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COINMACH CORPORATION AND SUBSIDIARIES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the period ended September 30, 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
(Exact name of registrant as specified in its charter)
Delaware 53-0188589
---------------------- ----------------
(State or other jurisdiction of (I. R. S.Employer
incorporation or organization) Identification No.)
303 Sunnyside Blvd., Suite 70, Plainview, New York 11803
- -------------------------------------------------- ----------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (516) 349-8555
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X .
As of the close of business on November 4, 2003, Coinmach Corporation had
outstanding 100 shares of common stock, par value $.01 per share (the "Common
Stock"), all of which shares were held by Coinmach Laundry Corporation.
1
COINMACH CORPORATION AND SUBSIDIARIES
INDEX
PART I.
Financial Information Page No.
- --------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2003 (Unaudited) and March 31, 2003 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months and Six Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
PART II.
Other Information
- -----------------
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signature Page 35
- --------------
2
COINMACH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
September 30, 2003 March 31, 2003(1)
------------------ ---------------
(Unaudited)
ASSETS:
Cash and cash equivalents $27,024 $27,428
Receivables, net 8,557 10,453
Inventories 16,255 14,125
Prepaid expenses 6,095 7,617
Advance location payments 74,534 70,911
Land, property and equipment, net of
accumulated depreciation of $218,386 and
$182,474 289,887 286,686
Contract rights, net of accumulated
amortization of $80,037 and $73,027 328,317 335,327
Goodwill 203,904 203,860
Other assets 19,230 19,754
-------- --------
Total assets $973,803 $976,161
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable and accrued expenses $33,214 $36,843
Accrued rental payments 30,368 29,481
Accrued interest 8,093 8,094
Interest rate swap liability 3,846 3,345
Deferred income taxes 77,968 79,621
Long-term debt 723,735 718,112
Due to Parent 50,572 50,863
Stockholder's equity:
Common stock and capital in excess of
par value 121,065 121,065
Accumulated other comprehensive loss,
net of tax (2,278) (2,007)
Accumulated deficit (72,780) (69,256)
-------- --------
Total stockholder's equity 46,007 49,802
-------- --------
Total liabilities and stockholder's equity $973,803 $976,161
======== ========
See accompanying notes.
- ------
1. The March 31, 2003 balance sheet has been derived from the audited
consolidated financial statements as of that date.
3
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands of dollars)
Three Months Ended Six Months Ended
--------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
--------- ------- --------- -------
REVENUES $129,951 $131,871 $262,468 $268,165
COSTS AND EXPENSES:
Laundry operating expenses 89,699 89,286 180,570 181,804
General and administrative 1,868 2,026 4,077 4,068
Depreciation and
amortization 26,999 25,974 53,911 51,868
--------- ------- --------- -------
118,566 117,286 238,558 237,740
--------- ------- --------- -------
OPERATING INCOME 11,385 14,585 23,910 30,425
INTEREST EXPENSE, NET 14,392 14,477 28,708 28,948
--------- ------- --------- -------
(LOSS) INCOME BEFORE INCOME TAXES (3,007) 108 (4,798) 1,477
(BENEFIT) PROVISION FOR INCOME
TAXES (610) 44 (1,274) 592
--------- ------- --------- -------
NET (LOSS) INCOME $ (2,397) $ 64 $ (3,524) $ 885
========= ======= ========= =======
See accompanying notes.
4
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
Six Months Ended
----------------------------
September 30, September 30,
2003 2002
------------ -------------
OPERATING ACTIVITIES:
Net (loss) income $(3,524) $ 885
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities:
Depreciation and amortization 36,038 33,467
Amortization of advance location payments 10,360 10,948
Amortization of intangibles 7,513 7,453
Gain on sale of equipment (46) (164)
Deferred income taxes (1,423) 592
Amortization of deferred issue costs 1,207 1,220
Change in operating assets and liabilities:
Other assets (1,184) (495)
Receivables, net 1,896 611
Inventories and prepaid expenses (608) (576)
Accounts payable and accrued expenses, net (4,388) 1,030
Accrued interest (1) (171)
------- -------
Net cash provided by operating activities 45,840 54,800
------- -------
INVESTING ACTIVITIES:
Additions to property and equipment (36,539) (36,908)
Advance location payments to location owners (12,337) (9,544)
Proceeds from sale of property and equipment 204 491
------- -------
Net cash used in investing activities (48,672) (45,961)
------- -------
FINANCING ACTIVITIES:
Proceeds from credit facility 8,200 6,000
Repayments to credit facility (4,000) (9,750)
Net repayments to Parent (291) (729)
Borrowings (repayments) of bank and other
borrowings 599 (8)
Principal payments on capitalized lease
obligations (2,080) (2,017)
------- -------
Net cash provided by (used in) financing
activities 2,428 (6,504)
------- -------
Net (decrease) increase in cash and cash
equivalents (404) 2,335
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,428 27,820
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $27,024 $30,155
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net $27,529 $27,963
======= =======
Income taxes paid $ 239 $ 177
======= =======
NON-CASH FINANCING ACTIVITIES:
Acquisition of fixed assets through capital
leases $ 2,904 $ 1,681
======= =======
5
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Coinmach Corporation, a Delaware corporation ("Coinmach" or the
"Company"), is the leading supplier of outsourced laundry services for
multi-family housing properties in North America. The condensed consolidated
financial statements of Coinmach include the accounts of all of its
subsidiaries. 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. 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 and providing laundromat
services at retail laundromats. 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. At September 30, 2003, the
Company owned and operated approximately 875,000 laundry machines in
approximately 80,000 locations throughout North America and in 164 retail
laundromats located throughout Texas and Arizona.
