-----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, Cd0m9KGmtCLmOpZTgQhJM5LXHLen/9ToVHwNkLIuYx9rdkoimKLqlnHQmYC/NwYV JokcWW+sBG457iiWkEeSUg== 0000950130-97-005235.txt : 19971124 0000950130-97-005235.hdr.sgml : 19971124 ACCESSION NUMBER: 0000950130-97-005235 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970328 FILED AS OF DATE: 19971121 SROS: NASD 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: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11907 FILM NUMBER: 97726502 BUSINESS ADDRESS: STREET 1: 55 LUMBER ROAD STREET 2: C/O COINMACH CORP CITY: ROSLYN STATE: NY ZIP: 11576 BUSINESS PHONE: 2122781509 MAIL ADDRESS: STREET 1: 55 LUMBER ROAD CITY: ROSLYN STATE: NY ZIP: 11576 10-K/A 1 AMENDMENT # 1 TO FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K/A AMENDMENT NO. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 28, 1997 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 OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 55 LUMBER ROAD, ROSLYN, NEW YORK 11576 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 484-2300 SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: CLASS A COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of May 26, 1997, the registrant had outstanding 10,004,278 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"). At May 26, 1997, the aggregate market value of Common Stock held by non- affiliates was approximately $83,688,840, based upon the closing price per share of the Common Stock as reported on The Nasdaq National Market on the close of business on May 23, 1997. For purposes of this calculation, shares of Common Stock held by stockholders party to that certain Voting Agreement, dated July 23, 1996, were excluded. This calculation is provided only for purposes of this report and does not represent an admission by either the registrant or any such person as to the status of such person. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the annual meeting of stockholders held on July 9, 1997 are incorporated by reference into Part III of the Form 10-K to which this Amendment No. 1 relates. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The undersigned registrant hereby amends Item 7 of its Form 10-K for the fiscal year ended March 28, 1997, as filed with the Securities and Exchange Commission on June 13, 1997, to read in its entirety as follows: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Business and Sources of Revenue The Company is principally engaged in the business of supplying coin- operated laundry equipment services to multi-family housing properties. Prior to giving effect to the Reliable Acquisition, the Company owns and operates approximately 337,000 coin-operated washers and dryers in approximately 30,000 multi-family housing properties on routes located in 30 states and the District of Columbia and in 150 retail laundromats throughout Texas. The Company's routes are located throughout the Northeast, Mid-Atlantic, Southeast, South-Central and Midwest regions of the United States. The Company, through Super Laundry, its wholly-owned subsidiary, is also a construction and laundromat equipment distribution company. The Company's most significant revenue source is derived from its route business. The Company provides coin-operated laundry equipment services to locations by leasing designated laundry rooms in buildings, typically on a long-term, renewable basis. In return for the exclusive right to provide laundry equipment services, most of the Company's leases 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 cost of servicing and collections in the route business, including, payroll, parts, vehicles and other related items, the cost of sales associated with Super Laundry and certain expenses related to the operation of retail laundromats acquired in the Kwik Wash Acquisition. In addition to commission payments, many of the Company's leases require the Company to make advance rental 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, individuals, property owners and managers of multi-family housing properties; (ii) operating, maintaining and servicing retail laundromats; and (iii) constructing complete turnkey retail laundromats, retrofitting existing retail laundromats, distributing exclusive lines of commercial coin and non- coin machines and parts, and selling service contracts. Certain Other Transactions On January 31, 1995, in connection with the acquisition of Coinmach Industries Co., L.P. and Super Laundry Co., L.P., (the "Coinmach Acquisition") certain asset values, primarily contract rights and fixed assets, were recorded at their then fair market value, adjusted to reflect