Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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 August 11, 2004, Coinmach Corporation had
outstanding 100 shares of common stock, par value $.01 per share (the "Common
Stock"), all of which shares were held by Coinmach Laundry Corporation.
COINMACH CORPORATION AND SUBSIDIARIES
INDEX
PART I.
Financial Information Page No.
- --------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2004 (Unaudited) and March 31, 2004 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
PART II.
Other Information
- -----------------
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signature Page 38
- --------------
2
COINMACH CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
June 30, 2004
(Unaudited) March 31, 2004(1)
------------- ---------------
ASSETS:
Current assets:
Cash and cash equivalents $ 45,509 $ 31,620
Receivables, net 7,468 6,207
Inventories 10,795 11,508
Assets held for sale 2,984 2,560
Prepaid expenses 5,151 5,097
Other current assets 2,379 1,974
------------- ---------------
Total current assets 74,286 58,966
Advance location payments 73,315 73,253
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $272,576 and
$253,736 279,418 283,688
Contract rights, net of accumulated amortization of
$90,593 and $87,139 320,015 323,152
Goodwill 204,780 204,780
Other assets 13,931 15,670
------------- ---------------
Total assets $ 965,745 $ 959,509
============= ===============
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Accounts payable $ 18,315 $ 20,407
Accrued expenses 11,734 8,928
Accrued rental payments 30,616 31,855
Accrued interest 17,977 7,549
Interest rate swap liability 705 3,597
Current portion of long-term debt 9,248 9,149
------------- ---------------
Total current liabilities 88,595 81,485
Deferred income taxes 76,199 75,749
Long-term debt, less current portion 706,765 708,482
Due to Parent 49,806 50,036
------------- ---------------
Total liabilities 921,365 915,752
Stockholder's equity:
Common stock and capital in excess of par value 121,065 121,065
Accumulated other comprehensive loss, net of tax (295) (2,006)
Accumulated deficit (76,390) (75,302)
------------- ---------------
Total stockholder's equity 44,380 43,757
------------- ---------------
Total liabilities and stockholder's equity $ 965,745 $ 959,509
============= ===============
See accompanying notes.
- ------
1 The March 31, 2004 balance sheet has been derived from the audited
consolidated financial statements as of that date.
3
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands of dollars)
Three Months Ended
----------------------------------
June 30, June 30,
2004 2003
------------- -------------
REVENUES $ 133,499 $ 132,517
COSTS AND EXPENSES:
Laundry operating expenses (exclusive of depreciation and
amortization and amortization of advance location
payments) 91,125 90,871
General and administrative 2,280 2,209
Depreciation and amortization 19,029 17,982
Amortization of advance location payments 4,926 5,180
Amortization of intangibles 3,680 3,750
------------- -------------
121,040 119,992
------------- -------------
OPERATING INCOME 12,459 12,525
INTEREST EXPENSE, NET 14,227 14,316
------------- -------------
LOSS BEFORE INCOME TAXES (1,768) (1,791)
BENEFIT FOR INCOME TAXES:
Current 19 75
Deferred (699) (739)
------------- -------------
(680) (664)
------------- -------------
NET LOSS $ (1,088) $ (1,127)
============ =============
See accompanying notes.
4
COINMACH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
Three Months Ended
June 30, 2004 June 30, 2003
------------- -------------
OPERATING ACTIVITIES:
Net loss $ (1,088) $ (1,127)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 19,029 17,982
Amortization of advance location payments 4,926 5,180
Amortization of intangibles 3,680 3,750
Gain on sale of equipment (29) (5)
Deferred income taxes (699) (739)
Amortization of deferred issue costs 603 604
Change in operating assets and liabilities, net of businesses acquired:
Other assets 273 (361)
Receivables, net (1,261) 1,842
Inventories and prepaid expenses 463 (2,548)
Accounts payable and accrued expenses, net (545) (977)
Accrued interest 10,428 10,058
------------- -------------
Net cash provided by operating activities 35,780 33,659
------------- -------------
INVESTING ACTIVITIES:
Additions to property and equipment (13,645) (17,470)
Advance location payments to location owners (4,968) (6,203)
Acquisition of net assets related to acquisitions of businesses (366) -
Proceeds from sale of property and equipment 156 37
------------- -------------
Net cash used in investing activities (18,823) (23,636)
------------- -------------
FINANCING ACTIVITIES:
Repayments of credit facility (2,153) -
Net repayments to Parent (230) (166)
Borrowings (repayments) of bank and other borrowings 279 (4)
Principal payments on capitalized lease obligations (964) (1,028)
------------- -------------
Net cash used in financing activities (3,068) (1,198)
------------- -------------
Net increase in cash and cash equivalents 13,889 8,825
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,620 27,428
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 45,509 $ 36,253
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net $ 3,218 $ 3,634
============= =============
Income taxes paid $ 67 $ 172
============= =============
NON-CASH FINANCING ACTIVITIES:
Acquisition of fixed assets through capital leases $ 1,220 $ 1,368
============= =============
5
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Coinmach
Corporation, a Delaware corporation ("Coinmach" or the "Company"), 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 162 retail laundromats
located throughout Texas and Arizona. Through Appliance Warehouse of America,
Inc. ("AWA"), a Delaware corporation jointly-owned by the Company and Holdings,
the Company rents 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, through its wholly-owned subsidiary American Laundry Franchising
Corp. ("ALFC"), builds and develops laundromat facilities for sale as franchise
locations.
At June 30, 2004, the Company owned and operated approximately 876,000
laundry machines in approximately 80,000 locations throughout North America.
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 U.S. generally accepted
accounting principles ("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)
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, 2004. Certain amounts in the financial statements have been
reclassified for presentation purposes.
2. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
June 30, March 31,
2004 2004
-------- ---------
Laundry equipment $ 7,146 $ 7,973
Machine repair parts 3,649 3,535
------- -------
$10,795 $11,508
======= =======
3. GOODWILL AND CONTRACT RIGHTS
Goodwill roll forward for the three months ended June 30, 2004 consists
of the following (in thousands):
Goodwill - beginning of period $204,780
Acquisitions -
--------
Goodwill - end of period $204,780
========
The Company accounts for goodwill in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS 142 requires an initial impairment assessment upon
adoption on April 1, 2002, as well as an annual assessment thereafter or more
frequently if circumstances dictate. The Company performed a fair market
valuation of its segments as of January 1, 2004. These segments represent the
Company's reporting units under SFAS 142.
7
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
3. GOODWILL AND CONTRACT RIGHTS (CONTINUED)
The valuation showed that the fair value of the reporting units exceeded their
book value, therefore no impairment of goodwill occurred in these reporting
units. The annual impairment test for the 2005 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, which arose
primarily from purchase price allocations pursuant to acquisitions, are
amortized using accelerated methods over periods ranging from 30-35 years. The
Company does not record contract rights relating to new locations signed in the
ordinary course of business.
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,
2005 (remainder of year) $10.4
2006 13.5
2007 13.2
2008 12.9
2009 12.6
Management evaluates the realizability of contract rights balances (if
there are indicators of impairment) based upon the Company's forecasted
undiscounted cash flows. Based upon present operations and strategic plans,
management believes that no impairment of contract rights has occurred.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
June 30, March 31,
2004 2004
---------- ----------
9% Senior Notes due 2010 $ 450,000 $ 450,000
Credit facility indebtedness 258,184 260,337
Obligations under capital leases 7,018 6,762
Other long-term debt with varying terms and maturities 811 532
---------- ----------
716,013 717,631
Less current portion 9,248 9,149
---------- ----------
$ 706,765 $ 708,482
========== ==========
8
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
4. LONG-TERM DEBT (continued)
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 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 revolving credit
portion of the Senior Secured Credit Facility provides 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 Secured Credit Facility is secured by
a first priority secured interest in all of the Company's real and personal
property and is guaranteed by each of the Company's domestic subsidiaries. In
addition, CLC and the Company pledged to the Collateral Agent their interests in
all of the issued and outstanding shares of capital stock of the Company and the
Company's domestic subsidiaries.
At June 30, 2004, the Company had outstanding debt consisting of (a)
$450 million of 9% Senior Notes and (b) approximately $258.2 million of term
loans with interest rates ranging from 3.88% to 3.94%. The term loans under the
Senior Secured Credit Facility, in aggregate principal amounts outstanding of
approximately $16.4 million and approximately $241.8 million as of June 30,
2004, are scheduled to be fully repaid by January 25, 2008 and July 25, 2009,
respectively. As of June 30, 2004, the Company had no amounts outstanding under
its revolving credit facility, which is scheduled to expire on January 25, 2008.
In addition to certain customary terms and provisions, including events
of default and customary representations, covenants and agreements, the Senior
Secured Credit Facility contains certain restrictive 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 limit the Company's ability to pay dividends. At June 30, 2004, the
Company was in compliance with the covenants under the indenture governing the
9% Senior Notes and the Senior Secured 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 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 a financial institution 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 a financial
institution effectively fixing the three-month LIBOR interest rate (as
determined therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50
9
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
4. LONG-TERM DEBT (continued)
million notional amount interest rate swap transaction with a financial
institution 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 June 30, 2004 of
approximately $0.3 million, net of tax, relating to the interest rate swaps that
qualify as cash flow hedges.
5. 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, the guarantees issued are full and unconditional and the guarantees are
joint and several. In addition, the combined operations of non-Guarantor
Subsidiaries represent less than 1% of total consolidated revenue and total
consolidated assets. Therefore, the Company has not included a separate column
for the non-Guarantor Subsidiaries because they are minor. The condensed
consolidating balance sheet as of June 30, 2004 and March 31, 2004, the
condensed consolidating statements of operations for the three months ended June
30, 2004 and 2003, and the condensed consolidating statement of cash flows for
the three months ended June 30, 2004 and 2003 include AWA, Super Laundry, ALFC
and Grand Wash & Dry Launderette, Inc., as Guarantor Subsidiaries.
