-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H9OY/OijQNnsmoPAYyGrPNLCkH176Vry+9FLszFVqW3tV76eyLUcEb8EGUqRtzTw ai/JMzabwf5G4cJ3rfqR3g== 0000902561-99-000066.txt : 19990209 0000902561-99-000066.hdr.sgml : 19990209 ACCESSION NUMBER: 0000902561-99-000066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COINMACH LAUNDRY CORP CENTRAL INDEX KEY: 0001013021 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 113258015 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11907 FILM NUMBER: 99523996 BUSINESS ADDRESS: STREET 1: 55 LUMBER ROAD STREET 2: C/O COINMACH CORP CITY: ROSLYN STATE: NY ZIP: 11576 BUSINESS PHONE: 5164842300 MAIL ADDRESS: STREET 1: 55 LUMBER ROAD CITY: ROSLYN STATE: NY ZIP: 11576 10-Q 1 FORM 10-Q 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 December 31, 1998 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 1-11907 Coinmach Laundry Corporation (Exact name of registrant as specified in its charter) Delaware 11-3258015 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Lumber Road, Roslyn, New York 11576 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (516) 484-2300 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 __. As of the close of business on February 5, 1999, Coinmach Laundry Corporation had outstanding 12,687,135 shares of Class A common stock, par value $.01 per share (the "Common Stock"), and 480,648 shares of non-voting Class B Common Stock, par value $.01 per share (the "Non-Voting Common Stock"). COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES INDEX PART I. Financial Information Page No. - --------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets- December 31, 1998 (Unaudited) and March 31, 1998 3 Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended December 31, 1998 and December 26, 1997 4 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three and Nine Months Ended December 31, 1998 and December 26, 1997 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 PART II. Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature Page 18 -2- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars)
December 31, 1998 March 31, 1998 1 ----------------- -------------- (Unaudited) ASSETS: Cash and cash equivalents $23,995 $22,456 Receivables, net 8,436 7,750 Inventories 16,535 13,430 Prepaid expenses 6,007 6,308 Advance location payments 79,034 74,026 Land, property and equipment, less accumulated depreciation of $111,287 and $72,234 218,587 194,328 Contract rights, less accumulated amortization of $62,098 and $39,923 412,788 366,762 Goodwill, less accumulated amortization of $18,309 and $12,530 110,658 110,424 Other assets 21,479 21,464 ------- ------- Total assets $897,519 $816,948 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY: Accounts payable $20,225 $ 17,128 Accrued rental payments 26,473 20,977 Accrued interest 5,421 13,993 Other accrued expenses 12,215 15,178 Deferred income taxes 82,364 79,511 11-3/4% Senior Notes 296,655 296,655 Premium on 11 3/4% Senior Notes, net 8,332 9,258 Credit facility indebtedness 388,489 296,267 Other long-term debt 7,021 9,236 Stockholders' equity: Common stock and capital in excess of par value 104,093 103,210 Notes receivable from management (232) (335) Accumulated deficit (53,537) (44,130) -------- ------- Total stockholders' equity 50,324 58,745 ------- ------- Total liabilities and stockholders' equity $897,519 $816,948 ======= ======== See accompanying notes. - ------ 1. The March 31, 1998 balance sheet has been derived from the audited financial statements as of that date.
