covenants with respect to limitations on (i)
indebtedness; (ii) certain payments (in the form of the declaration or payment
of certain dividends or distributions on the capital stock of the Company or its
subsidiaries or the purchase, redemption or other acquisition of any capital
stock of the Company or its subsidiaries); (iii) voluntary prepayments of
previously existing indebtedness; (iv) Investments (as defined in the Senior
Secured Credit Facility); (v) transactions with affiliates; (vi) liens; (vii)
sales or purchases of assets; (viii) conduct of business; (ix) dividends and
other payment restrictions affecting subsidiaries; (x) consolidations and
mergers; (xi) capital expenditures; (xii) issuances of certain equity securities
of the Company; and (xiii) creation of subsidiaries. The Senior Secured Credit
Facility also requires that the Company satisfy certain financial ratios,
including a maximum leverage ratio and a minimum consolidated interest coverage
ratio.
The Senior Secured Credit Facility contains certain events of default,
including the following: (i) the failure of the Company to pay any of its
obligations under the Senior Secured Credit Facility when due; (ii) certain
failures by the Company or its subsidiaries to pay principal or interest on
indebtedness or certain breaches or defaults by the Company in respect of
certain indebtedness, in each case, after the expiration of any applicable grace
periods; (iii) certain defaults by the Company or Coinmach Laundry in the
performance or observance of the agreements or covenants under the Senior
Secured Credit Facility or related agreements, beyond any applicable cure
periods; (iv) the falsity in any material respect of the Company's or its
subsidiaries' representations or warranties under the Senior Secured Credit
Facility; (v) certain judgments against the Company; and (vi) certain events of
bankruptcy or insolvency of the Company, its subsidiaries or Coinmach Laundry.
The Company is in compliance with all covenants under the indenture and
the Senior Secured Credit Facility and is not aware of any events of default, as
previously defined.
OPERATING AND INVESTING ACTIVITIES
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.
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, renewals 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 consists of
expenditures (i) on the Company's installed machine base and (ii) for other
general corporate purposes.
22
Capital expenditures for the 2003 Fiscal Year were approximately $86.7
million (excluding payments of approximately $4.0 million relating to capital
lease obligations and excluding approximately $2.0 million relating to
acquisition capital expenditures). The primary components of the Company's
capital expenditures are (i) machine expenditures, (ii) advance location
payments, and (iii) laundry room improvements. The growth in the installed base
of machines for the route business was approximately 3,000 machines for the 2003
Fiscal Year. The growth in the rental business machine base was approximately
26,800 machines for the 2003 Fiscal Year. The full impact on revenues and cash
flow generated from capital expended on the net increase in the installed base
of machines are 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. The Company anticipates that capital
expenditures, excluding acquisitions and internal growth, will be approximately
$74.0 million for the twelve months ending March 31, 2004. 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 years indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
--------------------------------------------
2003 2002 CHANGE
---- ---- ------
Route.................. $77.2 $71.0 $6.2
Distribution........... 0.1 -- 0.1
Rental................. 9.4 8.5 0.9
----- ----- ----
$86.7 $79.5 $7.2
===== ===== ====
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 the installed machines.
Management believes that the Company's future operating activities will
generate sufficient cash flow to repay indebtedness outstanding under the 9%
Senior Notes and borrowings under the Senior Secured Credit Facility or to
permit any necessary refinancings thereof. An inability of the Company, however,
to comply with covenants or other conditions contained in the indenture
governing the 9% Senior Notes or in the credit agreement evidencing the Senior
Secured Credit Facility could result in an acceleration of all amounts
thereunder. If the Company is unable to meet its debt service obligations, it
could be required to take certain actions such as reducing or delaying capital
expenditures, selling assets, refinancing or restructuring its indebtedness,
selling additional equity capital or other actions. There is no assurance that
any of such actions could be effected on commercially reasonable terms or on
terms permitted under the Senior Secured Credit Facility or the indenture
governing the 9% Senior Notes.
On November 29, 2002, the Company transferred all of the assets of the
Appliance Warehouse division of the Company to AWA. The value of the assets
transferred as determined by an independent appraiser as of such date was $34.7
million. In exchange for the transfer of such assets, AWA issued to the Company
(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
AWA Preferred Stock, with a liquidation value of $14.6 million, and (iii) 10,000
shares of AWA Common Stock. The AWA Preferred Stock is not redeemable and is
vested with voting rights. Except as may otherwise be required by applicable
law, the AWA Common Stock does not have any voting rights. Dividends on the AWA
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 AWA Preferred Stock, or in a
combination thereof, at the option of AWA. In March 2003, through a series of
transactions (collectively, the "Restructuring Transactions"), all of the AWA
Common Stock and all of the outstanding capital stock of CLC was contributed to
Holdings in exchange for substantially equivalent equity interests (in the form
of common and preferred membership units) in Holdings. As a result of the
Restructuring Transactions, (i) Holdings became the sole holder of all of the
outstanding AWA Common Stock, (ii) the Company became the sole holder of all of
the outstanding AWA Preferred Stock, (iii) Coinmach Laundry
23
became a wholly-owned subsidiary of Holdings, (iv) the former stockholders of
Coinmach Laundry became unitholders of Holdings and (v) AWA, subject to certain
specified qualifications, became a guarantor under, and subject to the covenants
contained in, the indenture governing the 9% Senior Notes and the Senior Secured
Credit Facility. See Item 11 "Executive Compensation--Employment
Agreements--Employment Agreements of Stephen R. Kerrigan, Mitchell Blatt and
Robert M. Doyle" and Item 13 "Certain Relationships and Related Transactions".
CERTAIN ACCOUNTING TREATMENT
The Company's depreciation and amortization expense, which aggregated
approximately $104.2 million for the 2003 Fiscal Year, reduces the Company's net
income, but not its cash flow from operations. In accordance with accounting
principles generally accepted in the United States, a significant amount of the
purchase price representing the value of location contracts arising from
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.
INFLATION AND SEASONALITY
In general, the Company's laundry operating expenses and general and
administrative expenses are affected by inflation and the effects of inflation
that may be experienced by the Company in future periods. Management believes
that such effects will not be material. The Company's business generally is not
seasonal.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is
effective April 1, 2003. This standard addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company has determined that the
implementation of this standard will not have a material effect on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, 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. The Company is
required to adopt this statement on April 1, 2003. As a result of adopting SFAS
No. 145, in future financial statement presentations the Company will classify
the extraordinary loss taken in January 2002 to continuing operations resulting
in total pre-tax loss of approximately $46.9 million for the year ended March
31, 2002.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard requires costs
associated with exit or disposal activities to be recognized when they are
incurred. The requirements of SFAS No. 146 apply prospectively to activities
that are initiated after December 31, 2002, and as such, the Company cannot
reasonably estimate the impact of adopting these new rules until and unless it
undertakes relevant activities in future periods.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to a
guarantor's accounting for and disclosures of certain guarantees issued. FIN 45
requires enhanced disclosures for certain guarantees. It also will require
certain guarantees that are issued or modified after December 31, 2002,
including certain third-party guarantees, to be initially recorded on the
balance sheet at fair value. For guarantees issued on or before December 31,
2002, liabilities are recorded when and if payments become probable and
estimable. The financial statement recognition provisions are effective
prospectively, and the Company cannot reasonably estimate the impact of adopting
FIN 45 until guarantees are issued or modified in future periods, at which time
their results will be initially reported in the financial statements.
24
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, relating
to consolidation of certain entities. First, FIN 46 will require identification
of the Company's participation in variable interests entities ("VIE"), which are
defined as entities with a level of invested equity that is not sufficient to
fund future activities to permit them to operate on a standalone basis, or whose
equity holders lack certain characteristics of a controlling financial interest.
Then, for entities identified as VIE, FIN 46 sets forth a model to evaluate
potential consolidation based on an assessment of which party to the VIE, if
any, bears a majority of the exposure to its expected losses, or stands to gain
from a majority of its expected returns. FIN 46 also sets forth certain
disclosures regarding interests in VIE that are deemed significant, even if
consolidation is not required. The Company has determined that the
implementation of this standard will not have a material effect on its financial
statements.
FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this Form 10-K and
other reports and statements filed by the Company from time to time with the
Securities and Exchange Commission (collectively, "SEC Filings") contain or may
contain certain forward-looking statements and information that are based on the
beliefs of the Company's management as well as estimates and assumptions made
by, and information currently available to, the Company's management.
Forward-looking statements are those that are not historical facts. When used in
SEC Filings, the words "anticipate," "project," "believe," "estimate," "expect,"
"future," "intend," "plan" and similar expressions, as they relate to the
Company or the Company's management, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions relating
to the Company's operations and results of operations, competitive factors,
shifts in market demand, and other risks and uncertainties that may be beyond
the Company's control. Such risks and uncertainties, together with any risks and
uncertainties specifically identified in the text surrounding such
forward-looking statements, include, but are not limited to, the Company's
ability to satisfy its debt service requirements, the costs of integration of
acquired businesses and realization of anticipated synergies, increased
competition, availability of capital to finance capital expenditures necessary
to increase and maintain the Company's operating machine base, the rate of
growth in general and administrative expenses due to the Company's business
expansion, the Company's dependence upon lease renewals, risks of extended
periods of reduced occupancy levels, and the ability of the Company to implement
its business strategy. Other risks and uncertainties also include changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including the Company's stockholders, customers, suppliers,
competitors, legislative, regulatory, judicial and other governmental
authorities. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, the Company's future performance
and actual results of operations may vary significantly from those anticipated,
projected, believed, estimated, expected, intended or planned.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal exposure to market risk relates to changes in
interest rates on its long-term borrowings. The Company's cash flow would be
adversely affected by an increase in interest rates. As of March 31, 2003, 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 interest rate debt increased
by 2.0% (or 200 basis points), the Company's annual interest expense on such
variable interest rate debt would increase by approximately $2.2 million,
assuming the total amount of variable interest rate debt outstanding was $111.3
million, the balance as of March 31, 2003.
25
The Company enters into interest rate swap agreements from time to time
to mitigate its exposure to adverse interest rate fluctuations. On September 23,
2002, the Company entered into three separate interest rate swap agreements
totaling $150 million in aggregate notional amount that effectively converts a
portion of its floating- rate term loans pursuant to the Senior Secured Credit
Facility to a fixed rate basis, thus reducing the impact of interest-rate
changes on future interest expense. The three swap agreements consist 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.
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'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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited consolidated financial statements and the notes thereto are
contained in pages F-1 through F-33 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The directors of the Company are listed on the table below which is
followed by descriptions of all positions and offices held by such persons with
the Company, the periods during which they have served as such and certain other
information. The term of office of each director continues until the election of
directors to be held at the next annual meeting of stockholders or until his
successor has been elected. There is no family relationship between any director
and any other director or executive officer of the Company. The information set
forth below concerning such directors has been furnished by such directors.
NAME TITLE AGE
---- ----- ---
Stephen R. Kerrigan Chairman of the Board and Director 49
James N. Chapman Director 41
David A. Donnini Director 38
Vincent J. Hemmer Director 34
Bruce V. Rauner Director 47
MR. KERRIGAN. Mr. Kerrigan has been Chief Executive Officer of Coinmach
Laundry since May 1996 and of the Company since November 1995. Mr. Kerrigan was
President and Treasurer of Solon and Coinmach Laundry from April 1995 until May
1996, and Chief Executive Officer of TCC from January 1995 until November 1995.
Mr. Kerrigan has been a director and Chairman of the CLC Board since April 1995
and of the Company Board since November 1995. Mr. Kerrigan was a director of TCC
from January 1995 to November 1995 and a director of Solon from April 1995 to
November 1995. Mr. Kerrigan served as Vice President and Chief Financial Officer
of TCC's predecessor, Coinmach Industries Co., L.P. from 1987 to 1994.
MR. CHAPMAN. Mr. Chapman has been a director of the Company and a
member of the board of managers of Holdings since March 2003 and a director of
Coinmach Laundry since 1995. He previously was a director of the Company from
November 1995 to November 1996 and a director of TCC from January 1995 to
November 1995. Mr. Chapman is associated with Regiment Capital Advisors, LLC
which he joined in January 2003. Prior to Regiment, Mr. Chapman acted as a
capital markets and strategic planning consultant with private and public
companies, as well as hedge funds, across a range of industries. Prior to
establishing an independent consulting practice, Mr. Chapman worked for The
Renco Group, Inc. from December 1996 to December 2001. Mr. Chapman serves as a
member of the board of directors of Anchor Glass Container Corporation, Davel
Communications, Inc., Meridian Rail LLC and Southwest Royalties, Inc.
MR. DONNINI. Mr. Donnini has been a director of the Company and a
member of the board of managers of Holdings since March 2003 and a director of
Coinmach Laundry since July 1995. He previously was a director of the Company
from November 1995 to November 1996 and a director of TCC from January 1995 to
November 1995. Mr. Donnini has been a Principal of GTCR since 1993, where he is
responsible for originating and making new investments, monitoring portfolio
companies and recruiting and training associates. Mr. Donnini serves on the
boards of TSI Telecommunications Services, Synagro Technologies, Inc and a
number of private companies.
MR. HEMMER. Mr. Hemmer has been a director of the Company and a member
of the board of managers of Holdings since March 2003 and a director of Coinmach
Laundry since July 2000. Mr. Hemmer has been a Principal of GTCR since 2001,
where he is responsible for originating and making new investments, monitoring
portfolio companies and recruiting and training associates. From 1998 to 2001,
Mr. Hemmer was a Vice-President of GTCR. Mr. Hemmer serves on the boards of
Synagro Technologies, Inc. and a number of private companies.
27
MR. RAUNER. Mr. Rauner has been a director of the Company and a member
of the board of managers of Holdings since March 2003 and a director of Coinmach
Laundry since July 1995. He previously was a director of the Company from
November 1995 to November 1996 and a director of TCC from January 1995 to
November 1995. Mr. Rauner has been a Principal and General Partner with GTCR
since 1984, where he is responsible for originating and making new investments,
monitoring portfolio companies and recruiting and training associates. Mr.
Rauner serves on the boards of a number of private companies.
EXECUTIVE OFFICERS
The executive officers of the Company are listed on the table below
which is followed by descriptions of all positions and offices held by such
persons with the Company and the periods during which they have served as such
and other information. The term of office of each executive officer continues
until the election of executive officers to be held at the next annual meeting
of directors or until his successor has been elected. There is no family
relationship between any executive officer and any other executive officer or
director of the Company.