a pro rata allocation of the excess of fair market value of net assets acquired, based on an independent appraisal, over the purchase price. On November 30, 1995, TCC merged with Solon (the "Merger") through an exchange of stock, whereupon the surviving corporation changed its name to Coinmach Corporation. Both Solon and TCC were under common ownership commencing April 5, 1995. The Merger was accounted for in a manner similar to a pooling of interests. In connection with a series of refinancing transactions on November 30, 1995, the Company issued approximately $196.7 million of Senior Notes (as hereinafter defined) which enabled the Company to, among other things, extend the maturity of its debt obligations, retire the remaining debt of TCC and provide additional working capital. 2 RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 8 and the Selected Historical Consolidated Financial Data included in Item 6 of this Form 10-K. Coinmach Laundry FISCAL YEAR ENDED MARCH 28, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 29, 1996 The discussion below should be read in conjunction with the following table, which combines the six month transition period ended March 29, 1996 and the period from April 5, 1995 to September 29, 1995 and the combined periods to be referred to as the prior fiscal year (in thousands):
SIX MONTH PERIOD TRANSITION PERIOD APRIL 5, 1995 TO YEAR ENDED ENDED MARCH 29, SEPTEMBER 29, MARCH 28, 1997 1996 1995 COMBINED -------------- ----------------- ---------------- -------- Revenues................ $206,852 $ 89,070 $ 89,719 $178,789 Laundry operating ex- penses................. 139,446 60,536 62,905 123,441 General and administra- tive expenses.......... 4,613 1,844 2,351 4,195 Depreciation and amorti- zation................. 46,316 18,212 18,423 36,635 Stock based compensation charge................. 2,152 -- -- -- Restructuring expenses.. -- -- 2,200 2,200 -------- -------- -------- -------- Operating income (loss). 14,325 8,478 3,840 12,318 Interest expense, net... 26,859 11,999 11,818 23,817 -------- -------- -------- -------- Loss before extraordinary items and income taxes........... (12,534) (3,521) (7,978) (11,499) Income tax (benefit) ex- pense.................. (2,307) (998) (1,862) (2,860) -------- -------- -------- -------- Loss before extraordi- nary items............. (10,227) (2,523) (6,116) (8,639) Extraordinary items, net of tax................. (296) (8,925) -- (8,925) -------- -------- -------- -------- Net loss................ $(10,523) $(11,448) $ (6,116) $(17,564) ======== ======== ======== ========
Revenues increased by approximately 16% for the 1997 Fiscal Year as compared to the prior fiscal year. The improvement in revenues was primarily attributable to increased route revenues resulting from internal expansion, the Allied Acquisition, the Kwik Wash Acquisition and an increase in revenues from Super Laundry. During the 1997 Fiscal Year, the Company's installed base increased by approximately 7,500 machines from internal growth due primarily to the elimination of capital constraints existing at Solon prior to the Merger, as compared to a reduction of approximately 750 machines during the twelve months ended March 29, 1996. Laundry operating expenses increased by approximately 13% for the 1997 Fiscal Year, as compared to the prior fiscal year. The increase was due primarily to the Allied Acquisition and the Kwik Wash Acquisition as well as an increase in the cost of sales related to Super Laundry's increased sales volume. Such increase in laundry operating expenses was offset by the implementation of cost savings programs in the Company's field operations and the consolidation of certain operating regions. General and administrative expenses increased by approximately $0.4 million or 10% for the 1997 Fiscal Year as compared to the prior fiscal year. The increase for the period was due to expenses associated with (i) the implementation of the Company's acquisition strategy, including legal and financial due diligence investigations of potential targets and related costs, (ii) the development and implementation of procedures for the management of investor relations, and (iii) systems development, refinement and integration. This increase includes a reduction of certain expenses resulting from the consolidation of the Company's corporate staff into its existing facility in Roslyn, New York on September 29, 1995. Depreciation and amortization increased by approximately 27% for the 1997 Fiscal Year, as compared to the prior fiscal year, due primarily to the Allied Acquisition and the Kwik Wash Acquisition, as well as an 3 increase in capital