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,
through its wholly-owned subsidiary American Laundry Franchising Corp. ("ALFC"),
began to build and develop laundromat facilities for sale as franchise
locations.
The contribution by AWA and CLC of all of their respective outstanding
common stock to Holdings in exchange for substantially equivalent equity
interests in Holdings in March 2003 did not result in a change in reporting
entity. The accompanying financial statements include the accounts of Coinmach
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in conformity with accounting principles
generally accepted in the United States ("GAAP") for interim financial reporting
and pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, such financial statements do not include all of the
information and footnotes required by GAAP for complete financial statements.
GAAP requires the Company's management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from such estimates.
6
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. Basis of Presentation (continued)
The interim results presented herein are not necessarily indicative of the
results to be expected for the entire year.
In the opinion of management of the Company, these unaudited condensed
consolidated financial statements contain all adjustments of a normal recurring
nature necessary for a fair presentation of the financial statements for the
interim periods presented. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2003. Certain amounts in the financial statements have been
reclassified for presentation purposes.
2. Goodwill and Contract Rights
Goodwill roll forward for the six months ended September 30, 2003 consists
of the following (in thousands):
Excess costs of investments over net
assets acquired - beginning of period $203,860
Acquisitions 44
--------
Excess costs of investments over net
assets acquired - end of period $203,904
========
The Company completed its most recent goodwill impairment test as of
December 31, 2002. The test involved the assessment of the fair market value of
the Company's segments. No impairment of goodwill was indicated at that time.
Under Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, the Company is required to perform goodwill impairment
tests on at least an annual basis or more frequently if circumstances dictate.
The annual impairment test for the 2004 fiscal year will be completed by the
Company's fiscal year end. There can be no assurances that future goodwill
impairment tests will not result in a charge to income.
Contract rights represent the value of location contracts arising from the
acquisition of laundry machines on location. These amounts arose primarily from
purchase price allocations pursuant to acquisitions based on independent
valuations. The Company does not record contract rights relating to new
locations signed in the ordinary course of business. Such contract rights are
amortized using accelerated methods over periods ranging from 30-35 years.
7
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. Goodwill and Contract Rights (continued)
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 (remaining balance) $7.0
2005 13.7
2006 13.4
2007 13.1
2008 12.8
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.
3. Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30, March 31,
2003 2003
------------- ---------
9% Senior Notes due 2010 $450,000 $450,000
Credit facility indebtedness 265,450 261,250
Obligations under capital
leases 7,652 6,828
Other 633 34
-------- --------
$723,735 $718,112
======== ========
On January 25, 2002, the Company issued $450 million of 9% Senior Notes
due 2010 (the "9% Senior Notes") and entered into a $355 million senior secured
credit facility (the "Senior Credit Facility") comprised of: (i) $280 million in
aggregate principal amount of term loans and (ii) a revolving credit facility
with a maximum borrowing limit of $75 million. The revolving credit portion of
the Senior Credit Facility includes up to $10 million of letter of credit
financings and short term borrowings under a swing line facility of up to $7.5
million. The Senior Credit Facility is secured by substantially all of the
Company's assets and is guaranteed by the Company's domestic subsidiaries. In
addition, CLC and the Company pledged to Bankers Trust Company, as Collateral
Agent, their interests in all of the issued and outstanding shares of capital
stock of the Company and the Company's domestic subsidiaries.
8
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. Long-Term Debt (continued)
At September 30, 2003, the Company had outstanding debt consisting of (a)
$450 million of 9% Senior Notes and (b) $261.3 million of term loans with
interest rates ranging from 3.87% to 4.12%. The term loans under the Senior
Credit Facility, in aggregate principal amounts outstanding of $18.3 million and
$243.0 million as of September 30, 2003, are scheduled to be fully repaid by
January 25, 2008 and July 25, 2009, respectively. As of September 30, 2003, the
Company had approximately $4.2 million outstanding under its revolving credit
facility, bearing interest at a rate of 3.87%, which is scheduled to expire on
January 25, 2008.
In addition to certain customary terms and provisions, including events of
default and customary representations, covenants and agreements, the Senior
Credit Facility contains certain restrictive covenants including, but not
limited to, a maximum leverage ratio, a minimum consolidated interest coverage
ratio and limitations on indebtedness, capital expenditures, advances,
investments and loans, mergers and acquisitions, dividends, stock issuances and
transactions with affiliates. Also, the indenture governing the 9% Senior Notes
and the Senior Credit Facility limit the Company's ability to pay dividends. At
September 30, 2003, the Company was in compliance with the covenants under the
indenture governing the 9% Senior Notes and the Senior Credit Facility.
On September 23, 2002, the Company entered into three separate interest
rate swap agreements totaling $150 million in aggregate notional amount that
effectively convert a portion of its floating-rate term loans pursuant to the
Senior Credit Facility to a fixed rate basis thereby 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 recognized an accumulated other
comprehensive loss in the stockholder's equity section included in the condensed
consolidated balance sheet at September 30, 2003 of approximately $2.3 million,
net of tax, relating to the interest rate swaps that qualify as cash flow
hedges.
9
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
4. 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. In March
2003, through a series of transactions, all of the outstanding common stock of
AWA 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 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 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 Credit Facility.
5. Guarantor Subsidiary
The Company's domestic subsidiaries (collectively, the "Guarantor
Subsidiaries") have guaranteed the Company's 9% Senior Notes and Senior Credit
Facility referred to in Note 3. The Company has not included separate financial
statements of the Guarantor Subsidiaries because the Company owns all of the
outstanding voting shares of such Guarantor Subsidiaries, and the guarantees
issued by such Guarantor Subsidiaries are full and unconditional. The condensed
consolidating balance sheet as of September 30, 2003 and March 31, 2003, the
condensed consolidating statements of operations for the three and six months
ended September 30, 2003 and the condensed consolidating statement of cash flows
for the six months ended September 30, 2003 include AWA as a Guarantor
Subsidiary, however, any prior corresponding periods do not include AWA as a
Guarantor Subsidiary.