NAME TITLE AGE
---- ----- ---
Stephen R. Kerrigan Chairman of the Board and
Chief Executive Officer 49
Mitchell Blatt President, Chief Operating Officer 51
Robert M. Doyle Chief Financial Officer, Senior Vice President,
Treasurer, Secretary 46
John E. Denson Senior Vice President 65
Michael E. Stanky Senior Vice President 51
For information regarding Mr. Kerrigan, see "-- Directors" above.
MR. BLATT. Mr. Blatt has been President and Chief Operating Officer of
Coinmach Laundry since April 1996 and of the Company since November 1995. Mr.
Blatt was the President and Chief Operating Officer of TCC from January 1995 to
November 1995. Mr. Blatt was a director of Coinmach Laundry and the Company from
November 1995 to March 2003. Mr. Blatt joined TCC as Vice President-General
Manager in 1982 and was Vice President and Chief Operating Officer from 1988 to
1994.
MR. DOYLE. Mr. Doyle has been Chief Financial Officer, Senior Vice
President, Treasurer and Secretary of Coinmach Laundry since April 1996 and of
the Company since November 1995. Mr. Doyle was a director of the Company from
November 1995 to March 2003. Mr. Doyle served as Vice President, Treasurer and
Secretary of TCC from January 1995 to November 1995. Mr. Doyle joined TCC's
predecessor in 1986 as Controller. In 1988, Mr. Doyle became Director of
Accounting, and was promoted in 1989 to Vice President and Controller.
MR. DENSON. Mr. Denson has been Senior Vice President of Coinmach
Laundry since April 1996 and of the Company since November 1995. Mr. Denson was
Senior Vice President of Solon from June 1987 until November 1995. Mr. Denson
has served as an officer of Solon under various titles since 1973, and served as
a director and Co-Chief Executive Officer of Solon from November 1994 to April
1995.
MR. STANKY. Mr. Stanky has been Senior Vice President of Coinmach
Laundry since April 1996 and of the Company since November 1995. Mr. Stanky was
a Senior Vice President of Solon from July 1995 to November 1995. Mr. Stanky
served Solon in various capacities since 1976, and in 1985 was promoted to Area
Vice President responsible for Solon's South-Central region. Mr. Stanky served
as a Co-Chief Executive Officer of Solon from November 1994 to April 1995.
28
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by
or paid to the Chief Executive Officer and the next four most highly compensated
executive officers of the Company (collectively, the "Named Executive Officers")
who had annual compensation in excess of $100,000 for all services rendered in
all capacities for the fiscal year ended March 31, 2003, the fiscal year ended
March 31, 2002 and the 2001 12-Month Period.
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------------------------------------ -------------
COMMON STOCK
OTHER ANNUAl UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION (16)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- ---------------------------- ------ ------ ----- ------------ ------------- -------------
Stephen R. Kerrigan 2003 440,120 497,500 131,952 (1) -- 2,946
Chief Executive Officer 2002 425,000 285,000 118,755 (2) -- 2,334
2001 404,617 275,000 70,266 (3) -- 2,631
Mitchell Blatt 2003 350,753 140,000 57,639 (4) -- 3,016
President, Chief 2002 300,753 90,000 45,583 (5) -- 2,334
Operating Officer 2001 301,731 120,000 27,671 (6) -- 2,352
Robert M. Doyle 2003 255,337 162,500 32,723 (7) -- 2,324
Chief Financial Officer 2002 248,076 80,000 24,419 (8) -- 2,944
2001 200,673 85,000 7,034 (9) -- 2,347
John E. Denson 2003 140,000 25,000 13,548 (10) -- 1,965
Senior Vice President 2002 140,000 21,000 31,039 (11) -- 1,925
2001 139,720 28,000 26,228 (12) -- 1,927
Michael E. Stanky 2003 200,550 89,800 29,125 (13) -- 2,833
Senior Vice President 2002 195,000 44,500 21,364 (14) -- 2,335
2001 195,684 50,000 3,800 (15) -- 2,421
- -----------
(1) Includes $77,429 in forgiven indebtedness of Mr. Kerrigan and MCS Capital,
Inc., an entity controlled by Mr. Kerrigan; $3,750 in interest, calculated
at a rate of 7.5% per annum on a loan made by the Company to Mr. Kerrigan;
$30,187 in interest calculated at a rate of 7% per annum on a loan made in
connection with the purchase of common stock of Coinmach Laundry relating
to the Going Private Transaction; $2,084 in automobile allowances; $16,728
in club membership fees; and $1,774 in life insurance premiums paid by the
Company on behalf of Mr. Kerrigan.
(2) Includes $81,968 in forgiven indebtedness; $3,750 in interest, calculated
at a rate of 7.5% per annum on a loan made by the Company to Mr. Kerrigan;
$14,451 in interest calculated at a rate of 7% per annum on a loan made in
connection with the purchase of common stock of Coinmach Laundry relating
to the Going Private Transaction; $2,175 in automobile allowances; $14,918
in club membership fees; and $1,493 in life insurance premiums paid by the
Company on behalf of Mr. Kerrigan.
29
(3) Includes $59,271 in forgiven indebtedness; $3,750 in interest calculated
at a rate of 7.5% per annum on a loan made by the Company to Mr. Kerrigan;
$5,950 in club membership fees; and $1,295 in life insurance premiums paid
by the Company on behalf of Mr. Kerrigan.
(4) Includes $23,301 in forgiven indebtedness; $15,304 in interest calculated
at a rate of 7% per annum on a loan made in connection with the purchase
of common stock of Coinmach Laundry relating to the Going Private
Transaction; $3,188 in automobile allowances; $13,398 in club membership
fees; and $2,448 in life insurance premiums paid by the Company on behalf
of Mr. Blatt.
(5) Includes $23,301 in forgiven indebtedness; $4,258 in automobile
allowances; $16,346 in club membership fees; and $1,678 in life insurance
premiums paid by the Company on behalf of Mr. Blatt.
(6) Includes $9,271 in forgiven indebtedness; $2,813 in automobile allowances;
$14,450 in club membership fees; and $1,137 in life insurance premiums
paid by the Company on behalf of Mr. Blatt.
(7) Includes $14,859 in forgiven indebtedness; $13,876 in interest expense
calculated at a rate of 7% per annum on a loan made in connection with the
purchase of common stock of Coinmach Laundry relating to the Going Private
Transaction; $2,563 in automobile allowances; and $1,425 in life insurance
premiums paid by the Company on behalf of Mr. Doyle.
(8) Includes $14,859 in forgiven indebtedness; $6,643 in interest expense
calculated at a rate of 7% per annum on a loan made in connection with the
purchase of common stock of Coinmach Laundry relating to the Going Private
Transaction; $2,083 in automobile allowances; and $834 in life insurance
premiums paid by the Company on behalf of Mr. Doyle.
(9) Includes $4,426 in forgiven indebtedness; $2,098 in automobile allowances;
and $510 in life insurance premiums paid by the Company on behalf of Mr.
Doyle.
(10) Includes $4,622 in forgiven indebtedness; $6,147 in interest expense
calculated at a rate of 7% per annum on a loan made in connection with the
purchase of common stock and preferred stock of Coinmach Laundry relating
to the Going Private Transaction; $775 in automobile allowances; and
$2,004 in life insurance premiums paid by the Company on behalf of Mr.
Denson.
(11) Includes $24,622 in forgiven indebtedness; $2,943 in interest expense
calculated at a rate of 7% per annum on a loan made in connection with the
purchase of common stock and preferred stock of Coinmach Laundry relating
to the Going Private Transaction; $950 in interest expense calculated at a
rate of 9.5% per annum on a loan made by the Company to Mr. Denson; $1,025
in automobile allowances; and $1,499 in life insurance premiums paid by
the Company on behalf of Mr. Denson.
(12) Includes $20,000 in forgiven indebtedness; $2,900 in interest calculated
at a rate of 9.5% per annum on a loan made by the Company to Mr. Denson;
$1,275 in automobile allowances; and $2,053 in life insurance premiums
paid by the Company on behalf of Mr. Denson.
(13) Includes $13,029 in forgiven indebtedness; $14,063 in interest expense
calculated at a rate of 7% per annum on a loan made in connection with the
purchase of common stock and preferred stock of Coinmach Laundry relating
to the Going Private Transaction; $363 in automobile allowances; and
$1,670 in life insurance premiums paid by the Company on behalf of Mr.
Stanky.
30
(14) Includes $13,029 in forgiven indebtedness; $6,732 in interest expense
calculated at a rate of 7% per annum on a loan made in connection with the
purchase of common stock and preferred stock of Coinmach Laundry relating
to the Going Private Transaction; $438 in automobile allowances; and
$1,165 in life insurance premiums paid by the Company on behalf of Mr.
Stanky.
(15) Includes $2,455 in forgiven indebtedness; $551 in automobile allowances;
and $794 in life insurance premiums paid by the Company on behalf of Mr.
Stanky.
(16) Represents matching contributions made by the Company to the 401(k) Plan
(as defined herein).
EMPLOYMENT AGREEMENTS
Employment Agreements of Stephen R. Kerrigan, Mitchell Blatt and Robert
M. Doyle. On March 6, 2003, in connection with the Restructuring Transactions,
the Company, Holdings, and each of Stephen R. Kerrigan (and MCS Capital, Inc.,
an entity controlled by Mr. Kerrigan ("MCS")), Mitchell Blatt and Robert M.
Doyle (each, a "Senior Manager"), entered into Senior Management Agreements
(collectively, the "Senior Management Agreements"), which replaced the senior
management agreements with the Senior Managers in effect since January 31, 1995.
The Senior Management Agreements provide for annual base salaries of $446,250,
$352,000 and $257,500 for each of Messrs. Kerrigan, Blatt and Doyle,
respectively, which amounts are reviewed annually by the board of managers of
Holdings (the "Holdings Board"). The Holdings Board, in its sole discretion, may
grant each Senior Manager an annual bonus. In addition, in the event of certain
qualified sales of equity securities or assets of Holdings, each Senior Manager
shall be entitled to a bonus equal to 2.0 times his annual base salary at the
time of such sale, plus the amount of the bonus paid in the most recently
completed fiscal year. Each Senior Manager's employment is terminable at the
will of such Senior Manager or at the discretion of the Holdings Board. Under
certain circumstances, the Senior Managers are entitled to severance pay upon
termination of their employment. If employment is terminated by the Holdings
Board without Cause (as defined in the Senior Management Agreements) or by a
Senior Manager for Good Reason (as defined in the Senior Management Agreements)
and not by reason of such Senior Manager's death or disability, and no Event of
Default (as defined in the Senior Management Agreements) has occurred under any
bank credit facility or other facility to which the Company is a party, Senior
Managers are entitled to receive severance pay in an amount equal to 2.0 times
their respective annual base salaries then in effect, payable in 18 equal
monthly installments. If employment is terminated as described above by the
Holdings Board and an Event of Default has occurred and is continuing under any
bank credit facility or other facility to which the Company is a party, Senior
Managers are entitled to receive severance pay in an amount equal to their
respective annual base salaries then in effect, payable in 12 equal monthly
installments. For a period of one year after termination of his employment, a
Senior Manager is subject to both non-competition and non-solicitation
provisions. Senior Managers are entitled to require Holdings to repurchase the
units of Holdings owned by them upon the occurrence of certain events, including
the termination of such Senior Manager without Cause (as defined in the
applicable Senior Management Agreement), the termination by the Senior Manager
for Good Reason (as defined in the applicable Senior Management Agreement), and
certain qualified sales of the equity securities or assets of Holdings. In the
event a Senior Manager violates the non-competition clause of his Senior
Management Agreement or is terminated for any reason, the units of Holdings
owned by such Senior Manager will be subject to repurchase by Holdings and
certain other members of Holdings. The units of Holdings owned by the Senior
Managers are subject to customary co-sale rights and rights of first refusal.
Employment Agreement of John E. Denson. The Company entered into an
employment agreement with Mr. Denson, dated as of September 5, 1996, which was
subsequently replaced with an employment agreement dated December 17, 2000. Mr.
Denson's current employment agreement has a term of one year and is
automatically renewable each year for successive one-year terms. Such agreement
provided for an annual base salary of $110,000, commencing January 1, 1997,
which amount is to be reviewed each December by the Company Board. During the
fiscal year ended March 31, 2003, the Company Board approved an annual base
salary for Mr. Denson of $140,000. The Company Board may, in its discretion,
grant Mr. Denson a performance-based annual bonus. The agreement is terminable
at the will of Mr. Denson or at the discretion of the Company Board. Under the
terms of such employment agreement, Mr. Denson is entitled to receive severance
pay upon termination of employment by the Company without Cause (as defined in
such agreement) in an amount equal to his annual base salary then in effect. Mr.
Denson is subject to both non-competition and non-solicitation provisions, for a
period of one year and two years, respectively, after termination of his
employment.
31
Employment Agreement of Michael E. Stanky. On July 1, 1995, Solon (as
predecessor-in-interest to the Company) entered into an employment agreement
with Mr. Stanky which provided for an annual base salary of $150,000 (the
"Stanky Employment Agreement"). During the fiscal year ended March 31, 2003, the
Company approved an annual base salary for Mr. Stanky of $202,800. Mr. Stanky is
terminable at his will or at the discretion of the Company Board. The Chief
Executive Officer of the Company, in his sole discretion, may grant Mr. Stanky
an annual bonus. If employment is terminated by the Company Board without Cause
(as defined in the Stanky Employment Agreement) and (i) no Event of Default (as
defined in the Stanky Employment Agreement) has occurred and is continuing, Mr.
Stanky is entitled to receive severance pay in an amount equal to 1.5 times his
annual base salary then in effect, or (ii) an Event of Default has occurred and
is continuing, Mr. Stanky will be entitled to receive severance pay in an amount
equal to 1.0 times his annual base salary then in effect, in each case payable
in 12 equal monthly installments. If Mr. Stanky terminates his employment for
Good Reason (as defined in the Stanky Employment Agreement), he shall be
entitled to an amount equal to one half of the severance pay described in the
immediately preceding sentence, depending on whether an Event of Default has
occurred and is continuing, payable over nine or six months, respectively. For a
period of one year after termination of his employment, Mr. Stanky is subject to
both non-competition and non-solicitation provisions.
REPORT ON EXECUTIVE COMPENSATION
The Company Board determines the total form and amount of compensation
for the Company's executive officers. Executive compensation is based on a
performance and rewards compensation system consisting of base salaries and
incentives (annual and long-term) that compensate executives for the achievement
of levels of performance. The Company's executive compensation policies are
intended to enable the Company to hire, retain and motivate high-quality
executives who meet the immediate business challenges and improve the
performance of the Company and are designed to pay base salaries and provide
total compensation opportunities which reward each executive for contributions
to the Company's successes.