10
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. GUARANTOR SUBSIDIARIES (continued)
Condensed consolidating financial information for the Company and its Guarantor
Subsidiaries are as follows (in thousands):
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2004
------------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
ASSETS
Current assets, consisting of cash, receivables,
inventory, assets held for sale, prepaid
expenses and other current assets $ 57,948 $ 16,338 $ - $ 74,286
Advance location payments 73,315 - - 73,315
Property, equipment and leasehold improvements,
net 249,542 29,876 - 279,418
Intangible assets, net 515,041 9,754 - 524,795
Intercompany loans and advances 55,734 (33,470) (22,264) -
Investment in subsidiaries (27,253) - 27,253 -
Investment in preferred stock 17,183 - (17,183) -
Other assets 13,782 149 - 13,931
------------ ------------ ------------ -----------
Total assets $ 955,292 $ 22,647 $ (12,194) $ 965,745
============ ============ ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 70,814 $ 8,533 $ - $ 79,347
Current portion of long-term debt 9,070 178 - 9,248
------------ ------------ ------------ -----------
Total current liabilities 79,884 8,711 - 88,595
Deferred income taxes 73,175 3,024 - 76,199
Long-term debt, less current portion 706,353 22,676 (22,264) 706,765
Due to parent 49,806 - - 49,806
Preferred stock and dividends payable - 17,183 (17,183) -
Total stockholder's equity 45,964 (28,837) 27,253 44,380
------------ ------------ ------------ -----------
Total liabilities and stockholder's equity $ 955,182 $ 22,757 $ (12,194) $ 965,745
============ ============ ============ ===========
11
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. GUARANTOR SUBSIDIARIES (continued)
CONDENSED CONSOLIDATING BALANCE SHEETS (continued)
MARCH 31, 2004
----------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
ASSETS
Current assets, consisting of cash, receivables,
inventory, assets held for sale, prepaid expenses
and other current assets $ 43,578 $ 15,388 $ - $ 58,966
Advance location payments 73,253 - - 73,253
Property, equipment and leasehold improvements, net 252,624 31,064 - 283,688
Intangible assets, net 518,178 9,754 - 527,932
Intercompany loans and advances 56,648 (34,826) (21,822) -
Investment in subsidiaries (27,460) - 27,460 -
Investment in preferred stock 16,777 - (16,777) -
Other assets 15,606 64 - 15,670
----------- ----------- ------------ -----------
Total assets $ 949,204 $ 21,444 $ (11,139) $ 959,509
=========== =========== ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 64,029 $ 8,307 $ - $ 72,336
Current portion of long-term debt 9,004 145 - 9,149
----------- ----------- ------------ -----------
Total current liabilities 73,033 8,452 - 81,485
Deferred income taxes 72,872 2,877 - 75,749
Long-term debt, less current portion 708,329 21,975 (21,822) 708,482
Due to parent 50,036 - - 50,036
Preferred stock and dividends payable - 16,777 (16,777) -
Total stockholder's equity 44,934 (28,637) 27,460 43,757
----------- ----------- ----------- -----------
Total liabilities and stockholder's equity $ 949,204 $ 21,444 $ (11,139) $ 959,509
=========== =========== =========== ===========
12
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. GUARANTOR SUBSIDIARIES (continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues $ 118,247 $ 15,252 $ - $ 133,499
Costs and expenses 106,600 14,440 - 121,040
------------- ------------ ------------ ------------
Operating income 11,647 812 - 12,459
Interest expense, net 13,777 450 - 14,227
------------- ------------ ------------ ------------
(2,130) 362 - (1,768)
Income taxes (835) 155 - (680)
------------- ------------ ------------ ------------
(1,295) 207 - (1.088)
Equity in loss of subsidiaries (207) - 207 -
------------- ------------ ------------ ------------
(1,088) 207 (207) (1,088)
Dividend income (406) - 406 -
------------- ------------ ------------ ------------
Net (loss) income $ (682) $ 207 $ (613) $ (1,088)
============= ============ ============ ============
THREE MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------
COINMACH AND
NON-GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
Revenues $ 117,596 $ 14,921 $ - $ 132,517
Costs and expenses 105,371 14,621 - 119,992
------------- ------------ ------------ ------------
Operating income 12,225 300 - 12,525
Interest expense, net 13,915 401 - 14,316
------------- ------------ ------------ ------------
(1,690) (101) - (1,791)
Income taxes (622) (42) - (664)
------------- ------------ ------------ ------------
(1,068) (59) - (1,127)
Equity in loss of subsidiaries 59 - (59) -
(1,127) (59) 59 (1,127)
Dividend income (402) - 402 -
------------- ------------ ------------ ------------
Net loss $ (725) $ (59) $ (343) $ (1,127)
============= ============ ============ ============
13
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. GUARANTOR SUBSIDIARIES (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 2004
---------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net (loss) income $ (682) $ 207 $ (613) $ (1,088)
Noncash adjustments 24,825 2,685 - 27,510
Change in operating assets and liabilities 10,166 (807) - 9,359
------------ ------------ ------------ ------------
Net cash provided by operating activities 34,309 2,085 (613) 35,781
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Investment in and advances to subsidiaries (613) - 613 -
Capital expenditures (17,548) (1,065) - (18,613)
Acquisition of assets (366) - - (366)
Sale of property and equipment - 156 - 156
------------ ------------ ------------ ------------
Net cash used in investing activities (18,527) (909) 613 (18,823)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Repayment of debt (2,153) - - (2,153)
Other financing items 149 (1,064) - (915)
------------ ------------ ------------ ------------
Net cash used in financing activities (2,004) (1,064) - (3,068)
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 13,777 112 - 13,889
Cash and cash equivalents, beginning of period 30,621 999 - 31,620
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 44,398 $ 1,111 $ - $ 45,509
============ ============ ============ ============
14
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. GUARANTOR SUBSIDIARIES (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (continued)
THREE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------
COINMACH
AND NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ (725) $ (59) $ (343) $ (1,127)
Noncash adjustments 24,840 1,932 - 26,772
Change in operating assets and liabilities 9,414 (1,400) - 8,014
------------ ------------ ----------- ------------
Net cash provided by operating activities 33,529 473 (343) 33,659
INVESTING ACTIVITIES
Investment in and advances to subsidiaries (343) - 343 -
Capital expenditures (21,189) (2,484) - (23,673)
Sale of property and equipment - 37 - 37
------------ ------------ ----------- ------------
Net cash used in investing activities (21,532) (2,447) 343 (23,636)
FINANCING ACTIVITIES
Other financing items (3,655) 2,457 - (1,198)
------------ ------------ ----------- ------------
Net cash (used in) provided by financing activities (3,655) 2,457 - (1,198)
------------ ------------ ----------- ------------
Net increase in cash and cash equivalents 8,342 483 - 8,825
Cash and cash equivalents, beginning of period 26,054 1,374 - 27,428
------------ ------------ ----------- ------------
Cash and cash equivalents, end of period $ 34,396 $ 1,857 $ - $ 36,253
============ ============ =========== ============
15
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 is
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 and depreciation and amortization),
cash flow and growth opportunity. The accounting policies of the segment are the
same as those described in the Company's Annual Report on Form 10-K for the year
ended March 31, 2004.