10
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. Guarantor Subsidiary (continued)
Condensed consolidating financial information for the Company and its Guarantor
Subsidiaries is as follows:
Condensed Consolidating Balance Sheets (in thousands of dollars)
September 30, 2003
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
ASSETS
Cash, receivables, inventory and
prepaid expenses $37,342 $20,589 $ - $57,931
Advance location payments 74,429 105 - 74,534
Land, property and equipment, net 257,582 32,305 - 289,887
Intangible assets, net 522,467 9,754 - 532,221
Intercompany loans and advances 40,806 (40,806) - -
Investment in subsidiaries (26,510) - 26,510 -
Investment in preferred stock 16,007 - (16,007) -
Other assets 39,778 413 (20,961) 19,230
-------- ------- -------- --------
Total assets $961,901 $22,360 $(10,458) $973,803
======== ======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $66,344 $ 9,177 $ - $75,521
Deferred income taxes 75,116 2,852 - 77,968
Debt 723,455 21,241 (20,961) 723,735
Due to parent 50,572 - - 50,572
Preferred stock and dividends payable - 16,007 (16,007) -
Total stockholder's equity 46,414 (26,917) 26,510 46,007
-------- ------- -------- --------
Total liabilities and stockholder's
equity $961,901 $22,360 $(10,458) $973,803
======== ======= ======== ========
11
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. Guarantor Subsidiary (continued)
Condensed Consolidating Balance Sheets (in thousands of dollars)
(continued)
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 529,433 9,754 - 539,187
Intercompany loans and advances 36,729 (36,729) - -
Investment in subsidiaries (26,485) - 26,485 -
Investment in preferred stock 15,135 - (15,135) -
Other assets 39,634 243 (20,123) 19,754
-------- ------- ------- --------
Total assets $961,259 $23,675 $(8,773) $976,161
======== ======= ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $66,606 $11,157 $ - $77,763
Deferred income taxes 76,751 2,870 - 79,621
Debt 717,702 20,533 (20,123) 718,112
Due to parent 50,863 - - 50,863
Preferred stock and dividends payable - 15,135 (15,135) -
Total stockholder's equity 49,337 (26,020) 26,485 49,802
-------- ------- ------- --------
Total liabilities and stockholder's
equity $961,259 $23,675 $(8,773) $976,161
======== ======= ======= ========
12
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. Guarantor Subsidiary (continued)
Condensed Consolidating Statements of Operations (in thousands of dollars)
Three months ended September 30, 2003
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues $114,760 $15,191 $ - $129,951
Costs and expenses 103,887 14,679 - 118,566
-------- ------- ------- --------
Operating income 10,873 512 - 11,385
Interest expense 13,938 454 - 14,392
-------- ------- ------- --------
(3,065) 58 - (3,007)
Income taxes (634) 24 - (610)
-------- ------- ------- --------
(2,431) 34 - (2,397)
Equity in loss of subsidiaries (34) - 34 -
-------- ------- ------- --------
(2,397) 34 (34) (2,397)
Dividend income (470) - 470 -
-------- ------- ------- --------
Net loss $(1,927) $ 34 $ (504) $(2,397)
======== ======= ======= ========
Three months ended September 30, 2002
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues $122,755 $ 9,116 $ - $131,871
Costs and expenses 108,107 9,179 - 117,286
-------- ------- ------- --------
Operating income 14,648 (63) - 14,585
Interest expense 14,473 4 - 14,477
-------- ------- ------- --------
175 (67) - 108
Income taxes 71 (27) - 44
-------- ------- ------- --------
104 (40) - 64
Equity in earnings of subsidiaries (40) - 40 -
-------- ------- ------- --------
Net income (loss) $ 64 $ (40) $ 40 $ 64
======== ======= ======= ========
13
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. Guarantor Subsidiary (continued)
Condensed Consolidating Statements of Operations (in thousands of dollars)
Six months ended September 30, 2003
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues $232,356 $30,112 $ - $262,468
Costs and expenses 209,258 29,300 - 238,558
-------- ------- ------- --------
Operating income 23,098 812 - 23,910
Interest expense 27,853 855 - 28,708
-------- ------- ------- --------
(4,755) (43) - (4,798)
Income taxes (1,256) (18) - (1,274)
-------- ------- ------- --------
(3,499) (25) - (3,524)
Equity in loss of subsidiaries 25 - (25) -
-------- ------- ------- --------
(3,524) (25) 25 (3,524)
Dividend income (872) - 872 -
-------- ------- ------- --------
Net loss $(2,652) $ (25) $ (847) $(3,524)
======== ======= ======= ========
Six months ended September 30, 2002
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues $248,472 $19,693 $ - $268,165
Costs and expenses 218,122 19,618 - 237,740
-------- ------- ------- --------
Operating income 30,350 75 - 30,425
Interest expense 28,940 8 - 28,948
-------- ------- ------- --------
1,410 67 - 1,477
Income taxes 565 27 - 592
-------- ------- ------- --------
845 40 - 885
Equity in earnings of subsidiaries 40 - (40) -
-------- ------- ------- --------
Net income (loss) $ 885 $ 40 $ (40) $ 885
======== ======= ======= ========
14
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. Guarantor Subsidiary (continued)