While the Company Board may rely upon quantitative measures or other
measurable objective criteria, such as earnings or other indicia of financial
performance, in reaching total compensation determinations, the Company Board
evaluates executive performance and reaches compensation decisions based upon a
subjective and careful analysis of each executive's specific contributions to
the Company as well as the recommendations of the Company's chief executive
officer. With respect to the determination of total compensation of the chief
executive officer, significant factors taken into account by the Company Board
include individual performance and contribution to the Company, effectiveness of
leadership, and the Company's significant strategic accomplishments and
achievement of annual business goals.
In determining the base salaries of executive officers, the Company
Board takes into consideration the level of responsibility and experience of
each executive officer and the knowledge and skill required. Executive
performance is evaluated and any base salary adjustment is based on an
evaluation of the individual's performance and contribution. Each year, the
chief executive officer makes recommendations with respect to salary adjustments
for all executive officers, which recommendations are reviewed, modified where
appropriate and approved or rejected by the Company Board. During the fiscal
year ended March 31, 2003, the Company Board approved annual base salaries for
each of Messrs. Kerrigan, Blatt, Doyle, Stanky and Denson of $446,250, $352,000,
$257,500, $202,800 and $140,000, respectively.
In addition to base salaries, the Company Board grants bonuses to
executive officers in recognition of their efforts to position the Company to
achieve future growth. After reviewing individual performances, the chief
executive officer makes recommendations with respect to bonuses and other
incentive awards, which recommendations are reviewed and, to the extent
determined appropriate, approved by the Company Board.
32
From time to time, the Company enters into employment contracts or
other compensation arrangements with its executive officers. Currently, the
Company has employment agreements with Messrs. Kerrigan, Blatt, Doyle, Stanky
and Denson and certain other key employees. The terms of the agreements with the
executive officers are summarized in "--Employment Agreements."
Stephen R. Kerrigan (Chairman)
Bruce V. Rauner
James N. Chapman
David A. Donnini
Vincent J. Hemmer
401(K) SAVINGS PLAN
The Company offers a 401(k) savings plan (the "401(k) Plan") to all
current eligible employees of the Company who have completed three months of
service. Pursuant to the 401(k) Plan, eligible employees may defer from 2% up to
25% of their salaries up to a maximum level imposed by applicable federal law
($12,000 in 2003). The percentage of compensation contributed to the plan is
deducted from each eligible employee's salary and considered tax-deferred
savings under applicable federal income tax law. Pursuant to the 401(k) Plan,
the Company contributes matching contribution amounts (subject to the Internal
Revenue Code limitation on compensation taken into account for such purpose) of
25% contributed to the 401(k) Plan by the respective eligible employee up to the
first 6% of the amount contributed by such employee. Eligible employees become
vested with respect to matching contributions made by the Company pursuant to a
vesting schedule based upon an eligible employee's years of service. After two
years of service, an eligible employee is 20% vested in all matching
contributions made to the 401(k) Plan. Such employee becomes vested in equal
increments thereafter through the sixth year of service, at which time such
employee becomes 100% vested. Eligible participants are always 100% vested in
their own contributions, including investment earnings on such amounts.
The Company made the following matching contributions during the fiscal
year ended March 31, 2003 to the Named Executive Officers appearing in the
Summary Compensation Table above: Mr. Kerrigan $2,946; Mr. Blatt $3,016; Mr.
Doyle $2,324; Mr. Denson $1,965; and Mr. Stanky $2,833.
COMPENSATION OF DIRECTORS
Directors receive no cash remuneration for their service as directors,
other than reimbursement of reasonable travel and related expenses for
attendance at Company Board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended March 31, 2003, all compensation matters
with respect to the Company were, and continue to be, addressed by the Company
Board, the Holdings Board or the Chief Executive Officer, as appropriate. None
of the Company's directors and none of its executive officers have a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of March 31, 2003, the Company had 100 shares of common stock, par
value $.01 per share, issued and outstanding, all of which were owned by
Coinmach Laundry. Coinmach Laundry completed the Going Private Transaction in
July 2000, pursuant to which it was acquired by an affiliate of GTCR Fund IV.
For more information concerning these transactions, see Item 1 -- "Business -
General Development of Business." In March 2003, Coinmach Laundry became a
wholly owned subsidiary of Holdings upon consummation of the Restructuring
Transactions.
33
The following table sets forth certain information regarding each of
the Common Units and Class C Preferred Units of Holdings beneficially owned as
of March 31, 2003 by (i) each of Holdings' directors, (ii) each of the Named
Executive Officers, and (iii) all directors of Holdings and the Named Executive
Officers as a group. Neither any of Holdings' directors nor any of the Named
Executive Officers beneficially own as of March 31, 2003 any Class A Preferred
Units or Class B Preferred Units.
NAME AND ADDRESS(1) OF
BENEFICIAL OWNER NUMBER OF UNITS PERCENT OF EACH UNIT CLASS
- ---------------------- ----------------------------------------- ---------------------------------------
COMMON UNITS CLASS C PREFERRED UNITS COMMON UNITS CLASS C PREFERRED UNITS
--------------- ----------------------- ------------ -----------------------
Stephen R. Kerrigan 8,320,914 (2) 3,403 (2) 4.98% 2.52%
Mitchell Blatt 7,376,400 3,833 4.41% 2.83%
Robert M. Doyle 3,165,898 763 1.89% *
Michael E. Stanky 2,058,122 368 1.23% *
John E. Denson 396,984 63 * *
James N. Chapman 756,436 110 * *
Bruce V. Rauner 116,133,474 (3) 104,520 (3) 69.48% 77.25%
David A. Donnini 116,133,474 (4) 104,520 (4) 69.48% 77.25%
Vincent J. Hemmer 116,133,474 (5) 104,520 (5) 69.48% 77.25%
All Officers and Directors as a
group (9 persons) 138,208,228 (6) 113,060 (7) 82.69% 83.56%
- -------------------
* Percentage of units beneficially owned does not exceed 1% of Common
Units outstanding.
(1) All addresses are c/o Coinmach Laundry Corporation, 303 Sunnyside Blvd.,
Suite 70, Plainview, New York 11803.
(2) All Common Units and Class C Preferred Units are beneficially owned by MCS
Capital, Inc., a corporation controlled by Mr. Kerrigan.
(3) All Common Units and Class C Preferred Units are held by GTCR-CLC, LLC, of
which GTCR Fund VII, L.P. is the Managing Member. Mr. Rauner is a
principal of GTCR Golder Rauner, L.L.C., the General Partner of GTCR
Partners VII, L.P., which is the General Partner of GTCR Fund VII, L.P.
Mr. Rauner disclaims beneficial ownership of such units.
(4) All Common Units and Class C Preferred Units are held by GTCR-CLC, LLC, of
which GTCR Fund VII, L.P. is the managing member. Mr. Donnini is a
principal of GTCR Golder Rauner, L.L.C., the General Partner of GTCR
Partners VII, L.P., which is the General Partner of GTCR Fund VII, L.P.
Mr. Donnini disclaims beneficial ownership of such units.
(5) All Common Units and Class C Preferred Units are held by GTCR-CLC, LLC, of
which GTCR Fund VII, L.P. is the managing member. Mr. Hemmer is a
principal of GTCR Golder Rauner, L.L.C., the General Partner of GTCR
Partners VII, L.P., which is the General Partner of GTCR Fund VII, L.P.
Mr. Hemmer disclaims beneficial ownership of such units.
(6) In calculating the Common Units beneficially owned by executive officers
and directors as a group, 116,133,474 units owned by GTCR-CLC, LLC and
included in the beneficial ownership amounts of each of Messrs. Rauner,
Donnini and Hemmer are included only once.
34
(7) In calculating the Class C Preferred Units beneficially owned by the
executive officers and directors as a group, 104,520 Class C Preferred
Units owned by GTCR-CLC, LLC and included in the beneficial ownership
amounts of each of Messrs. Rauner, Donnini and Hemmer are included only
once.
CHANGE OF CONTROL
Pursuant to the terms of the credit agreement governing the Senior
Secured Credit Facility, upon the occurrence of an Event of Default (as defined
in such credit agreement), the lenders under such credit facility have the right
to foreclose on all of the outstanding shares of common stock of the Company
issued to Coinmach Laundry and pledged to such lenders by Coinmach Laundry
pursuant to the terms and conditions of such credit agreement.
EQUITY PARTICIPATION PURCHASE PROGRAM
Pursuant to the Company's equity participation purchase program,
certain employees of the Company were eligible to acquire common stock of
Coinmach Laundry at a fixed price per share determined by the CLC Board. Such
shares were paid for by each participating employee and vest over a specified
period, typically over 4 years. Additionally, in connection with the Going
Private Transaction, members of senior management of the Company were eligible
to acquire preferred stock of Coinmach Laundry. On March 6, 2003, all vested and
unvested shares of Coinmach Laundry acquired under the equity participation
purchase program were contributed to Holdings in exchange for substantially
equivalent equity interests in Holdings. For more information relating to the
Company's equity participation purchase program, see Item 5 "Market for the
Company's Common Equity and Related Stockholder Matters--Equity Participation
Purchase Program".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AND CONSULTING SERVICES
During the last fiscal year, the Company paid Mr. Chapman, a member of
each of the Company Board, the Holdings Board and the CLC Board, $180,000 for
general financial advisory and investment banking services.
REGISTRATION AGREEMENT
In connection with the Restructuring Transactions, Holdings entered
into a registration agreement, dated March 6, 2003 (the "Registration Rights
Agreement"), with GTCR-CLC, LLC ("GTCR-CLC"), Messrs. Kerrigan (and MCS), Blatt,
Doyle, Stanky and Chapman, and the investors named therein (collectively, the
"Registration Rights Holders"). Pursuant to the Registration Rights Agreement,
Holdings granted the Registration Rights Holders certain rights with respect to
the registration under the Securities Act of 1933, as amended (the "Securities
Act"), for resale to the public, of the Registrable Securities (as defined in
the Registration Rights Agreement) of Holdings owned directly or indirectly by
each of them. The Registration Rights Agreement provides, among other things and
subject to limitations, that certain of the Registration Rights Holders have
"demand" registration rights, pursuant to which they may request registration
under the Securities Act of all or a portion of their Registrable Securities.
The Registration Rights Agreement also grants the Registration Rights Holders
"piggyback" registration rights, pursuant to which they may request inclusion of
their Registrable Securities in a registration statement proposed to be filed by
Holdings under the Securities Act. The Registration Rights Agreement provides
for customary provisions regarding the priority among the Registration Rights
Holders with respect to the number of Registrable Securities to be registered
pursuant to any demand or piggyback registration and indemnification by Holdings
of the Registration Rights Holders.
35
CERTAIN LOANS TO MEMBERS OF MANAGEMENT
GENERALLY
As of June 24, 2003, Messrs. Kerrigan (directly and indirectly through
MCS, an entity controlled by Mr. Kerrigan), Blatt, Doyle, Stanky and Denson each
owed the Company, Coinmach Laundry and/or Holdings $627,805, $497,266, $194,529,
$192,782 and $83,185, respectively, plus interest accrued and unpaid interest
thereon. During the last fiscal year, the largest aggregate amount owed to the
Company and/or Coinmach Laundry by Messrs. Kerrigan (directly and indirectly
through MCS), Blatt, Doyle, Stanky and Denson was $705,234, $551,746, $209,388,
$205,811 and $87,807, respectively, plus accrued and unpaid interest thereon.
EQUITY PURCHASE LOANS
The indebtedness of each of MCS and Mr. Blatt is evidenced, in part, by
(i) two promissory notes, each dated July 26, 1995 in an original principal
amount of $52,370, and (ii) two promissory notes, each dated May 3, 1996 in an
original principal amount of $21,797, issued to Coinmach Laundry in connection
with the purchase of certain of its equity securities. The obligations under
these notes accrue interest at a rate of 8% per annum and are secured by a
pledge of all of the Coinmach Laundry common stock held by MCS and Mr. Blatt.
The principal amounts outstanding under these notes are payable in eight equal
annual installments, commencing on the first anniversary of the date of issuance
of each such note. During the 2003 Fiscal Year, Coinmach Laundry forgave the
repayment of approximately (i) $6,546 by each of MCS and Mr. Blatt under the
promissory notes dated July 26, 1995, and (ii) $2,725 by each of MCS and Mr.
Blatt under the promissory notes dated May 3, 1996.
On December 17, 2000, each of MCS and Messrs. Doyle, Stanky and Denson,
and on September 6, 2001, Mr. Blatt, entered into promissory notes
(collectively, the "Management Promissory Notes") in favor of Coinmach Laundry
in connection with the purchase of shares of common stock of Coinmach Laundry
under the Company's equity participation purchase program in original principal
amounts of $408,547, $208,664, $211,476, $92,429 and $280,607, respectively. On
March 6, 2003, in connection with the Restructuring Transactions and the
corresponding exchange of all equity interests of Coinmach Laundry for equity
interests in Holdings, each of MCS and Messrs. Blatt, Doyle, Denson and Stanky
entered into amended and restated promissory notes (the "Amended Management
Promissory Notes") with Coinmach Laundry on identical terms as the Management
Promissory Notes in substitution and exchange for the Management Promissory
Notes. See "--Management Contribution Agreements". The obligations under the
Amended Management Promissory Notes are payable in installments over a period of
ten years, accrue interest at a rate of 7% per annum, may be prepaid in whole or
in part at any time and are secured by a pledge of certain membership units of
Holdings held by each borrower thereunder. During the 2003 Fiscal Year, Coinmach
Laundry forgave the repayment of approximately $48,345, $29,334, $24,309,
$24,637 and $10,768 of principal and interest owed by each of MCS, Mr. Blatt,
Mr. Doyle, Mr. Stanky, and Mr. Denson, respectively under such loans.
RELOCATION AND OTHER LOANS
On May 5, 1999, the Company extended a loan to Mr. Blatt in a principal
amount of $250,000, which loan was evidenced by a promissory note (the "Blatt
Original Note") providing, among other things, that the outstanding loan balance
was payable on May 5, 2002, that interest accrue thereon at a rate of 8% per
annum and that the obligations under such loan are secured by a pledge of
certain common stock of Coinmach Laundry held by Mr. Blatt. On March 15, 2002,
the Company and Mr. Blatt entered into a replacement promissory note (the "Blatt
Replacement Note") on identical terms as the Blatt Original Note in substitution
and exchange for the Blatt Original Note, except that (i) the Blatt Replacement
Note is in an original principal amount of $282,752, (ii) the outstanding loan
balance under the Blatt Replacement Note is payable in equal annual installments
of $56,550 commencing on March 15, 2003 and (iii) the obligations under the
Blatt Replacement Note, pursuant to an amendment to the Blatt Replacement Note
dated March 6, 2003, are secured by a pledge of certain preferred and common
units of Holdings held by Mr. Blatt.