16
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):
THREE MONTHS ENDED JUNE 30,
---------------------------------
2004 2003
-------------- --------------
REVENUE:
Route $ 118,247 $ 117,596
All other:
Rental 8,340 7,776
Distribution 6,912 7,145
-------------- --------------
Subtotal 15,252 14,921
-------------- --------------
Total $ 133,499 $ 132,517
============== ==============
EBITDA(1):
Route $ 39,204 $ 39,140
All other:
Rental 3,253 3,177
Distribution (83) (671)
-------------- --------------
Subtotal 3,170 2,506
-------------- --------------
Corporate expenses (2,280) (2,209)
-------------- --------------
Total $ 40,094 $ 39,437
============== ==============
LOSS BEFORE TAXES (2):
Route $ 14,505 $ 14,735
All other 1,045 534
-------------- --------------
Subtotal 15,550 15,269
-------------- --------------
Corporate expenses (2,280) (2,209)
Depreciation and amortization (811) (535)
Interest expense, net (14,227) (14,316)
-------------- --------------
Loss before taxes $ (1,768) $ (1,791)
============== ==============
- ------------
(1) See description of "Non-GAAP Financial Measures" immediately following this
table for a reconciliation of EBITDA to net loss for the periods indicated
above.
(2) Operating income before deducting general and administrative expenses.
17
COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. SEGMENT INFORMATION (continued)
NON-GAAP FINANCIAL MEASURES
EBITDA represents earnings from continuing operations before deductions for
interest, income taxes and depreciation and amortization. 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. EBITDA is also used by management as a measure of
evaluating the performance of the Company's three operating segments. Management
further believes that EBITDA is useful to investors as a measure of comparative
operating performance as it is less susceptible to variances in actual
performance resulting from depreciation, amortization and other non-cash charges
and more reflective of changes in pricing decisions, cost controls and other
factors that affect operating performance. Management uses EBITDA to develop
compensation plans, to measure sales force performance and to allocate capital
assets. Additionally, because Coinmach has historically provided EBITDA to
investors, it believes that presenting this non-GAAP financial measure provides
consistency in its financial reporting. 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 of each period presented (in millions):
Three months ended June 30,
------------------------------
2004 2003
----------- -----------
Net loss $ (1.1) $ (1.1)
Benefit for income taxes (0.6) (0.7)
Interest expense, net 14.2 14.3
Depreciation and amortization 27.6 26.9
---------- ----------
EBITDA $ 40.1 $ 39.4
========== ==========
18
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):
June 30, 2004 March 31, 2004
------------- --------------
Deferred tax liabilities:
Accelerated tax depreciation and
contract rights $ 110,238 $ 111,103
Other, net 1,333 1,246
------------- -------------
111,571 112,349
------------- -------------
Deferred tax assets:
Interest rate swap 410 1,591
Net operating loss carryforwards 32,132 32,294
Covenant not to compete 1,172 1,202
Other 1,658 1,513
------------- -------------
35,372 36,600
------------- -------------
Net deferred tax liability $ 76,199 $ 75,749
============= =============
The net operating loss carryforwards of approximately $78.7 million
expire between fiscal years 2005 through 2024. The majority of the Company's net
operating loss carryforwards begin to expire after four 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 for income taxes consists of (in thousands):
Three Months ended June 30,
----------------------------
2004 2003
-------- --------
Federal $ (545) $ (576)
State (135) (88)
-------- --------
$ (680) $ (664)
======== ========
19
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):
Three Months ended June 30,
----------------------------
2004 2003
-------- --------
Expected tax benefit $ (619) $ (627)
State tax benefit, net of
federal taxes (88) (57)
Permanent book/tax differences 27 20
Tax benefit -------- --------
$ (680) $ (664)
======== ========
20
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 our 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, 2004.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, our future performance and actual results of
operations may differ materially from those expected or intended.
Our primary financial objective is to increase our cash flow from
operations. Cash flow from operations represents a source of funds available to
service indebtedness and for investment in both organic growth and growth
through acquisitions. We have experienced net losses during the past three
fiscal years. Such net losses were attributable in part to significant non-cash
charges associated with our acquisitions and the related amortization of
contract rights (for all three fiscal years) and goodwill (for the 2002 fiscal
year) accounted for under the purchase method of accounting. We incur
significant depreciation and amortization expense relating to annual capital
expenditures, which also reduces our net income. The continued incurrence of
significant depreciation and amortization expenses may cause us to incur a net
loss.
We are principally engaged in the business of supplying laundry
equipment services to multi-family housing properties. Our most significant
revenue source is our route business, which over the last three fiscal years has
accounted for approximately 88% of our revenue. Through our route operations, we
provide 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 our contracts provide for commission payments to the location owners.
Commission expense (also referred to as rent expense), our 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 our
leases require us to make advance location payments to location owners, which
are capitalized and amortized over the life of the applicable leases. Advance
location payments to location owners are paid, as required by the applicable
lease, at the inception or renewal of a lease for the right to operate
applicable laundry rooms during the contract period, which generally ranges from
5 to 10 years. The amount of advance location payments varies depending on the
size of the location and the term of the lease. The Company also provides
collection services for other route based companies, including payphone
operators. At June 30, 2004, we owned and operated through our route business
approximately 677,000 washers and dryers in approximately 70,000 locations
throughout North America, including 162 retail laundromats located in 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.
21
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We also operate an equipment rental business through Appliance
Warehouse of America, Inc. ("AWA"), a Delaware corporation that is jointly-owned
by us and Coinmach Holdings, LLC ("Holdings"), a Delaware limited liability
company and our ultimate parent. AWA 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. At June 30, 2004, approximately
199,000 washers and dryers were installed with our rental customers through AWA.
We also operate an equipment distribution business through Super
Laundry Equipment Corp. ("Super Laundry"), our wholly-owned subsidiary. Super
Laundry's business consists of constructing and designing complete turnkey
retail laundromats, retrofitting existing retail laundromats, distributing
exclusive lines of commercial coin and non-coin operated machines and parts, and
selling service contracts. In addition, Super Laundry, 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.
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 our 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 our rental business.
ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
22
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. We calculate the estimated amount of cash and coin not yet
collected at the end of a reporting period, which remain at laundry room
locations by multiplying the average daily collection amount applicable to the
location with the number of days the location had not been collected. We
analytically review the estimated amount of cash and coin not yet collected at
the end of a reporting period by comparing such amount with collections
subsequent to the reporting period.
We are required to estimate the collectibility of our receivables. A
considerable amount of judgment is required in assessing the ultimate
realization of these receivables, including the current credit-worthiness of
each customer. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Allowance for doubtful accounts at June 30, 2004 was
approximately $3.3 million.
We currently have significant deferred tax assets, which are subject to
periodic recoverability assessments. Realization of our deferred tax assets is
principally dependent upon our 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.
We have significant intangible assets including 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 our Annual Report on Form 10-K for the fiscal year ended March 31,
2004.
23
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Comparison of the three-month periods ended June 30, 2004 and June 30, 2003.
The following table sets forth our revenues for the periods indicated
(in millions of dollars):
Three months ended June 30,
------------------------------------------
2004 2003 Change
--------- --------- ----------
Route $ 118.3 $ 117.6 $ 0.7
Rental 8.3 7.8 0.5
Distribution 6.9 7.1 (0.2)
--------- --------- ----------
$ 133.5 $ 132.5 $ 1.0
========= ========= ==========
Revenue increased by approximately $1.0 million or less than 1% for the
three-month period ended June 30, 2004, as compared to the prior year's
corresponding period.
Route revenue for the three months ended June 30, 2004 increased by
approximately $0.7 million or less than 1% over the prior year's corresponding
period. We believe that the increase was primarily the result of additional
revenue received from collection services rendered to independent payphone
operators. In addition, revenue increased slightly due to the timing of price
changes and internal growth in machine count during the prior and current year.
Distribution revenue for the three months ended June 30, 2004 decreased
by approximately $0.2 million or 3% 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. In addition, distribution revenue decreased due to the closing of
operations in California. Distribution revenue from our California operations
was approximately $0.7 million and $1.4 million for the three-month periods
ended June 30, 2004 and June 30, 2003, respectively.
Rental revenue for the three months ended June 30, 2004 increased by
approximately $0.5 million or 7% 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.
24
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Laundry operating expenses, exclusive of depreciation and amortization,
increased by approximately $0.3 million or less than 1% for the three-month
period ended June 30, 2004, as compared to the prior year's corresponding
period. The increase in laundry operating expenses was due primarily to costs
associated with internal growth of the rental business of approximately $0.5
million, additional expenses incurred from collection services rendered to
independent payphone operators of approximately $0.4 million, as well as
increased insurance costs related to both medical and general business insurance
coverage of approximately $0.4 million. These increases in laundry operating
expenses were offset by a reduction in operating expenses as a result of the
closing of California operations in the distribution business of approximately
$1.0 million. As a percentage of revenues, laundry operating expenses were 68.3%
for the three-month period ended June 30, 2004, as compared to 68.6% for the
three-month period ended June 30, 2003.
General and administrative expenses increased by less than $0.1 million
for the three-month period ended June 30, 2004, as compared to the prior year's
corresponding period. As a percentage of revenues, general and administrative
expenses were 1.7% for the three-month periods ended June 30, 2004 and June 30,
2003.
Depreciation and amortization expense increased by approximately $1.0
million or 6% for the three-month period ended June 30, 2004, as compared to the
prior year's corresponding period. The increase in depreciation and amortization
expense was primarily due to depreciation expense relating to capital
expenditures required by historical increases in our installed base of machines.
Amortization of advance location payments decreased by approximately
$0.3 million or 5% for the three-month period ended June 30, 2004, as compared
to the prior year's corresponding period. The decrease was primarily due to
advance location payments incurred in the prior years becoming fully amortized.
Amortization of intangibles decreased by approximately $0.1 million or
2% for the three- month period ended June 30, 2004, as compared to the prior
year's corresponding period. The decrease was primarily the result of
intangibles related to acquisitions becoming fully amortized.
Operating income margins were approximately 9.3% for the three-month
period ended June 30, 2004, as compared to approximately 9.5% for the prior
year's corresponding period. The decrease in operating income margin was
primarily due to increased depreciation and amortization expense as well as
decreased revenue in the distribution business, as discussed above.
25
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Interest expense decreased by approximately $0.1 million or 1% for the
three-month period ended June 30, 2004, as compared to the prior year's
corresponding period. The decrease in interest expense was primarily due to
decreased borrowing levels under the Company's senior secured credit facility
(the "Senior Secured 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 us in September 2002 that are fixed at a slightly
higher rate compared to variable rates.
The benefit for income taxes was approximately $0.6 million for the
three-month period ended June 30, 2004, as compared to approximately $0.7
million for the prior year's corresponding period. The effective tax rate for
the three-month period ended June 30, 2004 was 38% as compared to 37% for the
prior year's corresponding period.
Net loss was approximately $1.1 million for both the three-month period
ended June 30, 2004 and the prior year's corresponding period.
The following table sets forth EBITDA (as defined below) for each of
the Company's route, rental and distribution divisions for the periods indicated
(in millions of dollars):
Three months ended June 30,
---------------------------------------
2004 2003 Change
--------- --------- --------
Route $ 39.2 $ 39.1 $ 0.1
Rental 3.3 3.2 0.1
Distribution (0.1) (0.7) 0.6
Corporate expenses (2.3) (2.2) (0.1)
--------- --------- --------
$ 40.1 $ 39.4 $ 0.7
========= ========= ========
EBITDA represents earnings from continuing operations before deductions
for interest, income taxes and depreciation and amortization. Management
believes that EBITDA is useful as a means to evaluate our ability to service
existing debt, to sustain potential future increases in debt and to satisfy
capital requirements. EBITDA is also used by management as a measure of
evaluating the performance of our three operating segments. Management further
believes that EBITDA is useful to investors as a measure of comparative
operating performance as it is less susceptible to variances in actual
performance resulting from depreciation, amortization and other non-cash charges
and more reflective of changes in pricing decisions, cost controls and other
factors that affect operating performance. Management uses EBITDA to develop
compensation plans, to measure sales force performance and to allocate capital
assets. Additionally, because Coinmach has historically provided EBITDA to
investors, it believes that presenting this non-GAAP financial measure provides
consistency in its financial reporting. 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
26
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. See Note 6 to
the Condensed Consolidated Financial Statements (Unaudited) for a reconciliation
of EBITDA to net loss for the periods indicated in the table immediately above.