Condensed Consolidating Statements of Cash Flows (in thousands of dollars)
Six months ended September 30, 2003
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $(2,652) $ (25) $ (847) $(3,524)
Noncash adjustments 49,742 3,907 - 53,649
Change in operating assets and
liabilities (2,281) (2,005) - (4,286)
-------- ------- ------- --------
Net cash provided by operating
activities 44,809 1,877 (847) 45,839
-------- ------- ------- --------
INVESTING ACTIVITIES
Investment in and advances to
subsidiaries (847) - 847 -
Capital expenditures (43,375) (5,500) - (48,875)
Sale of property and equipment - 204 - 204
-------- ------- ------- --------
Net cash used in investing activities (44,222) (5,296) 847 (48,671)
-------- ------- ------- --------
FINANCING ACTIVITIES
Other financing items (2,357) 4,785 - 2,428
-------- ------- ------- --------
Net cash (used in) provided by
financing activities (2,357) 4,785 - 2,428
-------- ------- ------- --------
Net (decrease) increase in cash and
cash equivalents (1,770) 1,366 - (404)
Cash and cash equivalents, beginning
of period 26,054 1,374 - 27,428
-------- ------- ------- --------
Cash and cash equivalents, end of
period $24,284 $ 2,740 $ - $27,024
======== ======= ======= ========
15
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. Guarantor Subsidiary (continued)
Condensed Consolidating Statements of Cash Flows (in thousands of dollars)
(continued)
Six months ended September 30, 2002
---------------------------------------------------------
Coinmach and
Non-Guarantor Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ 885 $ 40 $ (40) $ 885
Noncash adjustments 53,189 327 - 53,516
Change in operating assets and
liabilities 1,160 (761) - 399
-------- ------- ------- --------
Net cash provided by (used in)
operating activities 55,234 (394) (40) 54,800
-------- ------- ------- --------
INVESTING ACTIVITIES
Investment in and advances to
subsidiaries (40) - 40 -
Capital expenditures (46,423) (29) - (46,452)
Sale of property and equipment 491 - - 491
-------- ------- ------- --------
Net cash used in investing activities (45,972) (29) 40 (45,961)
-------- ------- ------- --------
FINANCING ACTIVITIES
Other financing items (6,793) 289 - (6,504)
-------- ------- ------- --------
Net cash (used in) provided by
financing activities (6,793) 289 - (6,504)
-------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents 2,469 (134) - 2,335
Cash and cash equivalents, beginning
of period 27,562 258 - 27,820
-------- ------- ------- --------
Cash and cash equivalents, end of
period $30,031 $ 124 $ - $30,155
======== ======= ======= ========
16
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
6. Segment Information
The Company reports segment information for the route segment, its only
reportable segment. Information for the Company's other business operations are
reported 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 other business operations
reported in "All other" include the aggregation of the rental, distribution and
franchise 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, selling service contracts and
building and developing laundromat facilities for sale as franchise locations
through the Company's subsidiaries, Super Laundry and ALFC. 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 reportable segment and other businesses are the same as those described in
the Company's Annual Report on Form 10-K for the year ended March 31, 2003.
17
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
6. Segment Information (continued)
The table below presents information about the Company's segments (in
thousands of dollars):
Three Months ended Six Months ended
September 30, September 30,
-------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- ---------
Revenue:
- --------
Route $114,761 $115,619 $232,356 $ 234,730
All other:
Distribution 7,074 9,116 14,220 19,693
Rental 8,116 7,136 15,892 13,742
-------- -------- -------- ---------
Subtotal All other 15,190 16,252 30,112 33,435
-------- -------- -------- ---------
Total $129,951 $131,871 $262,468 $ 268,165
======== ======== ======== =========
EBITDA:
- -------
Route $ 37,512 $ 39,583 $ 76,651 $ 80,483
All other 2,740 3,002 5,247 5,878
General and administrative
expenses (1,868) (2,026) (4,077) (4,068)
-------- -------- -------- ---------
Total(1) $ 38,384 $ 40,559 $ 77,821 $ 82,293
======== ======== ======== =========
(Loss) Income before taxes:
- ---------------------------
Route(2) $ 13,092 $ 15,786 $ 27,826 $ 32,970
All other(2) 742 1,246 1,277 2,365
General and administrative
expenses (1,868) (2,026) (4,077) (4,068)
Depreciation and
amortization (581) (421) (1,116) (842)
Interest expense (14,392) (14,477) (28,708) (28,948)
-------- -------- -------- ---------
(Loss) income before
taxes $ (3,007) $ 108 $ (4,798) $ 1,477
======== ======== ======== =========
- ---------------------
(1) See description of "Non-GAAP Financial Measures" immediately following this
table for a reconciliation of EBITDA to net (loss) income for the periods
indicated above.
(2) Operating income before deducting general and administrative expenses.