-3- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of dollars, except per share data)
Three Months Ended Nine Months Ended ------------------ ----------------- December 31, December 26, December 31, December 26, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUES $130,736 $80,618 $373,645 $230,415 COSTS AND EXPENSES: Laundry operating expenses 85,738 53,840 245,461 154,150 General and administrative expenses 2,006 1,600 5,987 4,517 Depreciation and amortization 28,847 17,957 83,940 52,537 Stock-based compensation charge 369 400 987 945 --------- ------- ---------- --------- 116,960 73,797 336,375 212,149 --------- ------ --------- --------- OPERATING INCOME 13,776 6,821 37,270 18,266 INTEREST EXPENSE, NET 16,902 11,301 49,336 32,430 -------- ------ --------- --------- LOSS BEFORE INCOME TAXES (3,126) (4,480) (12,066) (14,164) --------- ------- --------- ---------- PROVISION (BENEFIT) FOR INCOME TAXES: Currently payable 400 80 647 230 Deferred (828) (775) (3,306) (2,830) ----- ----- --------- ---------- (428) (695) (2,659) (2,600) ----- ----- --------- ---------- NET LOSS $(2,698) $(3,785) $(9,407) $(11,564) ========= ========= ========= ========== BASIC AND DILUTED LOSS PER SHARE $(.20) $(.35) $(.71) $ (1.09) ====== ====== ====== ========== WEIGHTED AVERAGE COMMON 13,167,783 10,872,450 13,167,783 10,614,101 SHARES OUTSTANDING See accompanying notes.
-4- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of dollars)
Nine Months Ended ----------------- December 31, December 26, 1998 1997 ------------ ----------- OPERATING ACTIVITIES: Net loss $(9,407) $(11,564) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 38,580 22,910 Amortization of advance location payments 15,035 7,566 Amortization of intangibles 30,325 22,061 Deferred income taxes (3,306) (2,830) Stock-based compensation charge 987 945 Amortization of premium on 11 3/4% Senior Notes (926) (206) Amortization of debt discount and deferred issuance costs 1,316 533 Change in operating assets and liabilities, net of business acquired: Other assets (1,499) (1,348) Receivables, net (131) 718 Inventories and prepaid expenses (1,201) (3,679) Accounts payable 1,278 172 Accrued interest (8,572) (5,653) Accrued expenses, net 2,284 (916) Net cash provided by operating activities 64,763 28,709 ------ ------ INVESTING ACTIVITIES: Additions to property and equipment (45,718) (36,357) Advance location payments to location owners (16,230) (10,257) Additions to net assets related to acquisitions of businesses (89,584) (63,903) Net cash used for investing activities (151,532) (110,517) --------- --------- FINANCING ACTIVITIES: Debt transactions: Net (repayments) borrowing of bank and other borrowings (1,507) 2,075 Deferred debt issuance costs (381) (5,355) Proceeds (repayments) from credit facility, net 92,222 (55,000) Proceeds from issuance of 11 3/4% Senior Notes - 109,875 Repayment of 9-7/8% promissory note - (15,000) Principal payments on capitalized lease obligations (2,026) (841) Equity Transactions: Proceeds from issuance of common stock - 48,900 ------- ------ Net cash provided by financing activities 88,308 84,654 ------ ------ Net increase in cash and cash equivalents 1,539 2,846 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,456 14,729 ------ ------ CASH AND CASH EQUIVALENTS, END OF PERIOD $23,995 $17,575 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $57,863 $36,500 ======= ======= See accompanying notes.