EBITDA was approximately $40.1 million for the three months ended June
30, 2004, as compared to approximately $39.4 million for the three months ended
June 30, 2003. EBITDA margins increased to 30.0% for the three months ended June
30, 2004, as compared to 29.8% for the prior year's corresponding period. This
increase was primarily the result of increased revenues in the route and rental
businesses, as well as a reduction in operating expenses as a result of the
closing of California operations in the distribution business. This was offset
by an increase in costs associated with internal growth of the rental business,
additional expenses incurred from collection services rendered to independent
payphone operators, as well as increased insurance costs related to both medical
and general business insurance coverage, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We have substantial indebtedness and debt service requirements. At June
30, 2004, on a consolidated basis, we had outstanding long-term debt of
approximately $716.0 million, which included $450.0 million of our 9% Senior
Notes due 2010 (the "9% Senior Notes") and $258.2 million of borrowings under
our Senior Secured Credit Facility. Substantially all of our long-term debt is
scheduled to mature on or after July 25, 2009, when the remaining balance under
our Senior Secured Credit Facility becomes due. Our stockholder's equity was
approximately $44.4 million as of June 30, 2004.
Our primary liquidity needs are to fund capital expenditures, service
indebtedness and support working capital requirements. Our principal sources of
liquidity are cash flows from operating activities and selected borrowings
available under the Senior Secured Credit Facility. As of June 30, 2004, we had
cash and cash equivalents of approximately $45.5 million and available
borrowings under the Senior Secured Credit Facility of approximately $71.2
million.
As we have focused on increasing our cash flow from operating
activities, we have made significant capital investments, primarily consisting
of capital expenditures related to acquisitions, renewals and growth. We
anticipate that we will continue to utilize cash flows from operations to
finance our capital expenditures and working capital needs, including interest
and principal payments on our outstanding indebtedness.
If the proposed initial public offering of Coinmach Service Corp., a
Delaware corporation ("CSC"), and the other Proposed IDS Transactions (as
defined below) are consummated, we would become an indirect subsidiary of CSC.
As such, we would expect to also use cash flows
27
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
from operations to pay dividends on our capital stock and to make principal and
interest payments under a proposed intercompany loan to be made to us by CSC.
See "Proposed IDS Transactions."
Financing Activities
--------------------
On January 25, 2002, we issued the 9% Senior Notes and entered into the
Senior Credit Secured 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 Secured 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 Secured Credit Facility is secured by a first priority security interest
in all of our real and personal property and is guaranteed by each of our
domestic subsidiaries. The term loans under the Senior Secured Credit Facility,
in aggregate principal amounts outstanding of approximately $16.4 million and
$241.8 million as of June 30, 2004, are scheduled to be fully repaid by January
25, 2008 and July 25, 2009, respectively. We had no amounts outstanding under
our revolving credit facility, which is scheduled to expire on January 25, 2008.
Letters of credit outstanding at June 30, 2004 were approximately $3.8 million.
On September 23, 2002, we entered into three separate interest rate
swap agreements totaling $150 million in aggregate notional amount that
effectively convert a portion of our floating-rate term loans pursuant to the
Senior Secured 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 a financial institution 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 a
financial institution 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 a financial
institution 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. We recognized an
accumulated other comprehensive loss in the stockholder's equity section
included in the condensed consolidated balance sheet at June 30, 2004 of
approximately $0.3 million, net of tax, relating to the interest rate swaps that
qualify as cash flow hedges.
Operating and Investing Activities
----------------------------------
We use cash from operating activities to maintain and expand our
business. As we have focused on increasing our cash flow from operating
activities, we have made significant capital investments, primarily consisting
of capital expenditures related to acquisitions, renewals and growth. We
anticipate that we will continue to utilize cash flows from operations to
finance our capital expenditures and working capital needs, including interest
payments on our outstanding
28
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
indebtedness. Capital expenditures consist of expenditures (i) on our installed
machine base and (ii) for other general corporate purposes.
Capital expenditures for the three-month period ended June 30, 2004
were approximately $18.6 million (excluding payments of approximately $1.0
million relating to capital lease obligations and excluding approximately $0.4
million relating to acquisition capital expenditures). The primary components of
our capital expenditures are (i) machine expenditures, (ii) advance location
payments, and (iii) laundry room improvements. Additionally, capital
expenditures for the three-month period ended June 30, 2004 included
approximately $0.9 million attributable to technology upgrades. Our installed
base of machines for the route business increased by approximately 2,600
machines for the three-month period ended June 30, 2004. The growth in the
rental business machine base was approximately 1,300 for the three-month period
ended June 30, 2004. 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 our financial results until subsequent reporting
periods, depending on certain factors, including the timing of the capital
expended. While we estimate that we will generate sufficient cash flows from
operations to finance anticipated capital expenditures, there can be no
assurances that we will be able to do so.
The following table sets forth our capital expenditures (excluding
payments for capital lease obligations and business acquisitions) for the
periods indicated (in millions of dollars):
Three months ended June 30,
----------------------------------------
2004 2003 Change
--------- -------- --------
Route $ 17.6 $ 21.3 $ (3.7)
Rental 0.9 2.2 (1.3)
Distribution 0.1 0.2 (0.1)
-------- -------- --------
$ 18.6 $ 23.7 $ (5.1)
======== ======== ========
Management of our working capital, including timing of collections and
payments and levels of inventory, affect operating results indirectly. However,
our working capital requirements are, and are expected to continue to be,
minimal since a significant portion of our operating expenses are commission
payments based on a percentage of collections, and are not paid until after cash
is collected from the installed machines.