18
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
6. Segment Information (continued)
Non-GAAP Financial Measures
Management shows EBITDA (earnings from continuing operations before
interest, taxes, depreciation and amortization and other items, net), 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 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 GAAP) as an indicator of operating
performance or (b) cash flows from operating, investing and financing activities
(as determined by GAAP) as a measure of liquidity. Given that EBITDA is not a
measurement determined in accordance with GAAP and is thus susceptible to
varying calculations, EBITDA may not be comparable to other similarly titled
measures of other companies. The following table reconciles the Company's EBITDA
to net (loss) income for each period presented (in millions of dollars):
Three Months ended Six Months ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
------ ----- ------ -----
Net (loss) income $ (2.4) $ 0.1 $ (3.5) $ 0.9
(Benefit) provision for
income taxes (0.6) - (1.3) 0.6
Interest expense, net 14.4 14.5 28.7 28.9
Depreciation and amortization 27.0 26.0 53.9 51.9
------ ----- ------ -----
EBITDA $ 38.4 $40.6 $ 77.8 $82.3
====== ===== ====== =====
19
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
7. Income Taxes
The components of the Company's deferred tax liabilities and assets are as
follows (in thousands):
September 30, 2003 March 31, 2003
------------------ --------------
Deferred tax liabilities:
Accelerated tax depreciation and
contract rights $ 114,535 $ 113,436
Other, net 1,726 1,452
---------- ---------
116,261 114,888
---------- ---------
Deferred tax assets:
Interest rate swap 1,568 1,338
Net operating loss carryforwards 34,577 31,848
Covenant not to compete 1,148 1,081
Other 1,000 1,000
---------- ---------
38,293 35,267
---------- ---------
Net deferred tax liability $ 77,968 $ 79,621
========== =========
The net operating loss carryforwards of approximately $84.6 million, after
a reduction to reflect the limitation imposed under the provisions of the
Internal Revenue Code regarding change of ownership, expire between fiscal years
2004 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 (benefit) provision for income taxes consists of (in thousands of
dollars):
Three Months ended Six Months ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
----- ----- ------- -----
Federal $(534) $ 35 $(1,110) $ 462
State (76) 9 (164) 130
----- ----- ------- -----
$(610) $ 44 $(1,274) $ 592
===== ===== ======= =====
20
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
7. 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 of dollars):
Three Months ended Six Months ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
------ ----- ------- -----
Expected tax (benefit)
provision $(1,012) $ 38 $(1,639) $ 517
NOL valuation allowance 433 - 433 -
State tax (benefit) provision,
net of federal taxes (49) 5 (106) 84
Permanent book/tax differences 18 1 38 (9)
------ ----- ------- -----
Tax (benefit) provision $ (610) $ 44 $(1,274) $ 592
====== ===== ======= =====
The formation of AWA and related restructuring transactions created a tax
gain for the Company. The gain is deferred and may only be recognized 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.
21
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
Except for the historical information contained herein, certain matters
discussed in this document are forward-looking statements based on the beliefs
of the Company's management and are subject to certain risks and uncertainties,
including the risks and uncertainties discussed below, as well as other risks
set forth in the Company's Annual Report on Form 10-K for the year ended March
31, 2003. Should any of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's future performance and
actual results of operations may differ materially from those expected or
intended.
The Company's primary financial objective is to increase its cash flow
from operations. Cash flow from operations represents a source of funds
available to service indebtedness and for investment in both internal growth and
growth through acquisitions. The Company has experienced net losses during the
past three fiscal years. Such net losses were attributable in part to
significant non-cash charges associated with the Company's acquisitions and the
related amortization of contract rights and goodwill accounted for under the
purchase method of accounting.
The Company is principally engaged in the business of supplying outsourced
laundry services to multi-family housing properties. The Company's most
significant revenue source is its route business, which over the last three
fiscal years has accounted for approximately 90% of its revenue. Through its
route operations, the Company provides outsourced laundry equipment services to
locations by leasing laundry rooms from building owners and property management
companies, typically on a long-term, renewable basis. In return for the
exclusive right to provide these services, most of the Company's contracts
provide for commission payments to the location owners. Commission expense (also
referred to as rent expense), the Company's single largest expense item, is
included in laundry operating expenses and represents payments to location
owners. Commissions may be fixed amounts or percentages of revenues and are
generally paid monthly. In addition to commission payments, many of the
Company's leases require it to make advance location payments to location
owners, which are capitalized and amortized over the life of the applicable
leases. Through the Company's route business, the Company also currently
operates and provides laundromat services at 164 retail laundromats throughout
Texas and Arizona. The operation of retail laundromats involves leasing store
locations in desirable geographic areas, maintaining an appropriate mix of
washers and dryers at each store location and servicing the washers and dryers
at such locations. Laundry operating expenses include, in addition to commission
payments, (i) the cost of machine maintenance and revenue collection in the
route business, including payroll, parts, insurance and other related expenses,
(ii) costs and expenses incurred in maintaining the Company's retail
laundromats, including utilities and related expenses, (iii) the cost of sales
associated with the equipment distribution business and (iv) certain expenses
related to the operation of the Company's rental business.
22
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
General (continued)
- -------
In addition to its route business, the Company operates an equipment
distribution business through Super Laundry Equipment Corp. ("Super Laundry"),
its wholly-owned subsidiary. Super Laundry's business consists of constructing
and designing complete 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, commencing in September 2002, through its wholly-owned subsidiary,
American Laundry Franchising Corp. ("ALFC"), began to build and develop
laundromat facilities for sale as franchise locations. For each franchise
laundromat facility, ALFC entered into a purchase agreement and a license
agreement with the buyer whereby the buyer may use certain systems created by
ALFC to operate such facility. ALFC receives revenue primarily from the sale
price of the laundromat facility and, to a lesser extent, from an initial
franchise fee and certain other fees based on the sales from such facility.
The Company also operates an equipment rental business through Appliance
Warehouse of America, Inc. ("AWA"), a recently formed subsidiary of the Company
that is jointly-owned by the Company and Coinmach Holdings, LLC, a Delaware
limited liability company and the Company's ultimate parent ("Holdings"), which
leases laundry equipment and other household appliances and electronic items to
corporate relocation entities, owners and managers of multi-family housing
properties, and to a lesser extent, individuals and corporate relocation
entities.
Accounting Policies Involving Significant Estimates
- ---------------------------------------------------
The Company's financial statements are based on the selection and
application of significant accounting policies, which require management to make
significant estimates and assumptions. The Company believes that the following
are some of the more critical judgment areas in the application of its
accounting policies that currently affect its financial condition and results of
operations.
Revenue and cash and cash equivalents include an estimate of cash not yet
collected from laundry room locations at the end of a reporting period.