expenditures for the installed base of machines resulting from the elimination of capital constraints existing at Solon prior to the Merger. As a result of the Company's acquisition activity since early 1995, the Company incurred approximately $26.8 million in non-cash purchase accounting related depreciation and amortization charges for the 1997 Fiscal Year as compared to $23.6 million for the prior fiscal year. The Company incurred restructuring costs of approximately $2.2 million during the twelve months ended March 29, 1996 to cover severance obligations to certain personnel, costs to relocate certain corporate functions to Roslyn, New York, systems integration costs, and expenses related to the consolidation of certain of its regional offices, in each case, as a result of the Solon Acquisition and the Merger. The extraordinary items for the 1997 Fiscal Year consisted of costs related to the extinguishment of debt in February, 1997 and the termination of the then existing revolving credit facility. The extraordinary items for the six month period ending March 29, 1996 consisted of costs related to the extinguishment of debt in connection with the Company's refinancing in November 1995. Prior to the Offering, Coinmach Laundry issued, in privately negotiated transactions, 79,029 shares of its Class B common stock to certain members of management. The Company recorded a stock-based compensation charge of approximately $887,000 attributable to the issuance of such stock. In addition, approximately $103,000 of receivables relating to loans to management in connection with prior purchases of Coinmach Laundry's common stock were forgiven and have been recorded as a stock-based compensation charge. Coinmach Laundry also granted options to management and certain other individuals 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, Coinmach Laundry will record such discount as a stock-based compensation charge over the applicable four year vesting period. Coinmach Laundry also granted to two of its disinterested directors options to purchase up to a total of 120,000 shares of Common Stock. Coinmach Laundry will record 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. During the 1997 Fiscal Year, Coinmach Laundry recorded a stock-based compensation charge of approximately $1,162,000 relating to such options. The Company's operating income margin, approximately 7% of revenues for the 1997 Fiscal Year, was equal to that for the twelve month's ended March 29, 1996. Interest expense, net, increased by approximately 13% for the 1997 Fiscal Year as compared to the prior year due primarily to the Company's refinancing in November 1995 as well as entering into the Credit Agreement in January 1997. Partially offsetting this increase in interest expense was the decrease in the effective interest rate applied against outstanding borrowings as the result of such refinancing, as well as interest income earned on excess cash balances generated from operations. EBITDA/2/ was approximately $62.8 million (before deduction for stock-based compensation charges) for the 1997 Fiscal Year as compared to approximately $51.2 million (before deduction for restructuring costs) for the prior fiscal year, representing an improvement of approximately 23%. EBITDA margins improved to approximately 30% of revenues for the current year compared to approximately 29% of revenues for the prior year. - -------- /2/ EBITDA represents earnings from continuing operations before deductions for interest, income taxes, depreciation and amortization. EBITDA is used by management and 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 a 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 generally accepted accounting principles) as an indicator of operating performance or (b) cash flows from operating, investing and financing activities (as determined by generally accepted accounting principles) as a measure of liquidity. Given that EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. 4 SIX MONTH TRANSITION PERIOD ENDED MARCH 29, 1996 COMPARED TO THE PERIOD OCTOBER 1, 1994 TO APRIL 4, 1995 Prior to the merger of Solon and TCC, Solon's fiscal year was the fifty-two or fifty-three week period ended on the Friday nearest September 30. Effective upon the Merger, the Company changed its fiscal year end to the Friday nearest to March 31. The discussion below should be read in conjunction with the following table which combines the operating results of Solon and TCC for the period October 1, 1994 to April 4, 1995 (the predecessor period) (in thousands). The operating results of TCC are reflected in order to present comparable data.