29
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Summary of Contractual Obligations
----------------------------------
The following table sets forth information with regard to disclosures
about our contractual obligations and commitments:
PAYMENTS DUE IN FISCAL YEAR
--------------------------------------------------------------------------
TOTAL 2005 2006 2007 2008 2009 AFTER
----- ---- ---- ---- ---- ---- -----
Long-Term Debt Obligations $709.0 $ 4.2 $ 6.8 $ 8.1 $ 16.6 $12.6 $ 660.7
Capital Lease Obligations 7.0 2.3 2.6 1.6 0.5 - -
Operating Lease Obligations 30.7 6.3 7.6 5.8 3.9 2.8 4.3
-------- ------- -------- -------- -------- ------- ---------
$746.7 $12.8 $ 17.0 $ 15.5 $ 20.9 $15.4 $ 665.1
======== ======= ======== ======== ======== ======= =========
Future Capital Needs and Resources
----------------------------------
Our near-term cash requirements are primarily related to payment of
interest on our existing indebtedness, capital expenditures and working capital
and, if the Proposed IDS Transactions are consummated, dividend payments.
Substantially all of our long-term debt is scheduled to mature on or after July
25, 2009, when the remaining balances under the Senior Secured Credit Facility's
term loans become due. However, our level of indebtedness will have several
important effects on our future operations including, but not limited to, the
following: (i) a significant portion of our cash flow from operations will be
required to pay interest on our indebtedness and the indebtedness of our
subsidiaries, (ii) the financial covenants contained in certain of the
agreements governing such indebtedness will require us and/or our subsidiaries
to meet certain financial tests and may limit our respective abilities to borrow
additional funds, (iii) our ability to obtain additional financing in the future
for working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired and (iv) our ability to adapt to changes in the laundry
equipment services industry could be limited.
The most significant factors affecting our near-term cash flow
requirements are our ability to generate cash from operations, which is
dependent on our ability to attract new and retain existing customers, and our
ability to satisfy our debt service and capital expenditure requirements.
Considering our anticipated level of capital expenditures, our scheduled
interest payments and existing contractual obligations and subject to the
factors described below, we estimate that over the next twelve months cash flow
from operations, along with available cash and cash equivalents and borrowings
under the Senior Secured Credit Facility, will be sufficient to fund our
operating needs and to service the 9% Senior Notes and the Senior Secured Credit
Facility.
Other factors, including but not limited to whether we consummate the
Proposed IDS Transactions, any significant acquisition transactions, the pursuit
of any significant new business opportunities, potential material increases in
the cost of compliance with regulatory mandates (including state laws imposing
heightened energy and water efficiency standards on clothes washers), tax
treatment of our debt, unforeseen reductions in occupancy levels, changes in our
30
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
competitive environment, or unexpected costs associated with lease renewals, may
affect our ability to fund our liquidity needs in the future.
California and Maryland have adopted state laws imposing heightened
energy and water efficiency standards on commercial clothes washers, and other
states are considering similar laws. While such laws are not scheduled to go in
effect until early 2007, implementing machines compliant with such laws could
result in increased capital costs (including material and equipment costs),
labor and installation costs, and in some cases, operation and maintenance
costs. Other states in which we operate may adopt similar laws, which would
increase our costs associated with compliance.
We continuously monitor our debt position and coordinate our capital
expenditure program with expected cash flows and projected interest and dividend
payments. However, our actual cash requirements may exceed our current
expectations. In the event cash flow is lower than anticipated, we expect to
either (i) reduce or eliminate dividends, (ii) adjust capital expenditures,
(iii) supplement cash flow from operations with borrowings under the Senior
Secured Credit Facility, or (iv) evaluate other cost-effective funding
alternatives. If the Proposed IDS Transactions are consummated, we expect that
substantially all of the cash generated by our business in excess of operating
needs, debt service obligations and reserves will be distributed to the holders
of our common stock. As a result, we may not retain a sufficient amount of cash
to finance growth opportunities or unanticipated capital expenditure needs or to
fund our operations in the event of a significant business downturn. We may have
to forego growth opportunities or capital expenditures that would otherwise be
necessary or desirable if we do not find alternative sources of financing. If
sources of liquidity are not available or if we cannot generate sufficient cash
flow from operations, we might also be required to obtain additional sources of
funds through capital market transactions, reducing or delaying capital
expenditures, refinancing or restructuring our indebtedness, asset sales or
financing from third parties, or a combination thereof. Additional sources of
funds may not be available or allowed under the terms of our outstanding
indebtedness or that of our subsidiaries or, if available, may not have
commercially reasonable terms.
Our inability to comply with covenants or other conditions contained in
the indenture governing the 9% Senior Notes or the Senior Secured Credit
Facility could result in an acceleration of all amounts thereunder.
Proposed IDS Transactions
-------------------------
On April 13, 2004, CSC filed a registration statement on form S-1 with
the Securities and Exchange Commission (the "SEC") (such registration statement,
as amended by Amendment No. 1 filed with the SEC on June 14, 2004 and Amendment
No. 2 filed with the SEC on August 3, 2004, the "Registration Statement")
relating to the proposed initial public offering of Income Deposit Securities
("IDSs") and senior secured notes to be sold separate and apart from IDSs. IDSs
consist of CSC's Class A common stock and senior secured notes. Immediately
following the
31
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
offering and certain related corporate reorganization transactions, we will be
an indirect wholly-owned subsidiary of CSC, which in turn will be controlled by
Holdings. CSC was incorporated in the state of Delaware on December 23, 2003 and
has not had any material activity from the date of incorporation through June
30, 2004. The contemplated offerings and related transactions and use of
proceeds therefrom are referred to herein collectively as the "Proposed IDS
Transactions."