36
In connection with the Company's establishment of a corporate office in
Charlotte, North Carolina and the relocation of Mr. Kerrigan to such office in
September 1996, the Company extended a loan to Mr. Kerrigan in the principal
amount of $500,000 (the "Kerrigan Relocation Loan"). The Kerrigan Relocation
Loan provides for the repayment of principal and interest in five equal annual
installments commencing in July 1997 (each such payment date, a "Payment Date")
and accrual of interest at a rate of 7.5% per annum. During the fiscal year
ended March 31, 1998, the Company Board determined to extend the Kerrigan
Relocation Loan an additional five years providing for repayment of outstanding
principal and interest in equal annual installments ending July 2006. The
Kerrigan Relocation Loan provides that payments of principal and interest will
be forgiven on each Payment Date provided that Mr. Kerrigan is employed by the
Company on such Payment Date. If Mr. Kerrigan ceases to be employed by the
Company as a result of (i) a change in control of the Company, (ii) the death or
disability of Mr. Kerrigan while employed by the Company or (iii) a termination
by Mr. Kerrigan for cause (each, a "Termination Event"), then all outstanding
amounts due under the Kerrigan Relocation Loan are required to be forgiven as of
the date of such Termination Event. If Mr. Kerrigan's employment is terminated
upon the occurrence of any event that is not a Termination Event, then all
outstanding amounts due under the Kerrigan Relocation Loan will become due and
payable within 30 business days following the termination of Mr. Kerrigan's
employment.
SECURITYHOLDERS AGREEMENT
In connection with the Restructuring Transactions, Holdings entered
into a securityholders agreement, dated March 6, 2003 (the "Securityholders
Agreement"), with GTCR-CLC, Jefferies & Company, Inc., Messrs. Kerrigan (and
MCS), Blatt, Doyle, Stanky and Chapman, and the investors named therein
(collectively, the "Securityholders"). The Securityholders Agreement provides
that GTCR-CLC shall have the ability to designate for election a majority of the
Holdings Board for so long as GTCR owns in the aggregate at least 50% of the
securities of Holdings held by GTCR-CLC. In addition, under the Securityholders
Agreement, with the exception of any outside managers elected to the Coinmach
Board or the board of directors of AWA (the "AWA Board"), the composition of
each of the CLC Board, the Company Board and the AWA Board is required to be the
same as the Holdings Board. The Securityholders Agreement also provides for
certain restrictions on issuances and transfers of any of Holdings' units
purchased or otherwise acquired by any Securityholder including, but not limited
to, provisions providing (i) Securityholders with certain limited participation
rights in certain proposed transfers; (ii) certain Securityholders with limited
first refusal rights in connection with certain proposed transfers of Holdings'
units; and (iii) that if Holdings authorizes the issuance or sale of any Common
Units or any securities convertible, exchangeable or exercisable for Common
Units, Holdings will first offer to sell to the Securityholders a specified
percentage of the Common Units sold in such issuance. Under the Secuityholders
Agreement, upon approval by the Holdings Board and holders of a majority of the
Common Units of Holdings then outstanding of a sale of all or substantially all
of Holdings' assets or outstanding units (whether by merger, recapitalization,
consolidation, reorganization, combination or otherwise), each Securityholder
shall vote for such sale and waive any dissenters' rights, appraisal rights or
similar rights in connection therewith.
MANAGEMENT CONTRIBUTION AGREEMENTS
In connection with the Restructuring Transactions, Holdings entered
into separate management contribution agreements, dated March 5, 2003
(collectively, the "Management Contribution Agreements"), with Messrs. Kerrigan
(and MCS), Blatt, Doyle, Stanky and Chapman (collectively, the "Management
Stockholders"). Pursuant to the Management Contribution Agreements, the
Management Stockholders agreed to contribute to Holdings all of the CLC Capital
Stock and all of the AWA Common Stock owned by each of them in exchange for
substantially equivalent equity interests (in the form of Common Units and
certain Preferred Units) in Holdings. Pursuant to such agreements, the
Management Stockholders also assigned to Holdings their right to receive the
dividend that Coinmach Laundry declared on March 5, 2003 (the "CLC Dividend") .
The Management Contribution Agreements with Mr. Chapman and Mr. Stanky further
provide that the units of Holdings held by each of them are subject to customary
rights of first refusal. In addition, the Management Contribution Agreement with
Mr. Stanky provides that if Mr. Stanky violates the non-competition clause of
the Stanky Employment Agreement or is terminated for any reason, the units of
Holdings owned by him will be subject to repurchase by Holdings and certain
other members of Holdings.
37
PART IV
ITEM 14. 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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements and Schedule required to be filed in
satisfaction of Item 8 -- see Index to Consolidated Financial
Statements and Schedule appearing on Page F-1. Schedules not
required have been omitted.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the last quarter of Fiscal Year 2003.
(c) Exhibits: Those exhibits required to be filed by Item 601 of Regulation
S-K under the Securities Act are listed in the Exhibit Index and such
listing is incorporated by reference.
(d) None.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Roslyn,
State of New York on June 24, 2003.
COINMACH CORPORATION
By: /S/ STEPHEN R. KERRIGAN
---------------------------------------
Stephen R. Kerrigan
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Date: June 24, 2003 By: /S/ STEPHEN R. KERRIGAN
---------------------------------------
Stephen R. Kerrigan
Chairman of the Board of Directors and
Chief Executive Officer (Principal
Executive Officer)
Date: June 24, 2003 By: /S/ ROBERT M. DOYLE
---------------------------------------
Robert M. Doyle
Chief Financial Officer, Senior Vice
President Secretary and Treasurer
(Principal Financial and Accounting
Officer)
Date: June 24, 2003 By: /s/ BRUCE V. RAUNER
---------------------------------------
Bruce V. Rauner
Director
Date: June 24, 2003 By: /S/ VINCENT J. HEMMER
---------------------------------------
Vincent J. Hemmer
Director
Date: June 24, 2003 By: /S/ DAVID A. DONNINI
---------------------------------------
David A. Donnini
Director
Date: June 24, 2003 By: /S/ JAMES N. CHAPMAN
--------------------------------------
James N. Chapman
Director
39
COINMACH CORPORATION AND SUBSIDIARIES
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen R. Kerrigan, certify that:
1. I have reviewed this annual report on Form 10-K of Coinmach Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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 annual
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: June 24, 2003 /S/ STEPHEN R. KERRIGAN
---------------------------
Stephen R. Kerrigan
Chairman of the Board and
Chief Executive Officer
40
COINMACH CORPORATION AND SUBSIDIARIES
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert M. Doyle, certify that:
1. I have reviewed this annual report on Form 10-K of Coinmach Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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 annual
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: June 24, 2003 /S/ ROBERT M. DOYLE
-------------------------
Robert M. Doyle
Chief Financial Officer
41
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE SECURITIES ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE SECURITIES ACT
The Company has not sent any annual report to security holders covering
the Company's 2003 Fiscal Year. In addition, the Company has not sent any proxy
statement, form of proxy of other proxy soliciting material to more than ten of
the Company's security holders with respect to any annual or other meeting of
the Company's security holders.
42
COINMACH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................ F-2
As of March 31, 2003 and March 31, 2002:
Consolidated Balance Sheets.......................................................................... F-3
For the years ended March 31, 2003 and March 31, 2002 and for the periods from
July 1, 2000 to March 31, 2001 and from April 1, 2000 to June 30, 2000:
Consolidated Statements of Operations............................................................ F-4
Consolidated Statements of Stockholder's Equity.................................................. F-5
Consolidated Statements of Cash Flows............................................................ F-6
Notes to Consolidated Financial Statements....................................................... F-8
Schedule II--Valuation and Qualifying Accounts:
For the years ended March 31, 2003 and March 31, 2002 and for the Periods
from July 1, 2000 to March 31, 2001 and from
April 1, 2000 to June 30, 2000....................................................................... F-33
(All other financial schedules have been omitted because they are not applicable, or not required,
or because the required information is included in the consolidated financial statements or notes thereto.)
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Coinmach Corporation
We have audited the accompanying consolidated balance sheets of Coinmach
Corporation and Subsidiaries (the "Company") as of March 31, 2003 and March 31,
2002, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the years ended March 31, 2003 and March 31, 2002 and
the post-transaction period from July 1, 2000 to March 31, 2001 and the
pre-transaction period from April 1, 2000 to June 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Coinmach
Corporation and Subsidiaries at March 31, 2003 and March 31, 2002, and the
consolidated results of their operations and their cash flows for the years
ended March 31, 2003 and March 31, 2002 and the post-transaction period from
July 1, 2000 to March 31, 2001 and the pre-transaction period from April 1, 2000
to June 30, 2000, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the Consolidated Financial Statements, effective April
1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets".
/S/ ERNST & YOUNG LLP
New York, New York
June 6, 2003
F-2
COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
--------------------------------
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 27,428 $ 27,820
Receivables, less allowance of $1,553 and $1,342 10,453 11,883
Inventories 14,125 13,109
Prepaid expenses 7,617 7,166
Advance location payments 70,911 69,257
Land, property and equipment:
Laundry equipment and fixtures 421,681 363,183
Land, building and improvements 24,314 18,743
Trucks and other vehicles 23,165 18,848
--------- ----------
469,160 400,774
Less accumulated depreciation and amortization (182,474) (116,361)
--------- ---------
Net property and equipment 286,686 284,413
Contract rights, net of accumulated amortization of $73,027 and
$58,768 335,327 348,462
Goodwill 203,860 204,284
Other assets 19,754 22,927
--------- ---------
Total assets $ 976,161 $ 989,321
========= =========
See accompanying notes.
MARCH 31,
--------------------------------
2003 2002
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $36,843 $31,775
Accrued rental payments 29,481 28,576
Accrued interest 8,094 7,540
Interest rate swap liability 3,345 --
Deferred income taxes 79,621 81,850
Long-term debt 718,112 737,305
Due to parent 50,863 51,852
Stockholder's equity:
Common stock, par value $.01:
1,000 shares authorized, 100 shares issued and outstanding -- --
Capital in excess of par value 121,065 117,391
Accumulated other comprehensive loss, net of tax (2,007) --
Accumulated deficit (69,256) (66,968)
---------- ----------
Total stockholder's equity 49,802 50,423
---------- ----------
Total liabilities and stockholder's equity $ 976,161 $ 989,321
========== ==========
See accompanying notes.
F-3
COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED JULY 1, 2000 TO APRIL 1,2000 TO
MARCH 31, MARCH 31, MARCH 31, JUNE 30,
2003 2002 2001 2000
---------- ---------- --------------- ----------------
POST- PRE-
TRANSACTION TRANSACTION
Revenues $535,179 $538,895 $393,608 $134,042
Costs and expenses:
Laundry operating expenses 366,539 363,126 264,557 89,661
General and administrative 8,569 8,704 6,741 2,144
Depreciation and amortization 104,178 129,529 102,727 31,557
Other items, net (454) -- -- --
--------- --------- --------- ---------
478,832 501,359 374,025 123,362
--------- --------- --------- ---------
Operating income 56,347 37,536 19,583 10,680
Interest expense 58,167 65,889 52,391 16,661
Interest expense--escrow and interest rate
swap termination costs (Note 3a) -- 7,147 -- --
--------- --------- --------- ---------
Total interest expense, net 58,167 73,036 52,391 16,661
--------- --------- --------- ---------
Loss before income taxes and extraordinary
item (1,820) (35,500) (32,808) (5,981)
Provision (benefit) for income taxes:
Current 359 (1,586) (145) 544
Deferred 109 706 (7,060) (1,873)
468 (880) (7,205) (1,329)
Loss before extraordinary item (2,288) (34,620) (25,603) (4,652)
Extraordinary item, net of income tax benefit
of $4,657 -- (6,745) -- --
--------- --------- ---------- ---------
Net loss $ (2,288) $ (41,365) $ (25,603) $ (4,652)
========= ========== ========== =========
See accompanying notes.
F-4
COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED TOTAL
CAPITAL IN OTHER RECEIVABLES STOCKHOLDER'S
COMMON STOCK EXCESS OF COMPREHENSIVE ACCUMULATED FROM EQUITY
SHARES AMOUNT PAR VALUE LOSS DEFICIT MANAGEMENT (DEFICIT)
------ ------ ---------- ------------- ----------- ------------ -------------
Balance, March 31, 2000 100 $- $41,391 $ - $(71,513) $(21) $(30,143)
Forgiveness of receivables
from management - - - - - 21 21
Net loss (pre-transaction) - - - - (4,652) - (4,652)
--- -- ------- ------- --------- ----- --------
Balance, June 30, 2000
(pre-transaction) 100 $- $41,391 $ - $(76,165) $ - $(34,774)
=== == ======= ------- ========= ===== ========
Application of push-down
accounting, July 1, 2000 100 $- $117,391 $ - $ - $ - $117,391
Net loss (post-transaction) - - - - (25,603) - (25,603)
--- -- -------- ------- --------- ----- --------
Balance, March 31, 2001 100 - 117,391 - (25,603) - 91,788
Net loss - - - - (41,365) - (41,365)
--- -- -------- ------- --------- ----- --------
Balance, March 31, 2002 100 - 117,391 - (66,968) - 50,423
Net loss - - - - (2,288) - (2,288)
Loss on derivative
instruments, net of
income tax of $ 1,338 - - - (2,007) - - (2,007)
--- -- -------- ------- --------- ----- --------
Total comprehensive loss - - - (2,007) (2,288) - (4,295)
Capital contribution - - 1,000 - - - 1,000
Contribution of RDI investment - - 2,674 - - - 2,674
--- -- -------- ------- --------- ----- --------
Balance, March 31, 2003 100 $- $121,065 $(2,007) $(69,256) $ - $ 49,802
=== == ======== ======= ======== ===== ========
See accompanying notes.