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 the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Allowance for doubtful accounts at
September 30, 2003 was approximately $1.9 million.
23
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Accounting Policies Involving Significant Estimates (continued)
- ---------------------------------------------------
The Company currently has significant deferred tax assets, which are
subject to periodic recoverability assessments. Realization of the Company's
deferred tax assets is principally dependent upon its achievement of projected
future taxable income. Management's judgments regarding future profitability may
change due to future market conditions and other factors. These changes, if any,
may require possible material adjustments to these deferred tax asset balances.
The Company has significant intangible assets related to goodwill and
other acquired intangibles. The determination of related estimated useful lives
and whether or not these assets are impaired involves significant judgments.
Changes in strategy and/or market conditions, including estimated future cash
flows, could significantly impact these judgments and require adjustments to
recorded asset balances.
Results of Operations
- ---------------------
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto and with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
COMPARISON OF THE THREE- AND SIX-MONTH PERIODS ENDED SEPTEMBER 30, 2003
AND SEPTEMBER 30, 2002
The following table sets forth the Company's revenues for the periods
indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2003 2002 Change 2003 2002 Change
------- ------- ------ ------- -------- ------
Route $ 114.8 $ 115.6 $ (0.8) $ 232.4 $ 234.7 $(2.3)
Distribution 7.1 9.1 (2.0) 14.2 19.7 (5.5)
Rental 8.1 7.2 0.9 15.9 13.8 2.1
------- ------- ------ ------- -------- ------
$ 130.0 $ 131.9 $ (1.9) $ 262.5 $ 268.2 $(5.7)
======= ======= ====== ======= ======== ======
Revenue decreased by approximately $1.9 million or 1% for the three-month
period ended September 30, 2003, as compared to the prior year's corresponding
period. Revenue decreased by approximately $5.7 million or 2% for the six-month
period ended September 30, 2003, as compared to the prior year's corresponding
period.
24
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------
Route revenue for the three months ended September 30, 2003
decreased by approximately $0.8 million or less than 1% over the prior
year's corresponding period. Route revenue for the six months ended
September 30, 2003 decreased by approximately $2.3 million or 1% from the
prior year's corresponding period. Management believes that the decrease
in route revenue for the current periods as compared to the prior year's
corresponding periods was primarily the result of increased vacancies,
which management believes became apparent during the quarter ended
September 30, 2002, related to locations in certain regions, principally
in the Southeast and Texas, as well as, to a lesser extent, a transfer of
approximately 9,000 rental machines to AWA in the prior year's
corresponding periods. This decrease was slightly offset by an improvement
in revenue due to 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 these regions increase in the future, route
revenue in such regions may continue to decrease. Any such decrease,
however, may be mitigated by the Company's geographic diversity.
Distribution revenue for the three months ended September 30, 2003
decreased by approximately $2.0 million or 22% from the prior year's
corresponding period. Distribution revenue for the six months ended
September 30, 2003 decreased by approximately $5.5 million or 28% from the
prior year's corresponding period. Sales from the distribution business
unit are sensitive to general market conditions and economic conditions
and as a result have experienced downward pressure.
Rental revenue for the three months ended September 30, 2003
increased by approximately $0.9 million or 13% over the prior year's
corresponding period. Rental revenue for the six months ended September
30, 2003 increased by approximately $2.1 million or 15% over the prior
year's corresponding period. This increase was primarily the result of
internal growth of the machine base in existing areas of operations, as
well as, to a lesser extent, the transfer of approximately 9,000 rental
machines from the route business to AWA during the prior year's
corresponding periods.
Laundry operating expenses increased by approximately $0.4 million or less
than 1% for the three-month period ended September 30, 2003, as compared to the
prior year's corresponding period. Laundry operating expenses decreased by
approximately $1.2 million or less than 1% for the six months ended September
30, 2003, as compared to the prior year's corresponding period. The increase in
laundry operating expenses for the three-month period was due primarily to
increased insurance premium costs related to both medical and general business
insurance coverage, costs associated with expansion into new markets in the
rental business and increased utility costs in the Company's retail laundromats
caused by increased natural gas prices, offset
25
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------
by a reduction in cost of sales related to the decreased revenue experienced in
the distribution business, as discussed above. This decrease in laundry
operating expenses for the six-month period was due primarily to a reduction in
cost of sales related to the decreased revenue experienced in the distribution
business, as discussed above, offset by increased insurance premium costs
related to both medical and general business insurance coverage, costs
associated with expansion into new markets in the rental business and increased
utility costs in the Company's retail laundromats. As a percentage of revenues,
laundry operating expenses were approximately 69% for both the three- and
six-month periods ended September 30, 2003, as compared to 68% for both the
three- and six-month periods ended September 30, 2002.
General and administrative expenses decreased by approximately $0.2
million for the three-month period ended September 30, 2003, as compared to the
prior year's corresponding period. General and administrative expenses remained
unchanged for the six-month period ended September 30, 2003, as compared to the
prior year's corresponding period. As a percentage of revenues, general and
administrative expenses were approximately 1.5% for the three-month period ended
September 30, 2003 and approximately 1.6% for the six-month period ended
September 30, 2003, as compared to approximately 1.6% for both the three- and
six-month periods ended September 30, 2002.
Depreciation and amortization expense increased by approximately 4% for
the three- and six-month periods ended September 30, 2003, as compared to the
prior year's corresponding periods. The increase in depreciation and
amortization expense was primarily due to depreciation expense relating to
capital expenditures required by historical increases in the Company's installed
base of machines.