-5- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Description of Business Coinmach Laundry Corporation ("Coinmach Laundry"), a Delaware corporation, through its wholly-owned subsidiaries (collectively, the "Company"), is the leading supplier of outsourced laundry equipment services to multi-family housing properties throughout the United States. The Company's core business involves leasing laundry rooms from building owners and property management companies, installing and servicing the laundry equipment and collecting revenues generated from laundry machines. The Company owns and operates approximately 755,000 washers and dryers in approximately 75,000 locations on routes throughout the United States and in 162 retail laundromats located throughout Texas and Arizona. 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with 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 vary from such estimates. The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In the opinion of management of the Company, these unaudited condensed consolidated financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Coinmach Laundry's Annual Report on Form 10-K for the year ended March 31, 1998. Certain prior year's balances have been reclassified to conform with the current period presentation. 3. Loss per Share Basic and diluted loss per share for each of the three and nine months ended December 31, 1998 was calculated based upon the weighted average number of common shares outstanding of 13,167,783. Basic and diluted loss per share for the three months ended December 26, 1997 was calculated based upon the weighted average number of common shares outstanding of 10,872,450. Basic and diluted loss per share for the nine months ended December 26, 1997 was calculated based upon the weighted average number of common shares outstanding of 10,614,101. Conversion of common equivalent shares (stock options) was not assumed since the results would have been antidilutive. -6- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 4. Comprehensive Income On April 1, 1998, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company's net loss or stockholders' equity. The Company did not have any elements of comprehensive income which would be required to be included in its financial statements for the periods presented. 5. Long-Term Debt At December 31, 1998, Coinmach Corporation ("Coinmach"), a wholly-owned subsidiary of Coinmach Laundry, had outstanding long-term debt consisting of (a) approximately $296.7 million of 11 3/4% Senior Notes due 2005 (the "Senior Notes") and (b) $272.5 million of term loans and approximately $116.0 million of a revolving line of credit under the Amended and Restated Credit Facility. Indebtedness under the Amended and Restated Credit Facility is secured by all of the Company's real and personal property. Coinmach Laundry has guaranteed the indebtedness under the Amended and Restated Credit Facility and pledged to Bankers Trust Company, as Collateral Agent, its interests in all of the issued and outstanding shares of capital stock of Coinmach. In addition to certain terms and provisions, events of default, and customary restrictive covenants and agreements, the Amended and Restated Credit Facility contains certain 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 Senior Notes and the Amended and Restated Credit Facility limit Coinmach's ability to pay dividends. 6. Stockholders' Equity a. Secondary Offering On December 19, 1997, Coinmach Laundry completed a secondary offering (the "Secondary Offering") of 4,600,000 shares of Common Stock at a price of $19.75 per share (including the issuance of 600,000 shares in connection with the exercise of an underwriters' over-allotment option granted in connection therewith). In connection with the Secondary Offering, 2,665,000 shares were sold by Coinmach Laundry and 1,935,000 shares were sold by certain stockholders of the Company. The Company did not receive any proceeds from the sale of shares by selling stockholders. Proceeds generated from the Secondary Offering were approximately $49.9 million, after underwriting discounts and commissions and before expenses. -7- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 6. Stockholders' Equity (continued) b. Stock Option Plan Prior to the Company's initial public offering in July 1996 (the "Initial Offering"), the Company adopted the 1996 Employee Stock Option Plan (as amended and restated, the "Stock Option Plan"), which provides that the Company may grant stock options for the purchase of up to 1,109,147 shares of Common Stock to key employees of the Company over a period not to exceed ten years. The Company may grant incentive stock options at an exercise price per share not less than 100% of the fair market value of the Common Stock at the date of grant and stock options which do not qualify as incentive stock options at an exercise price per share not less than the average closing price of the Common Stock for the thirty consecutive trading days immediately preceding the date of grant. All stock options granted under the Stock Option Plan vest over four years in five equal installments (20% vest immediately on the date of grant and the remainder over a four year period) and expire ten years from the date of grant. Through December 31, 1998, the Company has granted 502,250 stock options