F-5
COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------ -------------
POST- PRE-
TRANSACTION TRANSACTION
OPERATING ACTIVITIES
Net loss $ (2,288) $(41,365) $(25,603) $ (4,652)
Adjustments to reconcile net loss to
net cash provided by
operating activities:
Extraordinary item -- 6,745 -- --
Depreciation and amortization 67,161 61,212 45,124 15,214
Amortization of advance location payments 21,214 23,437 19,063 6,122
Amortization of intangibles 15,803 44,880 38,540 10,221
Gain on sale of investment and equipment (3,532) (147) -- --
Deferred income taxes 109 706 (7,060) (1,873)
Amortization of debt discount and deferred
issue costs 2,439 2,008 981 431
Amortization of premium on 11-3/4% Senior Notes -- (1,009) (925) (309)
Stock based compensation -- -- -- 88
Change in operating assets and liabilities,
net of businesses acquired:
Other assets 126 (1,713) (1,582) (1,295)
Receivables, net 1,430 (1,813) 3,205 (1,536)
Inventories and prepaid expenses (1,292) 842 (837) 910
Accounts payable and accrued expenses, net 2,950 (6,729) (8,105) 3,087
Accrued interest 554 (8,399) 9,154 (9,001)
-------- -------- -------- --------
Net cash provided by operating activities 104,674 78,655 71,955 17,407
-------- -------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment (66,238) (63,995) (46,917) (18,063)
Advance location payments to location owners (20,447) (15,469) (13,703) (6,210)
Additions to net assets related to
acquisitions of businesses (1,976) (3,723) (5,582) --
Proceeds from sale of investment 6,585 -- -- --
Proceeds from sale of property and equipment 746 932 -- --
-------- -------- -------- --------
Net cash used in investing activities (81,330) (82,255) (66,202) (24,273)
-------- -------- -------- --------
F-6
COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------ -------------
POST- PRE-
TRANSACTION TRANSACTION
FINANCING ACTIVITIES
Proceeds from credit facility $18,000 $319,489 $27,242 $15,500
Repayments to credit facility (36,750) (434,820) (23,082) (6,349)
Proceeds from issuance of 9%
Senior Notes - 450,000 - -
Repayment of 1-13/4% Senior Notes - (296,655) - -
Premium on 1-13/4% Senior Notes - (8,714) - -
Net repayments to Parent (989) (1,356) (6,313) (47)
Repayments of bank and other
borrowings (16) (143) (74) (4)
Principal payments on capitalized
lease obligations (3,981) (3,745) (2,244) (831)
Debt issuance costs - (18,495) - -
Net cash (used in) provided by -------- -------- -------- --------
financing activities (23,736) 5,561 (4,471) 8,269
-------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (392) 1,961 1,282 1,403
Cash and cash equivalents, beginning
of period 27,820 25,859 24,577 23,174
------- -------- ------- -------
Cash and cash equivalents, end of period $27,428 $27,820 $25,859 $24,577
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $55,300 $80,800 $42,898 $25,772
======= ======= ======= =======
Income taxes paid $325 $694 $1,015 $629
==== ==== ====== ====
NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of fixed assets through
capital leases $3,554 $5,334 $2,458 $1,534
====== ====== ====== ======
Contribution of RDI Investment $2,674 $ - $ - $ -
====== ====== ====== ======
See accompanying notes.
F-7
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Coinmach Corporation includes the
accounts of all wholly-owned subsidiaries. Intercompany profits, transactions
and balances have been eliminated in consolidation. The Company is a
wholly-owned subsidiary of Coinmach Laundry Corporation ("CLC" or the "Parent"),
which in turn is a wholly-owned subsidiary of Coinmach Holdings, LLC
("Holdings"), the ultimate parent. Holdings, a Delaware limited liability
company, was formed on November 15, 2002 as part of the Restructuring
Transactions, as defined herein. Unless otherwise specified herein, references
to the "Company" shall mean Coinmach Corporation and its subsidiaries.
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 laundry machines and operating 163 retail laundromats
throughout Texas and Arizona. Through Appliance Warehouse of America, Inc.
("AWA"), a recently formed subsidiary jointly-owned by the Company and Holdings,
the Company 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"), a wholly-owned subsidiary of the Company, constructs, designs
and retrofits laundromats and distributes laundromat equipment. In addition,
Super Laundry, commencing in September 2002 and through its wholly-owned
subsidiary American Laundry Franchising Corp. ("ALFC"), began to build and
develop laundromat facilities for sale as franchise locations.
On May 12, 2000, CLC entered into an Agreement and Plan of Merger (the "Merger
Agreement") with CLC Acquisition Corporation ("CLC Acquisition"), a newly formed
Delaware corporation formed by Bruce V. Rauner, a director of CLC and a
principal of the indirect general partner of Golder, Thoma, Cressey, Rauner Fund
IV, L.P. ("GTCR Fund IV"), the then-largest stockholder of CLC. Pursuant to the
Merger Agreement, CLC Acquisition acquired all of CLC's outstanding common stock
and non-voting common stock (collectively, the "Shares") for $14.25 per share in
a two-step transaction consisting of a tender offer (the "Offer") followed by a
merger transaction (the "Merger") of CLC Acquisition with and into CLC, which
was completed on July 13, 2000 (collectively, the "Going Private Transaction").
The Going Private Transaction was accounted for using the purchase method of
accounting and, according to a practice known as "push down" accounting, as of
July 1, 2000 (the beginning of the accounting period closest to the date on
which control was effective), the Company adjusted its consolidated assets and
liabilities to their estimated fair values, based on independent appraisals,
valuations, estimations and other studies. The purchase price exceeded the fair
value of assets acquired (based on an independent appraisal for certain assets)
less liabilities assumed by approximately $124.2 million, which was allocated to
goodwill. In applying push-down accounting, the Company adjusted its accounts as
follows (in thousands):
Property and equipment $ 28,516
Contract rights 24,871
Goodwill 124,165
All other assets (4,676)
--------
$172,876
========
Deferred taxes $ 20,711
Capital in excess of par value 76,000
Accumulated deficit 76,165
--------
$172,876
========
F-8
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
References to the "pre-transaction" period refer to the Company prior to the
date of the Going Private Transaction and references to the "post-transaction"
period refer to the Company subsequent to the date of the Going Private
Transaction. As a result, the financial statements presented for the
post-transaction period are not comparable to the financial statements presented
for the pre-transaction periods. Had the Going Private Transaction taken place
at April 1, 2000, on an unaudited pro-forma basis, depreciation and amortization
and net loss would have been $3.5 million higher than reported for the
pre-transaction period ended June 30, 2000.
APPLIANCE WAREHOUSE TRANSFER
On November 29, 2002 (the "Transfer Date"), the Company transferred all of the
assets of the Appliance Warehouse division of the Company 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 (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 "AWA
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 ("AWA Common Stock").
The AWA Preferred Stock is not redeemable and is vested with voting rights.
Except as may otherwise be required by applicable law, the AWA Common Stock does
not have any voting rights. Dividends on the AWA Preferred Stock accrue
quarterly at the rate of 11% per annum and are payable in cash, in kind in the
form of additional shares of AWA Preferred Stock, or in a combination thereof,
at the option of AWA.
In March 2003, through a series of transactions (collectively, the
"Restructuring Transactions"), all of the AWA Common Stock and all of the
outstanding capital stock of CLC was contributed to Holdings in exchange for
substantially equivalent equity interests (in the form of common and preferred
membership units) in Holdings.
As a result of these Restructuring Transactions, (i) Holdings became the sole
holder of all of the outstanding AWA Common Stock, (ii) the Company became the
sole holder of all of the outstanding AWA Preferred Stock, (iii) CLC became a
wholly-owned subsidiary of Holdings, (iv) the former stockholders of CLC became
unit holders of Holdings and (v) AWA, subject to certain specified
qualifications, became a guarantor under, and subject to the covenants contained
in, the indenture governing the 9% Senior Notes and the Senior Secured Credit
Facility.
F-9
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECOGNITION OF REVENUES
The Company has agreements with various property owners that provide for the
Company's installation and operation of laundry machines at various locations in
return for a commission. These agreements provide for both contingent
(percentage of revenues) and fixed commission payments. The Company reports
revenues from laundry machines on the accrual basis and has accrued the cash
estimated to be in the machines at the end of each fiscal year.
Super Laundry's customers generally sign sales contracts pursuant to which Super
Laundry constructs and equips complete laundromat operations. Revenue is
recognized on the completed contract method. A contract is considered complete
when all costs have been incurred and either the installation is operating
according to specifications or has been accepted by the customer. The duration
of such contracts is normally less than six months. Construction-in-progress,
the amount of which is not material, is classified as a component of inventory
on the accompanying balance sheets. Sales of laundromats amounted to
approximately $26.8 million for the year ended March 31, 2003, $30.2 million for
the year ended March 31, 2002, and $21.1 million for the period from July 1,
2000 to March 31, 2001 (post-transaction), $10.8 million for the period from
April 1, 2000 to June 30, 2000 (pre-transaction).
ALFC enters into a purchase and license agreement with a buyer whereby the buyer
may use certain systems created by ALFC to operate such facility. ALFC receives
revenue primarily from the sale 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. For the year ended March 31, 2003, ALFC recorded
approximately $3.5 million in revenue.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
MARCH 31,
----------------------------
2003 2002
---- ----
Laundry equipment $9,948 $9,280
Machine repair parts 4,177 3,829
------- -------
$14,125 $13,109
======= =======
F-10
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the current year presentation.
LONG-LIVED ASSETS
As of April 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Long-lived assets held for use are subject to an impairment
assessment if the carrying value is no longer recoverable based upon the
undiscounted cash flows of the assets. The amount of the impairment is the
difference between the carrying amount and the fair value of the asset.
Management does not believe there is any impairment of long-lived assets at
March 31, 2003.
LAND, PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are carried at cost and are
depreciated or amortized on a straight-line basis over the lesser of the
estimated useful lives or lease life, whichever is shorter:
Laundry equipment, installation costs and fixtures 5 to 8 years
Leasehold improvements and decorating costs 5 to 8 years
Trucks and other vehicles 3 to 4 years
The cost of installing laundry machines is capitalized and included with laundry
equipment. Decorating costs, which represent the costs of refurbishing and
decorating laundry rooms in property-owner facilities, are capitalized and
included with leasehold improvements.
Upon the sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts, and the
resulting gain or loss is included in income. Maintenance and repairs are
charged to operations currently, and replacements of laundry machines and
significant improvements are capitalized.
GOODWILL
On April 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142 ("SFAS 142") Goodwill and Other Intangible Assets.
SFAS 142 requires an initial impairment assessment upon adoption on April 1,
2002, as well as an assessment thereafter. The Company engaged an independent
third-party business appraisal firm to assist in this process. After their
review of information provided by the Company and obtained from public sources,
the outside firm performed a fair market valuation of the Company's segments.
These segments represent the Company's reporting units under SFAS 142. Upon
completion of this evaluation it was determined that the fair value of the
reporting units exceeded their book value, therefore no impairment of goodwill
occurred in these reporting units.
Goodwill consists of the following (in thousands):
MARCH 31,
-------------------------
2003 2002
---- ----
Excess costs of investments
over net assets acquired $235,194 $234,122
Accumulated Amortization (30,910) (30,910)
Acquisitions 385 1,072
Other (809) -
--------- ---------
$203,860 $204,284
========= =========
F-11
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
Following is the impact on earnings of implementing SFAS 142 on the year ended
March 31, 2003, and what the impact on the same period in 2002 and 2001 post-
and pre-transaction would have been (in thousands):
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------ -------------
POST- PRE-
TRANSACTION TRANSACTION
Net loss $(2,288) $(41,365) $(25,603) $(4,652)
Add back: goodwill amortization,
net of tax - 15,542 11,601 2,062
-------- ------ ------ -----
Adjusted net loss $(2,288) $(25,823) $(14,002) $(2,590)
======= ======== ======== =======
CONTRACT RIGHTS
Contract rights represent the value of location contracts arising from the
acquisition of laundry machines on location. These amounts, which arose
primarily from purchase price allocations pursuant to acquisitions based on
independent appraisals, were 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 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 resulted in a decrease in
amortization expense by 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,
2004 $14.0
2005 13.7
2006 13.4
2007 13.1
2008 12.8
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 year ended March 31, 2002 would have been
approximately $29.4 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.
F-12
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVANCE LOCATION PAYMENTS
Advance location payments to location owners are paid at the inception or
renewal of a lease for the right to operate applicable laundry rooms during the
contract period, in addition to commission to be paid during the lease term and
are amortized on a straight-line basis over the contract term, which generally
ranges from 5 to 10 years. Prepaid rent is included on the balance sheet as a
component of prepaid expenses.
COMPREHENSIVE LOSS
Comprehensive loss is defined as the aggregate change in stockholder's equity
excluding changes in ownership interests. Comprehensive loss consists of losses
on derivative instruments (interest rate swap agreements).
INCOME TAXES
The Company accounts for income taxes pursuant to the liability method whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Any deferred tax assets recognized for net operating loss carryforwards
and other items are reduced by a valuation allowance when it is more likely than
not that the benefits may not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
DERIVATIVES
The Company accounts for derivatives pursuant to SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The derivatives used
by the Company are interest rate swaps designated as cash flow hedges.
The effective portion of the derivatives gain or loss is initially reported in
stockholders' equity as a component of comprehensive loss and subsequently
reclassified into earnings.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations, which is effective April
1, 2003. This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The Company has determined that the implementation
of this standard will not have a material effect on its financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, 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. The Company is
required to adopt this statement on April 1, 2003. As a result of adopting SFAS
No. 145, in future financial statement presentations the Company will classify
the extraordinary loss taken in January 2002 to continuing operations resulting
in total pre-tax loss of approximately $46.9 million for the year ended March
31, 2002.
F-13
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This standard requires costs associated with exit
or disposal activities to be recognized when they are incurred. The requirements
of SFAS No. 146 apply prospectively to activities that are initiated after
December 31, 2002, and as such, the Company cannot reasonably estimate the
impact of adopting these new rules until and unless it undertakes relevant
activities in future periods.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others, which clarifies the requirements of
SFAS No. 5, Accounting for Contingencies, relating to a guarantor's accounting
for and disclosures of certain guarantees issued. FIN 45 requires enhanced
disclosures for certain guarantees. It also will require certain guarantees that
are issued or modified after December 31, 2002, including certain third-party
guarantees, to be initially recorded on the balance sheet at fair value. For
guarantees issued on or before December 31, 2002, liabilities are recorded when
and if payments become probable and estimable. The financial statement
recognition provisions are effective prospectively, and the Company cannot
reasonably estimate the impact of adopting FIN 45 until guarantees are issued or
modified in future periods, at which time their results will be initially
reported in the financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities, which clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, relating to
consolidation of certain entities. First, FIN 46 will require identification of
the Company's participation in variable interests entities ("VIE"), which are
defined as entities with a level of invested equity that is not sufficient to
fund future activities to permit them to operate on a standalone basis, or whose
equity holders lack certain characteristics of a controlling financial interest.
Then, for entities identified as VIE, FIN 46 sets forth a model to evaluate
potential consolidation based on an assessment of which party to the VIE, if
any, bears a majority of the exposure to its expected losses, or stands to gain
from a majority of its expected returns. FIN 46 also sets forth certain
disclosures regarding interests in VIE that are deemed significant, even if
consolidation is not required. The Company has determined that the
implementation of this standard will not have a material effect on its financial
statements.