Operating income margins were approximately 8.8% for the three-month
period ended September 30, 2003, as compared to approximately 11.1% for the
prior year's corresponding period. Operating income margins were approximately
9.1% for the six-month period ended September 30, 2003, as compared to
approximately 11.3% for the prior year's corresponding period. The decrease in
operating income margin was primarily due to the decreased revenue in the
distribution business as discussed above, offset by internal growth of the
machine base in the rental business.
Interest expense, net, decreased by less than 1% for the three- and
six-month periods ended September 30, 2003, as compared to the prior year's
corresponding periods. The decrease in interest expense was primarily due to
decreased borrowing levels under the Company's $355 million senior secured
credit facility (the "Senior Credit Facility"), a decrease in variable interest
rates payable under such facility resulting from a market decline in interest
rates, offset by an increase in interest expense resulting from interest rate
swap agreements entered into by the Company in September 2002 that are at a
slightly higher fixed rate compared to variable rates.
26
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------
The benefit for income taxes for the six-month period ended September 30,
2003 was approximately $1.3 million as compared to a provision for income taxes
of approximately $0.6 million for the prior year's corresponding period. The
change for the six-month period is due to the corresponding decrease in pretax
loss from approximately $4.8 million for the six-month period ended September
30, 2003 as compared to a pretax income of approximately $1.5 million for the
six-month period ended September 30, 2002. The effective tax rate for the
six-month period ended September 30, 2003 was 27% as compared to 40% for the
prior year's corresponding period. The effective tax rate for the six-month
period ended September 30, 2003 reflects changes in the amount of net operating
loss carryforwards that the Company will be able to utilize.
Net loss was approximately $3.5 million for the six-month period ended
September 30, 2003, as compared to net income of approximately $0.9 million for
the prior year's corresponding period. The increase in net loss was primarily
the result of decreased revenue, as discussed above.
The following table sets forth EBITDA (before deducting general and
administrative expenses) for each of the route, distribution and rental
divisions for the years indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2003 2002 Change 2003 2002 Change
----- ------ ------ ----- ------ ------
Route $37.5 $ 39.6 $ (2.1) $76.6 $ 80.5 $ (3.9)
Distribution (0.3) 0.3 (0.6) (1.0) 0.6 (1.6)
Rental 3.1 2.7 0.4 6.3 5.3 1.0
G&A (1.9) (2.0) 0.1 (4.1) (4.1) -
----- ------ ------ ----- ------ ------
$38.4 $ 40.6 $ (2.2) $77.8 $ 82.3 $ (4.5)
===== ====== ====== ===== ====== ======
EBITDA represents earnings from continuing operations before interest,
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
27
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations (continued)
- ---------------------
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 Note 6 to the Notes to
Condensed Consolidated Financial Statements (Unaudited) for a reconciliation of
EBITDA to net (loss) income for the periods indicated in the table immediately
above.
EBITDA was approximately $38.4 million for the three months ended
September 30, 2003, as compared to approximately $40.6 million for the three
months ended September 30, 2002. EBITDA margins declined to approximately 29.5%
for the three months ended September 30, 2003, as compared to approximately
30.8% for the prior year's corresponding period. This decrease was primarily the
result of decreased revenues in the route and distribution businesses, increased
insurance premium costs related to both medical and general business insurance
coverage, costs associated with expansion into new markets in the rental
business and increased utility costs, as discussed above.
EBITDA was approximately $77.8 million for the six months ended September
30, 2003, as compared to approximately $82.3 million for the prior year's
corresponding period. EBITDA margins declined to approximately 29.6% for the six
months ended September 30, 2003, as compared to approximately 30.7% for the
prior year's corresponding period. This decrease was primarily the result of
decreased revenues in the route business, increased insurance premium costs
related to both medical and general business insurance coverage, costs
associated with expansion into new markets in the rental business and increased
utility costs, as discussed above.
Liquidity and Capital Resources
- -------------------------------
The Company continues to have substantial indebtedness and debt service
requirements. At September 30, 2003, the Company had outstanding debt of
approximately $723.7 million, which included $450 million of its 9% Senior Notes
due 2010 (the "9% Senior Notes") and $265.5 million of borrowings under its
Senior Credit Facility. The Company's stockholder's equity was approximately
$46.0 million as of September 30, 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 September 30, 2003 consisted of cash
and cash equivalents of $27.0 million and available borrowings under its Senior
Credit Facility of approximately $69.7 million.
28
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
On January 25, 2002, the Company issued the 9% Senior Notes and entered
into the Senior Credit Facility, which was comprised of: (i) $280 million in
aggregate principal amount of term loans and (ii) a revolving credit facility
with a maximum borrowing limit of $75 million. The Senior Credit Facility also
provides for up to $10 million of letter of credit financings and short-term
borrowings under a swing line facility of up to $7.5 million. The Senior Credit
Facility is secured by substantially all of the Company's assets. The term loans
under the Senior Credit Facility, in aggregate principal amounts outstanding of
approximately $18.3 million and $243.0 million as of September 30, 2003, are
scheduled to be fully repaid by January 25, 2008 and July 25, 2009,
respectively. As of September 30, 2003, the Company had approximately $4.2
million outstanding under its revolving credit facility, bearing interest at a
rate of 3.87%, which is scheduled to expire on January 25, 2008. Letters of
credit outstanding at September 30, 2003 were approximately $1.1 million.
The Company's working capital requirements are, and are expected to
continue to be, minimal since a significant portion of the Company's operating
expenses are not paid until after cash is collected from installed machines.
Under the Company's existing financing arrangements, the Company is required to
make (i) quarterly amortization payments under the Senior Credit Facility
commencing on March 31, 2004 with respect to the $30 million (original principal
amount) term loan and semi-annual amortization payments commencing on June 30,
2004 with respect to the $250 million (original principal amount) 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 convert a portion of its floating-rate term loans pursuant to the
Senior Credit Facility to a fixed rate basis, thereby 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 recognized an accumulated other
comprehensive loss in the stockholder's equity section included in the
Consolidated Balance Sheet at September 30, 2003 of approximately $2.3 million,
net of tax, relating to the interest rate swaps that qualify as cash flow
hedges.