to various employees of the Company pursuant to the Stock Option Plan, of which 248,500 were granted during the past fiscal nine months. During July and September, 1996, in connection with the Initial Offering, Coinmach Laundry granted certain non-qualified stock options to certain members of management to purchase up to 739,437 shares of Common Stock at 85% of the initial offering price of the Common Stock. Such options vest in equal annual installments (20% vest immediately on the date of grant and the remainder over a four year period) commencing on July 23, 1996, the effective date of the Initial Offering. The Company records the difference between the exercise price of such options and the initial offering price of Common Stock as a stock-based compensation charge over the applicable four year vesting period. On September 17, 1996, Coinmach Laundry granted to certain directors, each of whom was appointed by the Board of Directors of Coinmach Laundry on such date to serve as independent directors, stock options entitling each such director to purchase up to 60,000 shares of Common Stock (the "Independent Director Options"). The Independent Director Options vest in equal annual installments (25% vest immediately on the date of grant and the remainder over a three year period), commencing on September 17, 1996, and entitle each such director to purchase shares of Common Stock at the initial public offering price of the Common Stock. The Company records the difference between the exercise price of the Independent Director Options and the fair market value of the Common Stock on September 17, 1996 as a stock-based compensation charge over the applicable three year vesting period. On September 5, 1997, Coinmach Laundry granted to certain members of management certain non-qualified stock options to purchase up to 200,000 shares of Common Stock at an exercise price of $11.90 per share. Such options vest in equal annual installments (20% vest immediately on the date of grant and the remainder vest over a four year period) commencing on September 5, 1997. The Company records the difference between the exercise price of such options and the fair market value of -8- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 6. Stockholders' Equity (continued) the Common Stock on September 5, 1997 as a stock-based compensation charge over the applicable four year vesting period. On May 4, 1998, the Company granted to certain employees 248,500 non-qualified stock options pursuant to the Stock Option Plan and 31,244 non-qualified stock options to a director of the Company at an exercise price of $22.30938 per share. Such options vest in equal annual installments (20% vest immediately on June 10, 1998 and the remainder vest over a four year period). The Company records the difference between the exercise price of such options and the fair market value of the Common Stock on May 4, 1998 as a stock-based compensation charge over the applicable four year vesting period. For the nine months ended December 31, 1998, the Company recorded a stock-based compensation charge relating to the options described above of approximately $987,000. For the nine months ended December 26, 1997, the Company recorded a stock-based compensation charge relating to the options described above of approximately $945,000. 7. Acquisitions - 1998 On May 19, 1998, the Company completed the acquisition of Cleanco, Inc. and certain of its affiliates ("Cleanco") for a cash purchase price of approximately $23.0 million, excluding transaction expenses (the "Cleanco Acquisition"), financed with cash and borrowings under the Amended and Restated Credit Facility. Cleanco, headquartered in Miami, Florida, was a leading provider of outsourced laundry equipment services in southern Florida. The Cleanco Acquisition added approximately 21,000 machines to the Company's installed base. On June 5, 1998, the Company completed the acquisition of Gordon & Thomas Companies, Inc. ("G&T") for a cash purchase price of approximately $58 million, excluding transaction expenses (the "G&T Acquisition") and the assumption of certain liabilities. This transaction was financed with cash and borrowings under the Amended and Restated Credit Facility. G&T, headquartered in New Jersey, was a leading provider of outsourced laundry equipment services in the New York metropolitan area. The G&T Acquisition strengthened the Company's presence in the northeastern United States by adding approximately 36,000 machines to the Company's installed base. -9- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, certain information contained and 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 described herein and contained in the Company's Annual Report on Form 10-K for the year ended March 31, 1998. Should these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's future performance and actual results of operations may vary materially from those expected or intended. General The Company, through its operating subsidiaries, is principally engaged in supplying outsourced laundry equipment services to multi-family housing properties. The Company owns and operates approximately 755,000 washers and dryers in approximately 75,000 multi-family housing properties on routes throughout the United States and 162 retail laundromats located throughout Texas and Arizona. 