Pursuant to the Proposed IDS Transactions, CSC will make an
intercompany loan (the "Intercompany Loan") to us and an indirect capital
contribution (the "Capital Contribution") from a portion of the proceeds from
CSC's initial public offering. If the Proposed IDS Transactions are consummated,
we intend to use a portion of the Intercompany Loan and Capital Contribution to
redeem a portion of our 9% Senior Notes, to repay a portion of the outstanding
indebtedness under our Senior Secured Credit Facility and to terminate our
interest rate swap agreements. We have entered into an amendment to the Senior
Secured Credit Facility with the requisite lenders and agents thereunder to
permit the Proposed IDS Transactions, such amendment to be effective upon
completion of CSC's initial public offering.
The Intercompany Loan is expected to be our senior unsecured
obligation, will rank equally in right of payment with all our existing and
future senior indebtedness and will rank senior in right of payment to all our
existing and future subordinated indebtedness. Certain of our subsidiaries are
expected to guarantee the Intercompany Loan on a senior unsecured basis. The
Intercompany Loan is expected to contain covenants (other than a covenant
providing for the delivery of reports to holders) that are substantially the
same as those provided in the terms of the 9% Senior Notes; provided, however,
that on the redemption or repayment in full of the 9% Senior Notes, the
covenants contained in the Intercompany Loan will become substantially the same
as those provided in the terms of such other indebtedness that refinances or
replaces the 9% Senior Notes or, in the absence thereof, the notes which are a
part of the IDSs. The Intercompany Loan will be pledged by us to secure the
repayment of the CSC senior secured notes to be offered in connection with the
Proposed IDS Transactions.
Pursuant to the Proposed IDS Transactions, if at any time we are not
prohibited from doing so under the terms of our then outstanding indebtedness,
in the event that CSC undertakes a primary offering of IDSs or Class A common
stock, a portion of the net proceeds of such offering, subject to certain
limitations, will be loaned to us and increase the principal amount of the
Intercompany Loan. Furthermore, pursuant to the Proposed IDS Transactions, if at
any time we are not prohibited from doing so under the terms of our then
outstanding debt, we will be required to guarantee the CSC senior secured notes.
If after the consummation of the Proposed IDS Transactions, we merge
with or into CSC, the Intercompany Loan would be terminated and we, as a
constituent corporation of the merged companies, would become responsible for
the payment obligations relating to the CSC senior secured notes.
32
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
If the Proposed IDS Transactions are consummated, subject to applicable
law and restrictions contained in certain of our outstanding debt and financing
agreements relating to the payment of cash dividends on our common stock, we
expect to pay dividends on our common stock with available cash to enable CSC to
make cash dividend payments on its common stock and interest payments on the CSC
senior secured notes.
In connection with the Proposed IDS Transactions, CSC is in the process
of evaluating a long-term management incentive plan for our key employees which
may take one of several forms including stock options, stock grants, dividend
equivalents, and/or a performance-based cash plan.
Although CSC has filed the Registration Statement, there is no
assurance that the Proposed IDS Transactions will be consummated, in whole or in
part, and CSC may elect at any time and for any reason not to proceed with any
of the Proposed IDS Transactions.
CERTAIN ACCOUNTING TREATMENT
Our depreciation and amortization expense, amortization of advance
location payments and amortization of intangibles, which aggregated
approximately $27.6 million for the three months ended June 30, 2004 and
approximately $26.9 million for the three months ended June 30, 2003 reduces our
net income, but not our cash flow from operations. In accordance with GAAP, a
significant amount of the purchase price representing the value of location
contracts arising from businesses acquired by us is allocated to "contract
rights." Management evaluates the realizability of contract rights balances (if
there are indicators of impairment) based upon our forecasted undiscounted cash
flows. Based upon present operations and strategic plans, we believe that no
impairment of contract rights has occurred.
INFLATION AND SEASONALITY
In general, our laundry operating expenses and general and
administrative expenses are affected by inflation and the effects of inflation
may be experienced by us in future periods. We believe that such effects will
not be material. Our business generally is not seasonal.
33
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to changes in interest
rates on our long-term borrowings. Our cash flow would be adversely affected by
an increase in interest rates. As of June 30, 2004, we had approximately $108.2
million outstanding relating to our variable rate debt portfolio.
Our 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 our variable interest rate debt increased by 2.0% (or 200
basis points), our 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 $108.2 million, the balance as of
June 30, 2004.
We enter into interest rate swap agreements from time to time to
mitigate our exposure to adverse interest rate fluctuations. On September 23,
2002, we 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 Secured 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 a financial institution
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 a financial institution 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 a financial institution 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. If the Proposed IDS Transactions are consummated, we intend to
terminate these interest rate swap agreements with a portion of the net proceeds
from CSC's initial public offering.
Our 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.
We do not use derivative financial instruments for trading purposes and
are not exposed to foreign currency exchange risk.
34
COINMACH CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that, as of the
end of the period covered by this report, the Company's disclosure controls and
procedures were effective in enabling the Company to record, process, summarize,
and report information required to be included in the Company's periodic
Securities and Exchange Commission filings within the required time period.
There were no changes in the Company's internal controls over financial
reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
35
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
The Company filed Current Reports on Form 8-K on
(i) April 13, 2004 furnishing a press release
announcing the filing by Coinmach Service
36
COINMACH CORPORATION AND SUBSIDIARIES
Corp. of a registration statement on form S-1 for
a proposed public offering of Income Deposit
Securities and (ii) June 14, 2004 disclosing the
filing of amendment No. 1 to such registration
statement.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COINMACH CORPORATION
Date: August 12, 2004 /s/ Robert M. Doyle
-------------------
Robert M. Doyle
Senior Vice President and Chief Financial
Officer (On behalf of registrant and as
Principal Financial Officer)