29
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
As the Company has focused on increasing its cash flow from operating
activities, it has made significant capital investments, primarily consisting of
capital expenditures related to acquisitions, renewal and growth. The Company
anticipates that it will continue to utilize cash flows from operations to
finance its capital expenditures and working capital needs, including interest
payments on its outstanding indebtedness. Capital expenditures consists of
expenditures (i) on the Company's installed machine base and (ii) for other
general corporate purposes.
Capital expenditures for the three-month period ended September 30, 2003
were approximately $25.2 million (excluding approximately $1.1 million relating
to capital lease payments). Capital expenditures for the six-month period ended
September 30, 2003 were approximately $48.9 million (excluding approximately
$2.1 million relating to capital lease payments). The primary components of the
Company's capital expenditures are (i) machine expenditures, (ii) advance
location payments, and (iii) laundry room improvements. Additionally, capital
expenditures for the six months ended September 30, 2003 included approximately
$1.5 million attributable to technology upgrades. The Company's installed base
of machines for the route business increased by approximately 3,900 machines for
the six-month period ended September 30, 2003. The growth in the rental business
machine base was approximately 14,800 for the six-month period ended September
30, 2003. The full impact on revenues and cash flow generated from capital
expended on the net increase in the installed base of machines is not expected
to be reflected in the Company's financial results until subsequent reporting
periods, depending on certain factors, including the timing of the capital
expended. While the Company estimates that it will generate sufficient cash
flows from operations to finance anticipated capital expenditures, there can be
no assurances that it will be able to do so.
The following table sets forth the Company's capital expenditures
(excluding payments for capital lease obligations and business acquisitions) for
the periods indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2003 2002 Change 2003 2002 Change
------ ------ ------ ----- ------ ------
Route $ 22.2 $ 19.8 $ 2.4 $43.4 $ 40.1 $ 3.3
Distribution 0.2 - 0.2 0.4 - 0.4
Rental 2.8 2.9 (0.1) 5.1 6.3 (1.1)
------ ------ ------ ----- ------ ------
$ 25.2 $ 22.7 $ 2.5 $48.9 $ 46.4 $ 2.6
====== ====== ====== ===== ====== ======
30
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
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.
Management believes that cash generated by operations and from borrowings
under the Senior Credit Facility will be sufficient to meet the Company's
anticipated working capital, capital expenditures and debt service requirements
for the foreseeable future. An inability of the Company, however, to comply with
covenants or other conditions contained in the indenture governing the 9% Senior
Notes or in the Senior Credit Facility could result in an acceleration of all
amounts thereunder. If the Company is unable to meet its debt service
obligations, it could be required to take certain actions such as reducing or
delaying capital expenditures, selling assets, refinancing or restructuring its
indebtedness, selling additional equity capital or other actions. There is no
assurance that any of such actions could be effected on commercially reasonable
terms or on terms permitted under the Senior Credit Facility or the indenture
governing the 9% Senior Notes.
Certain Accounting Treatment
- ----------------------------
The Company's depreciation and amortization expense, which aggregated
approximately $53.9 million for the six months ended September 30, 2003, 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 related to businesses acquired by the
Company is allocated to "contract rights". Management evaluates the
realizability of contract rights balances (if there are indications 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
may be experienced by the Company in future periods. Management believes such
effects will not be material to the Company. The Company's business generally is
not seasonal.
31
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal exposure to market risk relates to changes in
interest rates on its long-term borrowings. The Company's cash flow would be
adversely affected by an increase in interest rates. As of September 30, 2003,
the Company had approximately $115.5 million outstanding relating to its
variable rate debt portfolio.
The Company's future earnings, cash flow and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market risk is
the risk of loss from adverse changes in market prices and interest rates. If
market rates of interest on the Company's variable 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 $2.3 million,
assuming the total amount of variable interest rate debt outstanding was $115.5
million, the balance as of September 30, 2003.
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 convert a
portion of its floating-rate term loans pursuant to the Senior Credit Facility
to a fixed rate basis, thereby 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.
32
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, together with the participation of the Company's
principal executive officer and principal financial officer, evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this report. Based on that evaluation, the Company's principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that material
information relating to the Company is made known to them by others within the
Company on a timely basis. However, there is no assurance that the Company's
disclosure controls and procedures will operate effectively under all
circumstances. 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.
33
COINMACH CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is party to various legal proceedings arising in the ordinary
course of business. Although the ultimate disposition of such proceedings is not
presently determinable, management does not believe that adverse determinations
in any or all such proceedings would have a material adverse effect upon the
Company's financial condition, results of operations or cash flows.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference from Exhibit 3.1 to the
Company's Form 10-K for the transition period from
September 30, 1995 to March 29, 1996, file number
0-7694)
3.2 Bylaws of the Company (incorporated by reference from
Exhibit 3.2 to the Company's Form 10-K for the
transition period from September 30, 1995 to March 29,
1996, file number 0-7694)
31.1 Certificate of Chief Executive Officer pursuant to 18
United States Code, Section 1350, as enacted by Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to 18
United States Code, Section 1350, as enacted by Section
302 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
-------------------
None.
34
COINMACH CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COINMACH CORPORATION
Date: November 4, 2003 /s/ Robert M. Doyle
------------------------------------------
Robert M. Doyle
Senior Vice President and Chief Financial
Officer (On behalf of registrant and as
Principal Financial Officer)
35