3. DEBT
Debt consists of the following (in thousands):
MARCH 31,
--------------------------
2003 2002
-------- --------
9% Senior Notes due 2010 $450,000 $450,000
Credit facility indebtedness 261,250 280,000
Obligations under capital leases 6,828 7,255
Other long-term debt with varying
terms and maturities 34 50
-------- --------
$718,112 $737,305
======== ========
F-14
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT (CONTINUED)
a. SENIOR NOTES
On January 25, 2002, the Company issued $450 million of 9% Senior Notes due 2010
(the "Private 9% Senior Notes"). The Private 9% Senior Notes were exchanged for
registered notes (the "Registered 9% Senior Notes", and together with the
Private 9% Senior Notes, the "9% Senior Notes") otherwise identical in all
respects to the Private 9% Senior Notes pursuant to a registration statement
filed by the Company with the Securities and Exchange Commission, which
registration statement was declared effective on July 15, 2002. The exchange of
the Private 9% Senior Notes for the Registered 9% Senior Notes was completed on
August 14, 2003. On January 25, 2002, the Company also entered into a new senior
secured credit facility (the "Senior Secured Credit Facility") (see Note 4b).
The Company used the net proceeds from the Private 9% Senior Notes, together
with borrowings under its Senior Secured Credit Facility to (i) redeem all of
its outstanding 11-3/4% Series C 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 with the funds that were set aside in escrow on January 25, 2002.
As of March 31, 2002, the Company recognized an extraordinary loss, net of
income taxes, of approximately $6.7 million as a result of the early
extinguishment of debt relating to the redemption of the 11-3/4% Senior Notes
and the refinancing of its prior senior credit facility. The Company also used a
portion of the net proceeds and borrowings to terminate interest rate swap
agreements entered into in connection with its prior senior credit facility (see
Note 4c). The Consolidated Statement of Operations for the year ended March 31,
2002 contains Interest Expense - escrow and interest rate swap termination
costs, which includes (i) the termination cost of the interest rate swap
agreement of approximately $4.2 million and (ii) interest paid on the 11-3/4%
Senior Notes for the period from January 25, 2002 through February 25, 2002 of
approximately $2.9 million.
Interest on the 9% Senior Notes is payable semi-annually on February 1 and
August 1, commencing August 1, 2002. The 9% Senior Notes are redeemable at the
option of the Company in whole or in part at any time or from time to time, on
or after February 1, 2006, upon not less than 30 nor more than 60 days notice at
the redemption prices set forth in the indenture agreement, dated January 25,
2002, by and between the Company and U.S. Bank, N.A. as Trustee (the
"Indenture"). The Senior Notes contain certain financial covenants and restrict
the payment of certain dividends, distributions or other payments from the
Company to CLC.
b. CREDIT FACILITY
The Company's Senior Secured Credit Facility entered into on January 25, 2002 is
comprised of an aggregate of $355 million of secured financing consisting of:
(i) a revolving credit facility which has a maximum borrowing limit of $75
million bearing interest at a monthly Eurodollar Rate plus 2.75% expiring on
January 25, 2008; (ii) a $30 million Tranche A ("Tranche A") term loan facility
bearing interest at a monthly Eurodollar Rate plus 2.75% and (iii) a $250
million Tranche B ("Tranche B") term loan facility bearing interest at a monthly
Eurodollar Rate plus 2.75%. The Senior Secured Credit Facility (revolving credit
facility portion) 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. These
interest rates are subject to change from time to time and may increase by 25
basis points or decrease up to 75 basis points based on certain financial
ratios.
In December 2002, the Company made a $15 million voluntary prepayment of amounts
owed under the term loans of its Senior Secured Credit Facility. As of March 31,
2003, there was approximately $18.3 million outstanding under Tranche A
requiring adjusted quarterly amortization payments commencing on March 31, 2004,
$243.0 million outstanding under Tranche B requiring adjusted semi-annual
amortization payments commencing on June 30, 2004, and no principal amount
outstanding on the revolving portion of the Senior Secured Credit Facility.
F-15
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT (CONTINUED)
b. CREDIT FACILITY (CONTINUED)
Interest on the Company's borrowings under the Senior Secured Credit Facility is
payable quarterly in arrears with respect to base rate loans and the last day of
each applicable interest period with respect to Eurodollar loans and at a rate
per annum not greater than the base rate or the Eurodollar rate, as defined.
Subject to certain conditions, the Company may, at its option convert base rate
loans into Eurodollar loans. At March 31, 2003, the monthly variable Eurodollar
interest rate was approximately 1.33%.
Indebtedness under the Senior Secured Credit Facility is secured by all of the
Company's real and personal property and is guaranteed by the Company's domestic
subsidiaries. Under the Senior Secured Credit Facility, the Company and CLC
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. The Senior Secured Credit Facility contains
covenants including, but not limited to, a maximum leverage ratio, a minimum
consolidated earnings before interest, taxes, depreciation and amortization
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 Secured Credit Facility limits the Company's ability to pay
dividends. At March 31, 2003, the Company was in compliance with its covenants
under the indenture governing the 9% Senior Notes and the Senior Secured Credit
Facility.
Debt outstanding under the Senior Secured Credit Facility consists of the
following (in thousands):
MARCH 31,
-------------------------
2003 2002
-------- -------
Tranche term loan A, quarterly payments
of approximately $913 commencing on
March 31, 2004, increasing to approxi-
mately $1,370 on March 31, 2006 through
January 25, 2008 (Interest rate of approx-
imately 4.08% at March 31, 2003) $18,264 $30,000
Tranche term loan B, semi-annual payments
of approximately $1,240 commencing on
June 30, 2004, increasing to approxi-
mately $6,199 on June 30, 2007 with
the final payment of approximately
$210,753 on July 25, 2009 (Interest rate
of approximately 4.08% at March 31, 2003) 242,986 250,000
Revolving line of credit - -
-------- --------
$261,250 $280,000
======== ========
In addition, as of March 31, 2003, the amount available on the revolving credit
facility portion of the Senior Secured Credit Facility was approximately $74.5
million. Letters of credit outstanding at March 31, 2003 were approximately $0.5
million.
F-16
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT (CONTINUED)
b. CREDIT FACILITY (CONTINUED)
The aggregate maturities of debt during the next five years and thereafter as of
March 31, 2003 are as follows (in thousands):
YEARS ENDING PRINCIPAL
MARCH 31, AMOUNT
----------- ---------
2004 $3,530
2005 8,485
2006 8,067
2007 8,373
2008 16,507
Thereafter 673,150
--------
Total debt $718,112
========
c. INTEREST RATE SWAPS
On September 23, 2002, the Company entered into three separate interest rate
swap agreements totaling $150 million in aggregate notional amount that
effectively converts a portion of its floating- rate term loans pursuant to the
Senior Secured Credit Facility to a fixed rate basis thus reducing the impact of
interest-rate changes on future interest expense. The three swap agreements
consist 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. 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 has recorded a loss of $2 million,
net of tax, for the year-ended March 31, 2003 related to the cash flow hedges,
as a component of comprehensive loss.
During the year ended March 31, 2002, the Company used a portion of the net
proceeds and borrowings from the 9% Senior Notes and the Senior Secured Credit
Facility to terminate all interest rate swap agreements entered into in
connection with its prior senior credit facility. The cost of terminating the
interest rate swap agreements was approximately $4.2 million which was recorded
as interest expense for the year ended March 31, 2002.
4. RETIREMENT SAVINGS PLAN
The Company maintains a defined contribution plan meeting the guidelines of
Section 401(k) of the Internal Revenue Code. Such plan requires employees to
meet certain age, employment status and minimum entry requirements as allowed by
law.
Contributions to such plan amounted to approximately $495,000 for the year ended
March 31, 2003, $487,000 for the year ended March 31, 2002, and $347,000 for the
period from July 1, 2000 to March 31, 2001 (post-transaction), $127,000 for the
period from April 1, 2000 to June 30, 2000 (pre-transaction). The Company does
not provide any other post-retirement benefits.
F-17
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The components of the Company's deferred tax liabilities and assets are as
follows (in thousands):
MARCH 31,
-----------------------
2003 2002
-------- --------
Deferred tax liabilities:
Accelerated tax depreciation and contract rights $113,436 $110,864
Other, net 1,452 925
-------- --------
114,888 111,789
-------- --------
Deferred tax assets:
Interest rate swap 1,338 --
Net operating loss carryforwards 31,848 28,906
Covenant not to compete 1,081 1,033
Other 1,000 -
-------- --------
35,267 29,939
-------- --------
Net deferred tax liability $ 79,621 $ 81,850
======== ========
The net operating loss carryforwards of approximately $78 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):
APRIL 1,
YEAR ENDED YEAR ENDED JULY 1, 2000 2000 TO
MARCH 31, MARCH 31, TO MARCH JUNE 30,
2003 2002 31, 2001 2000
---------- --------- ------------ -----------
POST- PRE-
TRANSACTION TRANSACTION
Federal $ 85 $(4,293) $(5,648) $(1,114)
State 383 (1,244) (1,557) (215)
---- -------- -------- --------
$468 $(5,537) $(7,205) $(1,329)
==== ======== ======== ========
F-18
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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):
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------ -------------
POST- PRE-
TRANSACTION TRANSACTION
Expected tax benefit $(616) $(16,372) $(11,485) $(2,093)
State tax provision (benefit), net
of federal taxes 249 (141) (1,009) (140)
Permanent book/tax differences:
Goodwill - 5,075 3,843 653
Alternative minimum tax - - 913 -
NOL expiration - 5,874 - -
Other 835 27 533 251
----- -------- -------- --------
Tax provision (benefit) $ 468 $(5,537) $(7,205) $(1,329)
===== ======== ======== ========
The incorporation of AWA and subsequent Restructuring Transactions created a tax
gain for the Company. The gain is deferred and may only be recoginized if AWA is
deconsolidated in the future. AWA has recorded a $1 million deferred tax asset
representing the benefit derived from the corresponding increase in the tax
basis of the assets it received from the Company.
6. RELATED PARTY TRANSACTIONS
The Company extended a loan to an executive officer in the principal amount of
$500,000 currently payable in ten equal annual installments ending in July 2006
(each payment date, a "Payment Date"), with interest accruing at a rate of 7.5%
per annum. The loan provides that payment of principal and interest will be
forgiven on each payment date based on certain conditions. The amounts forgiven
are charged to general and administrative expenses. The balance of such loan is
included in other assets as of March 31, 2003 and March 31, 2002, respectively.
On May 5, 1999, the Company extended a loan to an executive officer of the
Company in a principal amount of $250,000 to be repaid in a single payment on
the third anniversary of such loan with interest accruing at a rate of 8% per
annum. On March 15, 2002, the Company and the executive officer entered into a
replacement promissory note in exchange for the original note evidencing the
loan. The replacement note is in an original principal amount of $282,752, the
outstanding loan balance under the replacement note is payable in equal annual
installments of $56,550 commencing on March 15, 2003 and the obligations under
the replacement note are secured, pursuant to an amendment to the replacement
note dated March 6, 2003, by a pledge of certain preferred and common units of
Holdings held by such executive officer. The balance of such loan is included in
other assets as of March 31, 2003 and March 31, 2002.
During the year ended March 31, 2003, the Company paid a director of the Company
$180,000 for general financial advisory and investment banking services.
For the period from April 1, 2000 to June 30, 2000 (pre-transaction) the Company
recorded stock-based compensation charges of approximately $88,000, relating to
the options outstanding at that time. The Company recorded the difference
between the exercise price of all options granted and the respective initial
offering price or the fair market value of the common stock of CLC on the date
of grant as a stock-based compensation charge over the applicable vesting
period. As of March 31, 2003, there were no outstanding options.