PERIOD FROM OCTOBER 1, 1994 SIX MONTH TO APRIL 4, 1995 TRANSITION PERIOD --------------------------------- ENDED (PREDECESSOR)/1/,/2/ MARCH 29, 1996 (SUCCESSOR)/1/ TCC SOLON COMBINED ----------------- --------- --------- ----------- Revenues.................... $ 89,070 $ 35,789 $ 52,207 $ 87,996 Laundry operating expenses.. 60,536 28,253 33,165 61,418 General and administrative expenses................... 1,844 1,345 1,539 2,884 Depreciation and amortiza- tion....................... 18,212 6,009 10,304 16,313 -------- --------- --------- --------- Operating income............ 8,478 182 7,199 7,381 Interest expense, net....... 11,999 2,464 8,928 11,392 Other expense............... -- 1,341 -- 1,341 -------- --------- --------- --------- Loss before extraordinary item and income taxes...... (3,521) (3,623) (1,729) (5,352) Income tax (benefit) ex- pense...................... (998) 4 50 54 -------- --------- --------- --------- Loss before extraordinary item....................... (2,523) (3,627) (1,779) (5,406) Extraordinary item, net of tax........................ (8,925) -- (848) (848) -------- --------- --------- --------- Net loss.................... $(11,448) $ (3,627) $ (2,627) $ (6,254) ======== ========= ========= =========
- -------- /1/The term "Predecessor" refers to the period in time prior to the Solon Acquisition. The term "Successor" refers to the period in time after the Solon Acquisition and includes the historical results of Solon which have been restated to include the pooling of interests of TCC. Successor is presented on a different basis of accounting and, therefore, is not comparable to the Predecessor. /2/Certain reclassifications have been made to conform to the 1996 presentation. Revenues for the six month transition period ended March 29, 1996 were approximately 1.2% higher than combined revenues for the prior period. The improvement in revenues consisted primarily of increased revenues from Super Laundry of approximately $2.5 million. Such improvement was partially offset by a decrease of approximately $1.4 million in revenues from the route business. The average machine base for the six month transition period ended March 29, 1996 was approximately 1.4% lower than the prior period primarily as the result of constraints on available capital prior to the Merger. From September 30, 1995, through March 29, 1996, the Company successfully implemented a program to maintain its base of installed machines and eliminate any additional erosion. The effect of the decreased number of machines was partially offset by increased revenue per machine from price increases. Laundry operating expenses decreased by approximately 1.4% primarily as the result of decreased expenses of approximately $0.8 million related to implementation of cost savings programs in the Company's field operations and a decrease in commission expense of approximately 2.3%. These decreases were partially offset by an increase in the cost of sales related to the increased volume of Super Laundry. General and administrative expenses decreased by approximately $1.0 million, or 36.1%, primarily due to the consolidation of corporate staff by closing Solon's Philadelphia, Pennsylvania office and combining its operations into the Company's existing facility in Roslyn, New York on September 29, 1995. 5 Depreciation and amortization increased by approximately $1.9 million or 11.6% due primarily to purchase accounting adjustments resulting from the Solon Acquisition. Interest expense, net, increased by approximately 5.3%. Approximately $1.8 million of such increase was due primarily to the increased debt level that resulted from the Company's refinancing in November 1995. Offsetting this increase is approximately $0.8 million due to the decrease in the effective interest rate as the result of such refinancing. The increased debt resulted in an excess cash balance, which was contemplated to be used for working capital purposes and for future acquisition opportunities. The extraordinary item for the six month transition period ending March 29, 1996, consisted of costs related to the extinguishment of debt in connection with the Company's refinancing in late 1995. The extraordinary item for the period ended April 4, 1995, consisted of costs related to the change in control in connection with the Solon Acquisition. PERIOD APRIL 4, 1995 TO SEPTEMBER 29, 1995 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1994 The discussion below should be read in conjunction with the following table which combines the Predecessor period for the six months ended September 30, 1994 (in thousands):
PERIOD APRIL 5, 1995 TO SIX MONTHS ENDED SEPTEMBER 29, 1995 SEPTEMBER 30, 1994 -------------------- -------------------------- (SUCCESSOR)/1/ (PREDECESSOR)/1/,/2/ TCC SOLON COMBINED ------- ------- -------- Revenues....................... $89,719 $37,154 $51,577 $88,731 Laundry operating expenses..... 62,905 28,576 32,337 60,913 General and administrative ex- penses........................ 2,351 1,123 1,444 2,567 Depreciation and amortization.. 18,423 7,576 10,966 18,542 Restructuring costs............ 2,200 -- -- -- ------- ------- ------- ------- Operating income (loss)........ 3,840 (121) 6,830 6,709 Interest expense, net.......... 11,818 2,214 9,053 11,267 ------- ------- ------- ------- Loss before income taxes....... (7,978) (2,335) (2,223) (4,558) Income tax (benefit) expense... (1,862) 24 3,208 3,232 ------- ------- ------- ------- Net Loss....................... $(6,116) $(2,359) $(5,431) $(7,790) ======= ======= ======= =======