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. Also included in laundry operating expenses are the costs of servicing and collecting in the route business, including payroll, parts, vehicles and other related items, the cost of sales associated with the equipment distribution business and certain expenses related to the operation of retail laundromats. In addition to commission payments, many of the Company's leases require the Company to make advance location payments to the location owners. These advance payments are capitalized and amortized over the life of the applicable lease. Other revenue sources for the Company include: (i) leasing laundry equipment and other household appliances and electronic items to corporate relocation entities, individual property owners and managers of multi-family housing properties (approximately $8.1 million for the nine months ended December 31, 1998 and approximately $2.2 million for the nine months ended December 26, 1997); (ii) operating, maintaining and servicing retail laundromats (approximately $14.9 million for the nine months ended December 31, 1998 and approximately $15.9 million for the nine months ended December 26, 1997); and (iii) constructing complete turnkey retail laundromats, retrofitting retail laundromats, distributing exclusive lines of commercial coin and non-coin operated machines and parts, and selling service contracts (approximately $27.5 million for the nine months ended December 31, 1998 and approximately $18.9 million for the nine months ended December 26, 1997). -10- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 1998. Comparison of the three and nine month periods ended December 31, 1998 and December 26, 1997 Revenues increased by approximately 62% for both the three and nine month periods ended December 31, 1998, as compared to the prior year's corresponding periods. This improvement in revenues resulted primarily from the Company's execution of its acquisition strategy and increased route revenues resulting from internal expansion. Based on the historical revenues of acquired businesses, the Company estimates that approximately $127.6 million of its revenue increase for the current nine month period is primarily due to the National Coin Acquisition (as defined) in July 1997, the ALI Acquisition (as defined) in January 1998, the Macke Acquisition (as defined) in March 1998, the Cleanco Acquisition in May 1998 and the G&T Acquisition in June 1998. In addition, during the current nine month period, the Company's installed machine base increased by approximately 18,000 machines from internal growth (excluding the machines added from the Cleanco Acquisition and the G&T Acquisition during such period) as compared to an increase of approximately 16,700 machines during the prior year's corresponding period. Included in internal growth are acquisitions of small, local route operators and new customers secured by the Company's sales force. Laundry operating expenses increased by approximately 59% for both the three and nine month periods ended December 31, 1998, as compared to the prior year's corresponding periods. The increase was due basically to an increase in laundry operating expenses (primarily commission expense) related to the National Coin Acquisition, the ALI Acquisition, the Macke Acquisition, the Cleanco Acquisition and the G&T Acquisition. However, as a percentage of revenue, laundry operating expenses were 65.6% for the three month period ended December 31, 1998 and 65.7% for the nine month period ended December 31, 1998 as compared to 66.8% for the three month period ended December 26, 1997 and 66.9% for the nine month period ended December 26, 1997. General and administrative expenses increased by approximately $0.4 million for the three month period ended December 31, 1998 and by approximately $1.5 million for the nine month period ended December 31, 1998, as compared to the prior year's corresponding periods. The increase for such periods was due to various costs and expenses related to (i) the Company's acquisition strategy, including systems development and refinement relating to the integration of prior acquisitions, and (ii) accounting, management information systems and other administrative functions associated with the Company's growth. However, as a percentage of revenues, general and administrative expenses were 1.5% for the three month period ended December 31, 1998 and 1.6% for the nine month period ended December 31, 1998, as compared to 2.0% for each of the prior year's corresponding periods. -11- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations (continued) Depreciation and amortization expenses increased by approximately 61% for the three month period ended December 31, 1998 and by approximately 60% for the nine month period ended December 31, 1998, as compared to the prior year's corresponding periods, due primarily to contract rights and goodwill associated with the above-mentioned acquisitions, as well as an increase in capital expenditures with respect to the Company's installed base of machines. During 1996 and 1997, the Company granted to certain members of management of the Company and certain other individuals non-qualified options to purchase shares of Common Stock at a 15% discount to the initial offering price of the Common Stock. With respect to such options granted to its employees, the