F-19
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES
The Company's domestic subsidiaries ("Guarantor Subsidiaries") have guaranteed
the Company's 9% Senior Notes and Senior Secured Credit Facility referred to in
Note 4. 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. The condensed consolidating
balance sheet as of March 31, 2003, the condensed consolidating statements of
operations for the year ended March 31, 2003, and the condensed consolidating
statement of cash flows for the year ended March 31, 2003 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 (in thousands):
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2003
--------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Cash, receivables, inventory and
prepaid expenses $ 40,217 $ 19,406 $ - $ 59,623
Advance location payments 70,782 129 - 70,911
Land, property and equipment, net 255,814 30,872 - 286,686
Intangible assets, net 528,994 10,193 - 539,187
Intercompany loans and advances 45,188 (45,188) - -
Investment in subsidiaries (32,148) - 32,148 -
Investment in preferred stock 16,206 - (16,206) -
Other assets 40,678 244 (21,168) 19,754
--------- --------- --------- ---------
Total assets $965,731 $ 15,656 $ (5,226) $976,161
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 67,546 $ 10,516 $ (299) $ 77,763
Deferred income taxes 81,462 (1,496) (345) 79,621
Debt 717,702 21,578 (21,168) 718,112
Due to parent 50,863 - - 50,863
Preferred stock and dividends payable - 16,206 (16,206) -
Total stockholder's equity 48,158 (31,148) 32,792 49,802
--------- --------- --------- ---------
Total liabilities and stockholder's
equity $965,731 $ 15,656 $ (5,226) $976,161
========= ========= ========= ========
F-20
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS (CONTINUED)
MARCH 31, 2002
--------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY 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
Intercompany loans and advances 3,181 - (3,181) -
Investment in subsidiaries 8,371 (1,300) (7,071) -
Other assets 22,261 666 - 22,927
--------- --------- --------- ---------
Total assets $981,747 $ 17,826 $(10,252) $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 737,305 - - 737,305
Due to parent 51,852 - - 51,852
Total stockholder's equity 50,423 10,252 (10,252) 50,423
--------- --------- --------- ---------
Total liabilities and stockholder's
equity $981,747 $17,826 $(10,252) $989,321
========= ========= ========= ========
F-21
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 2003
--------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Revenues $471,443 $ 63,736 $ - $535,179
Costs and expenses 414,107 64,725 - 478,832
--------- --------- -------- ---------
Operating income (loss) 57,336 (989) - 56,347
Interest expense 53,676 4,491 - 58,167
--------- --------- -------- ---------
3,660 (5,480) - (1,820)
Income taxes 3,365 (2,253) (644) 468
--------- --------- -------- ---------
295 (3,227) 644 (2,288)
Equity in loss of subsidiaries 3,227 - (3,227) -
--------- --------- -------- ---------
(2,932) (3,227) 3,871 (2,288)
Dividend income (1,606) - 1,606 -
--------- --------- -------- ---------
Net loss $(1,326) $ (3,227) $ 2,265 $ (2,288)
======== ========= ======== =========
YEAR ENDED MARCH 31, 2002
--------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ------------
Revenues $500,476 $38,419 $ - $538,895
Costs and expenses 462,250 39,109 - 501,359
--------- -------- ------ ---------
Operating income (loss) 38,226 (690) - 37,536
Interest expense 72,298 738 - 73,036
--------- -------- ------ ---------
(34,072) (1,428) - (35,500)
Income taxes (674) (206) - (880)
--------- -------- ------ ---------
(33,398) (1,222) - (34,620)
Equity in loss of subsidiaries (1,222) - 1,222 -
--------- -------- ------ ---------
(34,620) (1,222) 1,222 (34,620)
Extraordinary item, net of income tax (6,745) - - (6,745)
--------- -------- ------ ---------
Net loss $(41,365) $(1,222) $1,222 $(41,365)
========= ======== ====== =========
F-22
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (CONTINUED)
JULY 1, 2000 TO MARCH 31, 2001 (POST-TRANSACTION)
-------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
Revenues $367,583 $26,025 $ - $393,608
Costs and expenses 347,612 26,413 - 374,025
--------- -------- ----- ---------
Operating income (loss) 19,971 (388) - 19,583
Interest expense 51,871 520 - 52,391
--------- -------- ----- ---------
(31,900) (908) - (32,808)
Income taxes (7,005) (200) - (7,205)
--------- -------- ----- ---------
(24,895) (708) - (25,603)
Equity in loss of subsidiaries (708) - 708 -
--------- -------- ---- ---------
Net loss $(25,603) $ (708) $708 $(25,603)
========= ======== ==== =========
APRIL 1, 2000 TO JUNE 30, 2000 (PRE-TRANSACTION)
-------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
Revenues $121,786 $12,256 $- $134,042
Costs and expenses 112,080 11,282 - 123,362
-------- ------- ------ ---------
Operating income 9,706 974 - 10,680
Interest expense 16,497 164 - 16,661
--------- -------- ------ ---------
(6,791) 810 - (5,981)
Income taxes (1,509) 180 - (1,329)
--------- -------- ------ ---------
(5,282) 630 - (4,652)
Equity in earnings of subsidiaries 630 - (630) -
--------- -------- ------ ---------
Net (loss) income $(4,652) $ 630 $(630) $ (4,652)
========= ======== ====== =========
F-23
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 2003
-------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ (1,326) $(3,227) $ 2,265 $ (2,288)
Noncash adjustments 95,309 7,885 - 103,194
Change in operating assets and
liabilities 4,585 (817) - 3,768
--------- -------- ------- ---------
Net cash provided by operating
activities 98,568 3,841 2,265 104,674
--------- -------- ------- ---------
INVESTING ACTIVITIES
Investment in and advances to
Subsidiaries 2,265 - (2,265) -
Capital expenditures (77,163) (9,522) - (86,685)
Acquisition of assets (1,776) (200) - (1,976)
Sale of investment 6,585 - - 6,585
Sale of property and equipment - 746 - 746
--------- -------- ------- ---------
Net cash used in investing activities (70,089) (8,976) (2,265) (81,330)
--------- -------- ------- ---------
FINANCING ACTIVITIES
Proceeds from debt 18,000 - - 18,000
Repayment of debt (36,750) - - (36,750)
Other financing items (11,535) 6,549 - (4,986)
--------- -------- ------- ---------
Net cash (used in) provided by
financing activities (30,285) 6,549 - (23,736)
--------- -------- ------- ---------
Net (decrease) increase in cash and
cash equivalents (1,806) 1,414 - (392)
Cash and cash equivalents, beginning
of year 27,860 (40) - 27,820
--------- -------- ------- ---------
Cash and cash equivalents, end of year $ 26,054 $ 1,374 $ - $ 27,428
========= ======== ======= =========
F-24
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31, 2002
-------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss $(41,365) $(1,222) $1,222 $(41,365)
Noncash adjustments 136,347 1,485 - 137,832
Change in operating assets and
liabilities (13,679) (4,133) - (17,812)
--------- -------- ------- ---------
Net cash provided by (used in)
operating activities 81,303 (3,870) 1,222 78,655
--------- -------- ------- ---------
INVESTING ACTIVITIES
Investment in and advances to
Subsidiaries 1,222 - (1,222) -
Capital expenditures (79,415) (49) - (79,464)
Acquisition of assets (3,723) - - (3,723)
Sale of property and equipment 932 - - 932
--------- -------- ------- ---------
Net cash used in investing activities (80,984) (49) (1,222) (82,255)
--------- -------- ------- ---------
FINANCING ACTIVITIES
Proceeds from debt 769,489 - - 769,489
Repayment of debt (731,475) - - (731,475)
Other financing items (36,188) 3,735 - (32,453)
--------- -------- ------- ---------
Net cash provided by financing
activities 1,826 3,735 - 5,561
--------- -------- ------- ---------
Net increase (decrease) in cash and
cash equivalents 2,145 (184) - 1,961
Cash and cash equivalents, beginning
of year 25,418 441 - 25,859
--------- -------- ------- ---------
Cash and cash equivalents, end of year $ 27,563 $ 257 $ - $ 27,820
========= ======== ======= =========
F-25
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
JULY 1, 2000 TO MARCH 31, 2001
-------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss $(25,603) $ (708) $ 708 $(25,603)
Noncash adjustments 95,227 496 - 95,723
Change in operating assets and
liabilities 2,104 (269) - 1,835
--------- ------- ------ ---------
Net cash provided by (used in)
operating activities 71,728 (481) 708 71,955
--------- ------- ------ ---------
INVESTING ACTIVITIES
Investments in and advances to
Subsidiaries 708 - (708) -
Capital expenditures (60,573) (47) - (60,620)
Acquisition of assets (1,251) (4,331) - (5,582)
--------- ------- ------ ---------
Net cash used in investing activities (61,116) (4,378) (708) (66,202)
FINANCING ACTIVITIES
Proceeds from debt 27,242 - - 27,242
Repayment of debt (23,082) - - (23,082)
Other financing items (11,495) 2,864 - (8,631)
--------- ------- ------ ---------
Net cash (used in) provided by
financing activities (7,335) 2,864 - (4,471)
--------- ------- ------ ---------
Net increase (decrease) in cash and
cash equivalents 3,277 (1,995) - 1,282
Cash and cash equivalents, beginning
of period 22,141 2,436 - 24,577
--------- ------- ------ ---------
Cash and cash equivalents, end of
period $ 25,418 $ 441 $ - $ 25,859
========= ======= ====== =========
F-26
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
APRIL 1, 2000 TO JUNE 30, 2000
--------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net (loss) income $ (4,652) $ 630 $(630) $ (4,652)
Noncash adjustments 29,299 595 - 29,894
Change in operating assets and
liabilities (8,111) 276 - (7,835)
--------- ------- ------ ---------
Net cash provided by operating
Activities 16,536 1,501 (630) 17,407
--------- ------- ------ ---------
INVESTING ACTIVITIES
Investments in and advances to
Subsidiaries (630) - 630 -
Capital expenditures (24,210) (63) - (24,273)
--------- ------- ------ ---------
Net cash used in investing activities (24,840) (63) 630 (24,273)
--------- ------- ------ ---------
FINANCING ACTIVITIES
Proceeds from debt 15,500 - - 15,500
Repayment of debt (6,349) - - (6,349)
Other financing items (1,304) 422 - (882)
--------- ------- ------ ---------
Net cash provided by financing
activities 7,847 422 - 8,269
--------- ------- ------ ---------
Net (decrease) increase in cash and
cash equivalents (457) 1,860 - 1,403
Cash and cash equivalents, beginning
of period 22,598 576 - 23,174
--------- ------- ------ ---------
Cash and cash equivalents, end of
period $ 22,141 $2,436 $ - $ 24,577
========= ======= ====== =========
F-27
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Rental expense for all operating leases, which principally cover office and
warehouse facilities, laundromats and vehicles, was approximately $8,649 for the
year ended March 31, 2003, $8,136 for year ended March 31, 2002, $5,877 for the
period from July 1, 2000 to March 31, 2001 (post-transaction), and $2,026 for
the period from April 1, 2000 to June 30, 2000 (pre-transaction).
Future minimum rental commitments under all capital leases and noncancelable
operating leases as of March 31, 2003 are as follows (in thousands):
CAPITAL OPERATING
------- ---------
2004 $2,965 $8,211
2005 2,620 6,970
2006 1,646 6,040
2007 395 4,597
2008 - 3,006
Thereafter - 5,081
------ -------
Total minimum lease payments 7,626 $33,905
Less amounts representing interest 798 =======
------
$6,828
======
The Company utilizes third party letters of credit to guarantee certain business
transactions, primarily certain insurance activities. The total amount of the
letters of credit at March 31, 2003 and March 31, 2002 were approximately $0.5
million and $1.0 million, respectively.
On November 18, 1999, K. Reed Hinrichs v. Stephen R. Kerrigan, et al., a
purported class action lawsuit, was filed in the Delaware Court of Chancery,
Newcastle County naming CLC, GTCR Fund IV, GTCR Golder Rauner, L.L.C. and
certain of its executive officers as defendants. Plaintiffs allege that the
defendants' proposal to acquire between 80% and 90% of the Common Stock for
$13.00 per share was inadequate and that the defendants breached their fiduciary
duty to the CLC's public shareholders. The matter was stayed by mutual agreement
of the parties due to the subsequent consummation of the Going Private
Transaction (see Note 1). This class action lawsuit was dismissed pursuant to a
notice and order of dismissal filed by the plaintiff with the Delaware County
Chancery Court on October 20, 2000.
The Company is a 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
financial condition, results of operations or cash flows of the Company.
In connection with insurance coverages, which include workers' compensation,
general liability and other coverages, annual premiums are subject to limited
retroactive adjustment based on actual loss experience.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate the value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques.
F-28
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts of cash and cash equivalents, receivables, the Senior
Secured Credit Facility, and other long-term debt approximate their fair value
at March 31, 2003.
The carrying amount and related estimated fair value for the 9% Senior Notes are
as follows (in thousands):
ESTIMATED FAIR
CARRYING AMOUNT VALUE
--------------- --------------
9% Senior Notes at March 31, 2003 $450,000 $468,000
9% Senior Notes at March 31, 2002 $450,000 $463,500
The fair value of the 9% Senior Notes are based on quoted market prices.
10. SEGMENT INFORMATION
The Company reports segment information for its only reportable segment, the
route segment, and provides information for its non-reportable segments as "All
other". The route segment, 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
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 jointly-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 service contracts
through the Company's wholly-owned subsidiary, Super Laundry. Prior to the
quarter ending September 30, 2001, the "All Other" segment included the
operations of the Company's retail laundromats. The Company's segment
information for all periods presented has been restated to combine the Company's
operation of the retail laundromats with the route segment as this is more
representative of its core business. The Company evaluates performance and
allocates resources based on EBITDA (earnings from continuing operations before
interest, taxes, depreciation and amortization and other items, net), cash flow
and growth opportunity. The accounting policies of the segments are the same as
those described in Note 2, Summary of Significant Accounting Policies.
The table below presents information about the Company's segments (in
thousands):
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------- -------------
POST- PRE-
TRANSACTION TRANSACTION
Revenue:
Route $471,443 $478,106 $353,483 $117,561
All other:
Distribution 34,993 38,419 26,026 12,256
Rental 28,743 22,370 14,099 4,225
-------- --------- -------- --------
Subtotal other 63,736 60,789 40,125 16,481
-------- --------- -------- --------
Total $535,179 $538,895 $393,608 $134,042
======== ======== ======== ========
F-29
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------- -------------
POST- PRE-
TRANSACTION TRANSACTION
EBITDA:
Route $158,938 $165,999 $123,005 $41,437
All other 9,702 9,770 6,046 2,944
Reconciling item:
Corporate expenses (8,569) (8,704) (6,741) (2,144)
--------- --------- --------- --------
Total $160,071 $167,065 $122,310 $42,237
========= ========= ========= ========
Depreciation and amortization
expense:
Route $94,489 $104,448 $84,728a $27,860
All other 7,746 7,961 5,357 1,590
Reconciling item:
Amortization of goodwill and
depreciation 1,943 17,120 12,642 2,107
--------- --------- --------- --------
Total $104,178 $129,529 $102,727 $31,557
========= ========= ========= ========
Income before taxes and
extraordinary item:
Route $ 64,449 $61,551 $38,277 $13,577
All other 1,956 1,809 689 1,354
--------- --------- --------- --------
Subtotal 66,405 63,360 38,966 14,931
Reconciling items:
Corporate expense (8,569) (8,704) (6,741) (2,144)
Amortization of goodwill and
Depreciation (1,943) (17,120) (12,642) (2,107)
Other items, net 454 - - -
Interest expense (58,167) (73,036) (52,391) (16,661)
--------- --------- --------- --------
Loss before income taxes and
extraordinary item $(1,820) $(35,500) $(32,808) $(5,981)
========= ========= ========= ========
a. July 1, 2000 to March 31, 2001 (post transaction) route depreciation and
amortization expense includes $5.9 million representing the value of contract
rights relating to locations not renewed.
NON-GAAP FINANCIAL MEASURES
Management shows EBITDA (earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization and other items), a
non-GAAP financial measure, in its financial reports and believes that EBITDA is
useful as a means to evaluate the Company's ability to service existing debt, to
sustain potential future increases in debt and to satisfy capital requirements.
In addition, because the Company has historically provided EBITDA to investors,
it believes that presenting this non-GAAP financial measure provides consistency
in its financial reporting. EBITDA is also used to determine the Company's
compliance with key financial covenants under its financing agreements, which,
among other things, impacts the amount of indebtedness the Company is
F-30
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
NON-GAAP FINANCIAL MEASURES (CONTINUED)
permitted to incur. 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) as an indicator of operating performance or (b) cash flows from
operating, investing and financing activities (as determined by accounting
principles generally accepted in the United States) as a measure of liquidity.
Given that EBITDA is not a measurement determined in accordance with accounting
principles generally accepted in the United States and is thus susceptible to
varying calculations, EBITDA may not be comparable to other similarly titled
measures of other companies. The following table reconciles the Company's EBITDA
to net loss for each period presented (in thousands):
YEAR ENDED YEAR ENDED JULY 1, 2000 APRIL 1, 2000
MARCH 31, MARCH 31, TO MARCH 31, TO JUNE 30,
2003 2002 2001 2000
---------- ---------- ------------- -------------
POST- PRE-
TRANSACTION TRANSACTION
Expenditures for acquisitions
and additions of
long-lived assets:
Route $78,939 $74,350 $55,039 $21,440
All other 9,722 8,837 11,163 2,833
------- ------- ------- -------
Total $88,661 $83,187 $66,202 $24,273
======= ======= ======= =======
Segment assets:
Route $947,588 $956,438 $992,024
All other 14,516 15,113 14,074
Corporate assets 14,083 17,770 7,976
-------- -------- ----------
Total $976,187 $989,321 $1,014,074
======== ======== ==========
11. OTHER ITEMS, NET
In October 2002, CLC contributed its ownership interest in Resident 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 (the "RDI Sale"), 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.