- -------- /1/The term "Predecessor" refers to the period in time prior to the Solon Acquisition. The term "Successor" refers to the period in time after the Solon Acquisition and includes the historical results of Solon which have been restated to include the pooling of interests of TCC. Successor is presented on a different basis of accounting and therefore, is not comparable to the Predecessor. /2/Certain reclassifications have been made to conform to the 1995 presentation. Revenues for the period April 5, 1995 to September 29, 1995 were approximately 1.1% higher than combined revenues for the prior period. The improvement in revenues consisted primarily of increased revenues from Super Laundry of approximately $1.3 million. Such improvement was partially offset by a decrease of approximately $0.3 million in revenues from routes, primarily due to a 2.0% decline in the average number of laundry machines on location, due to constraints on capital prior to the Merger. The effect of the decreased number of machines was partially offset by increased revenue per machine of approximately 1.6% primarily due to price increases. Laundry operating expenses increased by approximately 3.3%, primarily due to an increase of $1.0 million in the cost of sales related to the increase in Super Laundry revenue. The remaining increase is primarily the result of the method of accounting for installation costs applied in the Successor period. This increase is the result of increased cost of sales related to the increased volume of Super Laundry. In addition, the Company's commission expense decreased by approximately 1.0%. 6 General and administrative expenses decreased by approximately $0.2 million, or 8.4% primarily due to a decrease in the corporate staff. The Company provided for restructuring costs of approximately $2.2 million to cover severance payments to certain of Solon's management, administrative and regional personnel, costs to relocate Solon's financial and administrative functions to Roslyn, New York, costs to integrate certain financial and operating systems, and costs related to the consolidation of certain of Solon's regional offices. Interest expense, net, increased to approximately 4.9% primarily due to an increase in the interest rate on TCC's revolver, which was based on the prime lending rate. Solon FISCAL YEAR ENDED SEPTEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994 The discussion should be read in conjunction with the following table which combines the Predecessor and Successor periods for fiscal 1995 (in thousands).
FISCAL YEAR ENDED SEPTEMBER 29, 1995 ------------------------------------- APRIL 5, OCTOBER 1, FISCAL YEAR 1995 TO 1994 TO ENDED SEPTEMBER 29, APRIL 4, SEPTEMBER 30, 1995 1995 TOTAL 1994 ------------- -------------- -------- ------------------ SUCCESSOR(1) PREDECESSOR(1) PREDECESSOR(1),(2) Revenues................ $89,719 $52,207 $141,926 $104,553 Laundry operating expenses............... 62,905 33,165 96,070 66,527 Depreciation and amortization........... 18,423 10,304 28,727 21,347 General and administrative expenses............... 2,458 1,539 3,997 2,839 Gain on sale of equipment.............. -- -- -- (109) Restructuring costs..... 2,200 -- 2,200 -- ------- ------- -------- -------- Operating income........ 3,733 7,199 10,932 13,949 Interest expense, net... 11,541 8,928 20,469 18,105 ------- ------- -------- -------- Loss before income taxes and extraordinary item................... (7,808) (1,729) (9,537) (4,156) ------- ------- -------- -------- Provision (benefit) for income taxes: Currently payable....... 420 270 690 200 Deferred................ (2,282) (220) (2,502) 2,562 ------- ------- -------- -------- (1,862) 50 (1,812) 2,762 ------- ------- -------- -------- Loss before extraordinary item..... (5,946) (1,779) (7,725) (6,918) Extraordinary item, net of income taxes of $0.. -- 848 848 -- ------- ------- -------- -------- Net loss................ $(5,946) $(2,627) $ (8,573) $ (6,918) ======= ======= ======== ========
- -------- (1) The term "Predecessor" refers to the period in time prior to the Solon Acquisition. The term "Successor" refers to the period in time after the Solon Acquisition and includes the historical results of Solon which have been restated to include the pooling of interests of TCC. Successor is presented on a different basis of accounting and therefore, is not comparable to the Predecessor. (2) Certain reclassifications have been made to conform to the 1995 presentation. Excluding revenues of TCC of $38.5 million for the Successor period, revenues of $103.4 million for fiscal 1995 were $1.1 million or 1.1% lower than revenues for fiscal 1994. A favorable change of approximately $1.8 million in revenues resulting from increases in revenue per machine was offset by approximately $2.9 million in losses caused by a decline in the average number of laundry machines on location. The