Company records such discount as a stock-based compensation charge over the applicable four year vesting period. The Company also granted to two of its directors Independent Director Options to purchase up to a total of 120,000 shares of Common Stock. The Company records the difference between the exercise price of such options and the fair market value of the Common Stock on the date of grant as a stock-based compensation charge over the applicable three year vesting period. On May 4, 1998, the Company granted 248,500 non-qualified stock options to certain employees pursuant to the Stock Option Plan and 31,244 non-qualified stock options to a director of the Company at an exercise price of $22.30938 per share. Such options vest in equal annual installments (20% vest immediately on June 10, 1998 and the remainder vest over a four year period). The Company records the difference between the exercise price of such options and the fair market value of the Common Stock on May 4, 1998 as a stock-based compensation charge over the applicable four year vesting period. During the nine months ended December 31, 1998, the Company recorded a stock-based compensation charge relating to these options of approximately $987,000. During the nine months ended December 26, 1997, the Company recorded a stock-based compensation charge relating to these options of approximately $945,000. Operating income margins were approximately 10.5% for the three month period ended December 31, 1998, as compared to approximately 8.5% for the three month period ended December 26, 1997. Operating income margins were approximately 10.0% for the nine month period ended December 31, 1998, as compared to approximately 7.9% for the nine month period ended December 26, 1997. Interest expense, net, increased by approximately 50% for the three month period ended December 31, 1998 and by approximately 52% for the nine month period ended December 31, 1998, as compared to each of the prior year's corresponding periods due primarily to increased borrowing levels under the Amended and Restated Credit Facility in connection with certain acquisitions, as well as increased interest expense due to the offering by the Company of $100 million aggregate principal amount of 11 3/4% Series C Senior Notes due 2005 (the "Series C Notes") in October 1997. EBITDA (earnings before deductions for interest, income taxes, depreciation and amortization) before deduction for stock-based compensation charges was approximately $122.2 million for the nine months ended December 31, 1998, as compared to approximately $71.7 million for the corresponding period in 1997, representing an improvement of approximately 70%. EBITDA margins improved to -12- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations (continued) approximately 32.7% for the nine months ended December 31, 1998, compared to approximately 31.1% for the prior year's corresponding period. EBITDA is used by certain investors as an indicator of a company's historical ability to service debt. Management believes that an increase in EBITDA is an indication of the Company's improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to either (a) operating income (as determined by GAAP) as an indicator of operating performance or (b) cash flows from operating, investing and financing activities (as determined by GAAP) as a measure of liquidity. Given that EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. Liquidity and Capital Resources The Company continues to have substantial indebtedness and debt service requirements. At December 31, 1998, the Company had outstanding long-term debt (excluding the premium on the Series C Notes) of approximately $692.2 million and stockholders' equity of approximately $50.3 million. The Company's level of indebtedness will have several important effects on its future operations, including, but not limited to, the following: (a) a significant portion of the Company's cash flow from operations will be required to pay interest on its indebtedness; (b) 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; (c) 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 (d) the Company's ability to adapt to changes in the outsourced laundry equipment services industry and to economic conditions in general will be limited. As the Company has focused on increasing its cash flow from operating activities, it has made significant capital investments primarily consisting of capital expenditures related to acquisitions, renewal and growth. The Company anticipates that it will continue to utilize cash flows from operations to finance its capital expenditures and working capital needs, including interest payments on its outstanding indebtedness. Capital expenditures for the nine months ended December 31, 1998 were approximately $151.5 million. Of such amount, the Company spent approximately $89.6 million in acquisition and related transaction costs, primarily due to the Cleanco Acquisition and the G&T Acquisition, and approximately $17.4 million related to the net increase in the installed base of machines of approximately 18,000 machines. The balance of approximately $44.5 million (which consists of machine expenditures, advance location payments and laundry room improvements) was used to maintain the existing machine base in current locations and through replacement of discontinued locations and for general corporate purposes. The full impact on revenues and cash flow generated from capital expended on acquisitions and the net increase in the installed base are not expected to be reflected in the Company's financial results until subsequent reporting periods, depending on certain factors, including the timing of the capital expended. 