In addition to the cash proceeds received from the RDI Sale, the Company may be
entitled to additional funds relating to $5.0 million that was placed in escrow
by the purchasing company subject to among other things certain working capital
adjustments and customary indemnification obligations being satisfied. In
addition, approximately $1.8 million of additional funds may also be distributed
relating to the RDI Sale based on continued employment of certain management
members of RDI. These funds are also subject to the Company's ownership
percentage, equivalent to approximately 32%, and are scheduled to be paid in
equal installments in both October 2003 and October 2004. Amounts received from
the escrow funds or the additional funds will be recorded as income when it
becomes probable the Company will receive such funds and the amounts can be
reasonably estimated. However, there can be no assurance that the Company will
receive such funds.
Offsetting the gain on the sale of RDI was approximately $2.8 million of various
expenses related to (i) professional fees incurred in connection with the
Restructuring Transactions, including the transfer of the Appliance Warehouse
division to AWA and the formation of Holdings, (ii) organizational costs related
to the formation of ALFC and (iii) certain expenses associated with the
consolidation of certain offices of the Super Laundry business which was the
result of several actions taken by the Company to reduce operating costs in
Super Laundry. These actions included, among other things, the closing of
operations in Northern California, New Jersey and Maryland, reassignment of
F-31
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER ITEMS, NET (CONTINUED)
various responsibilities among its remaining management team, the write-off
inventory due to obsolescence and the write-off of various receivable balances,
none of which are material individually, which the Company has chosen not to
pursue.
F-32
COINMACH CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE --DESCRIBE PERIOD
- --------------------------------------------------- ----------- ----------- ---------- ---------- ----------
Year ended March 31, 2003:
Reserves and allowances deducted from asset
accounts: Allowance for uncollected accounts $1,342,000 $1,188,358 (977,358) $1,553,000
Year ended March 31, 2002:
Reserves and allowances deducted from asset
accounts: Allowance for uncollected accounts 998,000 754,555 (410,555) 1,342,000
Period from July 1, 2000 to March 31, 2001:
Reserves and allowances deducted from asset
accounts: Allowance for uncollected accounts 723,717 602,795 (328,512) 998,000
Period from April 1, 2000 to June 30, 2000:
Reserves and allowances deducted from asset
accounts: Allowance for uncollected accounts 638,000 144,047 (58,330) 723,717
F-33
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of Coinmach Corporation
("Coinmach") (incorporated by reference from exhibit 3.1 to
Coinmach's Form 10-K for the transition period from September 30,
1995 to March 29, 1996, file number 0-7694)
3.2* Amended and Restated Bylaws of Coinmach
4.1 Indenture, dated as of January 25, 2002, by and between Coinmach,
as Issuer, and U.S. Bank, N.A., as Trustee (incorporated by
reference from exhibit number 4.8 to Coinmach's report on Form
10-Q for the nine-month period ended December 31, 2001)
4.2 Registration Rights Agreement, dated as of January 25, 2002, by
and between Coinmach, the Guarantors (as defined therein) and the
Initial Purchasers (as defined therein) (incorporated by
reference from exhibit number 4.9 to Coinmach's report on
Form 10-Q for the nine-month period ended December 31, 2001)
4.3 Form of 9% Senior Note (included as an exhibit to Exhibit 4.1
hereto) (incorporated by reference from exhibit number 4.10
to Coinmach's report on Form 10-Q for the nine-month period ended
December 31, 2001)
10.1 Purchase Agreement, dated as of January 31, 1995, by and among
The Coinmach Corporation ("TCC"), CIC I Acquisition Corp.
("CIC"), the stockholders of CIC and Coinmach Holdings Corp.
(incorporated by reference from exhibit number 10.1 to Coinmach's
Registration Statement on Form S-1, file number 333-00620)
10.2 Equity Purchase Agreement, dated as of January 31, 1995, by and
between TCC and Golder, Thoma, Cressey, Rauner Fund IV, L.P.
("GTCR"), subsequently amended by the Omnibus Agreement (as
hereinafter defined) (incorporated by reference from exhibit
number 10.2 to Coinmach's Registration Statement on Form S-1,
file number 333-00620)
10.3 Investor Purchase Agreement, dated as of January 31, 1995, by and
between TCC, GTCR, MCS Capital Management, Inc. and Stephen R.
Kerrigan, subsequently amended by the Omnibus Agreement (as
hereinafter defined) (incorporated by reference from exhibit
number 10.4 to Coinmach's Registration Statement on Form S-1,
file number 333-00620)
10.4 Stock Pledge Agreement, dated as of January 31, 1995, by and
between TCC and MCS Capital, Inc. ("MCS") (incorporated by
reference from exhibit number 10.5 to Coinmach's Registration
Statement on Form S-1, file number 333-00620)
10.5 Stock Pledge Agreement, dated as of January 31, 1995, by and
between TCC and Mitchell Blatt (incorporated by reference from
exhibit number 10.6 to Coinmach's Registration Statement on
Form S-1, file number 333-00620)
10.6 Promissory Note, dated January 31, 1995, of MCS in favor of TCC,
subsequently amended by the Omnibus Agreement (as hereinafter
defined) (incorporated by reference from exhibit number 10.7 to
Coinmach's Registration Statement on Form S-1, file number
333-00620)
10.7 Promissory Note, dated January 31, 1995, of Mitchell Blatt in
favor of TCC, subsequently amended by the Omnibus Agreement (as
hereinafter defined) (incorporated by reference from exhibit
number 10.8 to Coinmach's Registration Statement on Form
S-1, file number 333-00620)
1
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.8* Senior Management Agreement, dated as of March 6, 2003, by and
among Coinmach, Coinmach Holdings, LLC ("Holdings"), MCS Capital
Inc. ("MCS") and Stephen R. Kerrigan
10.9* Senior Management Agreement, dated as of March 6, 2003,
by and among Coinmach, Holdings and Mitchell Blatt
10.10* Senior Management Agreement, dated March 6, 2003, by and among
Coinmach, Holdings and Robert M. Doyle
10.11 Employment Agreement, dated as of July 1, 1995, by and between
Solon, Michael E. Stanky and GTCR (incorporated by reference from
exhibit number 10.14 to Coinmach's Registration Statement on Form
S-1, file number 333-00620)
10.12 Omnibus Agreement, dated as of November 30, 1995, among SAS,
Solon, TCC and each of the other parties executing a signature
page thereto (the "Omnibus Agreement") (incorporated by reference
from exhibit number 10.20 to Coinmach's Registration Statement on
Form S-1, file number 333-00620)
10.13 First Amendment to Stock Purchase Agreement, dated as of January
8, 1997 (incorporated by reference from exhibit 10.3 to
Coinmach's Form 10-Q for the quarterly period ended December 27,
1996, file number 0-7694)
10.14 Registration Rights Agreement, dated as of March 14,
1997, between Coinmach and Atlanta Washer & Dryer Leasing, Inc.
(incorporated by reference from exhibit 10.33 to Coinmach's Form
10-K for the fiscal year ended March 28, 1997, file number
0-7694)
10.15 Senior Management Employment Agreement, dated as of December 17,
2000, by and between Coinmach and John E. Denson (incorporated by
reference from exhibit number 10.19 to Coinmach's Registration
Statement on Form S-4, file number 333-86998)
10.16 Promissory Note, dated February 11, 1997, of Stephen R. Kerrigan
in favor of Coinmach (incorporated by reference from exhibit
10.35 to Coinmach's Form 10-K for the fiscal year ended March 28,
1997, file number 0-7694)
10.17 Promissory Note, dated January 8, 1997, of Coinmach Laundry
Corporation ("Coinmach Laundry") in favor of Richard F. Enthoven,
as agent for Tamara Lynn Ford, Richard Kyle Ford, Traci Lea Ford,
Tucker F. Enthoven, Richard F. Enthoven, and Richard Franklin
Ford, Jr., Trustee u/d/t February 4, 1994 (incorporated by
reference from exhibit 10.38 to Coinmach's Form 10-K for the
fiscal year ended March 28, 1997, file number 0-7694)
10.18 Tax Cooperation Agreement, dated as of January 8, 1997, by and
among Kwik Wash Laundries, L.P., KWL, Inc., Kwik-Wash Laundries,
Inc., Coinmach and the Sellers (incorporated by reference from
exhibit 10.39 to Coinmach's Form 10-K for the fiscal year ended
March 28, 1997, file number 0-7694)
10.19 Consulting Services Agreement, dated as of January 8, 1997, by
and between Richard F. Enthoven and Coinmach (incorporated by
reference from exhibit 10.40 to Coinmach's Form 10-K for the
fiscal year ended March 28, 1997, file number 0-7694)
10.20 Credit Agreement dated January 25, 2002, among Coinmach, Coinmach
Laundry, the Subsidiary Guarantors party thereto, the Lending
Institutions listed therein, Bankers Trust, Deutsche Bank Alex.
Brown Inc., J.P. Morgan Securities Inc., First Union Securities,
Inc. and Credit Lyonnais New York Branch (incorporated by
reference from exhibit number 10.24 to Coinmach's Registration
Statement on Form S-4, file number 333-86998)
2
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.21 Holdings Pledge Agreement, dated January 25, 2002, made by
Coinmach Laundry to Bankers Trust (incorporated by reference from
exhibit number 10.25 to Coinmach's Registration Statement on Form
S-4, file number 333-86998)
10.22 Credit Party Pledge Agreement, dated January 25, 2002, made by
Coinmach and each of the Guarantors party thereto to Bankers
Trust (incorporated by reference from exhibit number 10.26 to
Coinmach's Registration Statement on Form S-4, file number
333-86998)
10.23 Security Agreement, dated January 25, 2002, among
Coinmach, each of the Guarantors party thereto and Bankers Trust
(incorporated by reference from exhibit number 10.27 to
Coinmach's Registration Statement on Form S-4, file number
333-86998)
10.24 Collateral Assignment of Leases, dated January 25, 2002, by
Coinmach in favor of Bankers Trust (incorporated by reference
from exhibit number 10.28 to Coinmach's Registration Statement on
Form S-4, file number 333-86998)
10.25 Collateral Assignment of Location Leases, dated January 25, 2002,
by Coinmach in favor of Bankers Trust (incorporated by reference
from exhibit number 10.29 to Coinmach's Registration Statement on
Form S-4, file number 333-86998)
10.26 Amendment to Investor Purchase Agreement, dated January 8, 1997,
by and among Coinmach Laundry, GTCR, Heller, JNL, Harvard, MCS,
James N. Chapman, Michael E. Marrus, Mitchell Blatt and Michael
Stanky (incorporated by reference from exhibit 10.52 to
Coinmach's Form 10-K for the fiscal year ended March 28, 1997,
file number 0-7694)
10.27 Promissory Note, dated March 24, 1997, of John E. Denson in favor
of Coinmach (incorporated by reference from exhibit 10.53 to
Coinmach's Form 10-K for the fiscal year ended March 28, 1997,
file number 0-7694)
10.28 Supply Agreement, dated as of May 13, 1997, by and among
Coinmach, SLEC and Raytheon Appliances, Inc. (incorporated by
reference from exhibit 10.58 to Coinmach's Form 10-Q for the
quarterly period ended December 26, 1997, file number
0-7694) (superceded by exhibit 10.57 of this report)
10.29 Supply Agreement, dated as of May 1, 1998, by and among Coinmach,
SLEC and Raytheon Commercial Laundries, LLC (certain portions of
this exhibit were omitted pursuant to the grant of a request for
confidential treatment) (incorporated by reference from exhibit
10.75 to Coinmach's Form 10-K for the fiscal year ended
March 31, 1998, file number 0-7694)
10.30 Purchase Agreement, dated as of January 17, 2002, by and among
Coinmach, as Issuer, the Guarantors (as defined therein), and the
Initial Purchasers (as defined therein) (incorporated by
reference from exhibit number 10.59 to Coinmach's report on Form
10-Q for the nine-month period ended December 31, 2001)
10.31* Registration Agreement, dated as of March 6, 2003, by and among
Holdings, GTCR-CLC, LLC ("GTCR-CLC"), MCS, Stephen R. Kerrigan,
Mitchell Blatt, Robert M. Doyle, Michael E. Stanky, James N.
Chapman, and the investors named therein
10.32* Securityholders Agreement, dated as of March 6, 2003, by and
among Holdings, GTCR-CLC, Jefferies & Company, Inc., MCS, Stephen
R. Kerrigan, Mitchell Blatt, Robert M. Doyle, Michael E. Stanky,
James N. Chapman, and the investors named therein
3
10.33* Management Contribution Agreement, dated as of March 5, 2003, by
and among Holdings, MCS, Stephen R. Kerrigan and Coinmach Laundry
10.34* Management Contribution Agreement, dated as of March 5, 2003, by
and between Holdings and Mitchell Blatt
10.35* Management Contribution Agreement, dated as of March 5, 2003, by
and between Holdings and Robert M. Doyle
10.36* Management Contribution Agreement, dated as of March 5, 2003, by
and between Holdings and Michael E. Stanky
10.37* Management Contribution Agreement, dated as of March 5, 2003,
by and between Holdings and James N. Chapman
10.38* Amended and Restated Promissory Note, by and between MCS, as
borrower, and Coinmach Laundry, dated March 6, 2003
10.39* Amended and Restated Promissory Note, by and between
Mitchell Blatt, as borrower, and Coinmach Laundry, dated
March 6, 2003
10.40* Amended and Restated Promissory Note, by and between
Robert M. Doyle as borrower, and Coinmach Laundry, dated
March 6, 2003
10.41* Amended and Restated Promissory Note, by and between
Michael E. Stanky, as borrower, and Coinmach Laundry,
dated March 6, 2003
10.42* Amended and Restated Promissory Note, by and between
John E. Denson, as borrower, and Coinmach Laundry, dated
March 6, 2003
10.43* Replacement Promissory Note, by and between Mitchell Blatt,
as borrower, and Coinmach, dated March 15, 2002 and amendment
dated March 6, 2003
12.1 Statement re Computation of Earnings to Fixed Charges
(incorporated by reference from exhibit number 12.1 to
Coinmach's Registration Statement on Form S-4,
file number 333-86998)
21.1* Subsidiaries of Coinmach Corporation
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
- ---------
*Filed herewith.
4