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. -13- COINMACH LAUNDRY 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 working capital requirements are, and are expected to continue to be, minimal since a significant portion of the Company's operating expenses are not paid until after cash is collected from the installed machines. In connection with certain of the financing agreements governing the Company's indebtedness, Coinmach is required to make monthly cash interest payments as required by the Amended and Restated Credit Facility and semi-annual cash interest payments on the Senior Notes. Management believes that the Company's future operating activities will generate sufficient cash flow to repay indebtedness outstanding under the Senior Notes and borrowings under the Amended and Restated Credit Facility or to permit any necessary refinancings thereof. An inability of the Company, however, to comply with covenants or other conditions under the Amended and Restated Credit Facility or contained in the indenture governing the Senior Notes could result in an acceleration of all amounts due 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, if at all, or on terms permitted under the Amended and Restated Credit Facility or the indenture governing the Senior Notes. The Company's depreciation and amortization expenses (aggregating approximately $83.9 million for the nine months ended December 31, 1998) have the effect of reducing net income but not operating cash flow. In accordance with GAAP, a significant amount of the purchase price of businesses acquired by the Company is allocated to "contract rights", which costs are amortized over periods of 15 years. Summary of Recent Acquisitions On July 17, 1997, Coinmach completed the acquisition of National Laundry Equipment Company, Whitmer Vend-O-Mat Laundry Services, Inc. and certain other related parties (the "National Coin Acquisition") for an aggregate purchase price of approximately $19 million, excluding transaction expenses. The National Coin Acquisition, which was financed through borrowings under the Company's then existing credit facility, enabled the Company to further expand its operations by providing laundry equipment services to multi-family housing properties in the states of Ohio, Indiana, Kentucky, Michigan, West Virginia, Pennsylvania, Georgia, Tennessee, Illinois and Florida, as well as by distributing exclusive lines of commercial coin and non-coin laundry machines and parts. On January 15, 1998, Coinmach completed the acquisition of the route business of Apartment Laundries, Inc. ("ALI"), pursuant to which Coinmach acquired substantially all the assets of ALI for a cash purchase price of $16.2 million, excluding transaction expenses (the "ALI Acquisition"). The ALI Acquisition was financed through working capital and borrowings under the Company's then existing credit facility. ALI provided outsourced laundry equipment services for multi-family housing units in Oklahoma, Texas, Kansas and Arkansas. On March 2, 1998, Coinmach completed the acquisition of Macke Laundry Service, L.P. and substantially all of the assets of certain related entities (collectively, "Macke") for a cash purchase price -14- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources (continued) of approximately $213 million, excluding transaction expenses (the "Macke Acquisition"). The Macke Acquisition was financed with cash and borrowings under the Amended and Restated Credit Facility, which was amended and restated in connection with such acquisition to provide for additional borrowing capacity on substantially similar terms. The Macke Acquisition enabled the Company to further expand its route operations by providing outsourced laundry equipment services to multi-family housing properties throughout the United States and added approximately 236,000 machines to the Company's base. On May 19, 1998, Coinmach completed the Cleanco Acquisition. The Cleanco Acquisition was financed with cash and borrowings under the Amended and Restated Credit Facility. Cleanco, headquartered in Miami, Florida, was a leading provider of outsourced laundry equipment services in southern Florida. The Cleanco Acquisition added approximately 21,000 machines to the Company's installed base. On June 5, 1998, Coinmach completed the G&T Acquisition which was financed with cash and borrowings under the Amended and Restated Credit Facility. G&T, headquartered in New Jersey, was a leading provider of outsourced laundry equipment services in the New York metropolitan area. The G&T Acquisition strengthened the Company's presence in the northeastern United States by adding approximately 36,000 machines to the Company's installed base. As part of its business strategy, the Company will continue to evaluate opportunities to acquire local, regional and multi-regional route businesses. There can be no assurance that the Company will find attractive acquisition candidates or effectively manage the integration of acquired businesses into its existing business. Year 2000 The Company has undertaken a comprehensive Year 2000 initiative managed by a team consisting of internal staff and outside consultants. The Year 2000 initiative has involved an extensive review of the Company's information systems and an assessment of the compliance status of customers, suppliers and lenders with whom the Company has a significant relationship. The Company anticipates its information systems will be substantially Year 2000 compliant by the fall of 1999. The Company has contacted its significant customers, suppliers and lenders to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. Based on its evaluations to date, the Company believes that it will not be materially impacted by Year 2000 problems arising from its relationships with customers, suppliers and lenders. During 1999, the Company will continue to assess the Year 2000 compliance of these parties and will develop contingency plans should it appear that these parties will not be adequately prepared to address Year 2000 problems that could significantly impact the Company's operations. -15- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Year 2000 (continued) As of December 31, 1998, costs incurred in connection with Year 2000 compliance have not been material. The Company anticipates that future costs associated with the Year 2000 initiative will not be material to the Company's results of operation or financial condition. The Company believes it is devoting appropriate resources to the Year 2000 issue and that its internal systems will be adequately prepared for Year 2000 processing. While there can be no assurance of third party compliance, based on the analysis performed to date, the Company believes that it has resolved or has adequately addressed all identified Year 2000 issues. While the Company believes its planning efforts are adequate to address Year 2000 concerns, there can be no assurance that all such Year 2000 issues have been adequately identified and addressed, and actual results could differ materially from those planned or anticipated. The Company will continue to monitor Year 2000 readiness and to develop appropriate responses should they be required. 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 that such effects have not been nor will be material to the Company. The Company's business does not exhibit material seasonality fluctuations. -16- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES --------------------------------------------- PART II. OTHER INFORMATION ITEM 1. Legal Proceedings From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions can not be accurately predicted, management believes that any such liability, individually or in the aggregate, will not have a material adverse effect on the financial condition and results of operations of the Company. ITEM 2. Changes in Securities None. ITEM 3. Defaults Upon Senior Securities None. 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 Fourth Amended and Restated Certificate of Incorporation of Coinmach Laundry (incorporated by reference from Exhibit 3.5 to Coinmach Laundry's Form 10-Q for the quarterly period ended June 30, 1998) 3.2 Third Amended and Restated Bylaws of Coinmach Laundry (incorporated by reference from Exhibit 3.1 to Coinmach Laundry's Form 10-Q for the quarterly period ended September 27, 1996) 27.1 Financial Data Schedule (b) Reports on Form 8-K None. -17- COINMACH LAUNDRY 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 LAUNDRY CORPORATION Date: February 5, 1999 /s/ ROBERT M. DOYLE -------------------------------------------- Robert M. Doyle Senior Vice President and Chief Financial Officer (On behalf of registrant and as Principal Financial Officer) -18- EX-27 2 FDS -- COINMACH LAUNDRY CORPORATION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001013021 Coinmach Laundry Corporation 1,000 U.S. DOLLAR 9-MOS 3-MOS MAR-31-1999 MAR-31-1999 APR-01-1998 OCT-01-1998 DEC-31-1998 DEC-31-1998 1 1 23,995 0 0 0 8,436 0 0 0 16,535 0 0 0 329,874 0 (111,287) 0 897,519 0 0 0 692,165 0 0 0 0 0 104,093 0 (53,769) 0 897,519 0 0 0 373,645 130,736 0 0 245,461 85,738 90,914 31,222 0 0 49,336 16,902 (12,066) (3,126) (2,659) (428) (9,407) (2,698) 0 0 0 0 0 0 (9,407) (2,698) (.71) (.20) (.71) (.20) Total Assets: Includes Advance Location Payments of $79,034, Contract Rights of $412,788 and Goodwill of $110,658, each net of accumulated amortization at December 31, 1998. Bonds: Includes $296,655 of 11-3/4 senior notes, as well as debt outstanding under a credit facility of $388,489 at December 31, 1998. Total Liabilities: Includes Accrued Rental Payments of $26,473 and Accrued Interest of $5,421 at December 31, 1998. Other Expenses: Includes stock based compensation charges of $369 and $987 for the quarter and nine months ended December 31, 1998. Income Tax: The provision (benefit) for income taxes consists of $400 and $647 currently payable and ($828) and ($3,306) deferred, for the quarter and nine months ended December 31, 1998. Net Income: In addition, EBITDA of $122,197 (earnings before interest, income taxes, depreciation and amortization) before the deduction for the stock-based compensation charge was generated for the reported period. EBITDA is a meaningful measure of a company's ability to service debt.
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