decline in the average number of laundry machines on location was primarily due to the lack of available capital prior to the Merger. Revenue per machines rose slightly primarily because of price increases and improved occupancy levels in the Southeast and South-Central regions. Excluding laundry operating expenses of TCC of $29.8 million for the Successor period, laundry operating expenses of $66.3 million for fiscal 1995 were $0.2 million or 0.3% lower than laundry operating expenses for fiscal 1994. Commissions expense decreased by approximately $1.0 million due to lower revenues and a 7 reduction in the average commissions rate from 44.7% of revenues during fiscal 1994 to 44.1% of revenues during fiscal 1995. The decrease in the commissions rate was primarily attributable to Solon's ongoing commission control programs and a shift away from higher commission locations primarily in the Washington, D.C. Metropolitan area. Laundry operating expenses other than commissions expense rose by approximately $0.8 million in fiscal 1995 compared to fiscal 1994 primarily due to inflationary increases. Excluding depreciation and amortization expenses of TCC of $5.5 million for the Successor period, depreciation and amortization increased by $1.9 million or 8.6% for fiscal 1995, compared to the prior year. The increase was due primarily to purchase accounting adjustments resulting from the Solon Acquisition. Excluding general and administrative expenses of TCC of $0.9 million for the Successor period, general and administrative expenses of $3.1 million for fiscal 1995 were $0.3 million or 10.7% higher than such expenses for fiscal 1994. General and administrative expenses include a charge of approximately $0.3 million for the cost of a severance agreement with the former chief executive officer of Solon. Solon provided for one-time restructuring costs of approximately $2.2 million to cover severance payments to certain of Solon's management, administrative and regional personnel, costs to relocate Solon's financial and administrative functions to Roslyn, New York, costs to integrate certain financial and operating systems, and costs related to the consolidation of certain of Solon's regional offices. Excluding interest expense of TCC of $2.7 million for the Successor period, interest expense for fiscal 1995 decreased by $0.3 million or 1.7% compared to the prior year primarily due to an increase in interest income, and to a lesser extent, a decrease in interest caused by a repurchase and retirement of $1.0 million of Solon's 12 3/4% Senior Notes due 2001 in November 1994. Solon's income tax benefit was $1.8 million in fiscal 1995 compared to a tax provision of $2.8 million for fiscal 1994. As further discussed in the consolidated financial statements, the tax provision for fiscal 1994 included a $3.7 million charge to establish a valuation allowance for previously recorded deferred tax assets. The deferred tax asset of $2.0 million recorded in the Successor period does not reflect a valuation allowance because the loss can be utilized against the deferred tax liabilities in the carryforward periods. In addition to this benefit, Solon's effective income tax rate differs from the amount computed by applying the U.S. federal statutory rate to loss before income taxes as a result of state taxes and permanent book/tax differences. Solon incurred costs aggregating $0.8 million in connection with the Solon Acquisition, including a total of $0.4 million in lump sum payments made to fourteen management employees pursuant to certain contractual arrangements relating to the acquisition. The total costs have been reflected as an extraordinary item in the financial statements. TCC (and CIC I Acquisition Corp. ("CIC"), its Predecessor) THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31, 1994 The discussion of three months ended March 31, 1995 is based on management's combination of the one month ended January 31, 1995 for TCC's predecessor and the two months ended March 31, 1995 for TCC. Although the Coinmach Acquisition was completed during this period, management does not believe there was a material impact on TCC's day to day operations and thus believes the combination of the two periods is appropriate. Despite the change in accounting basis, management believes it can make a meaningful comparison to the prior year's comparable three month period. Revenues were $17.4 million for the three month period ended March 31, 1995, a decrease of $0.9 million or 5.0% compared to the three month period ended March 31, 1994. This decrease was primarily the result of a decrease in Super Laundry revenues of approximately $1.2 million, which was due to the timing of completed 8 contracts. Super Laundry recognizes revenue on a completed contract basis. During the three months ended March 31, 1995, Super Laundry completed fewer contracts than in the corresponding period in the prior year. This shortfall was eliminated in the subsequent quarter. Increases in route revenues of approximately $0.3 million, primarily due to increased revenue per machine of approximately 1%, partially offset this shortfall. The increase in revenue per machine was primarily due to TCC's price review program whereby vend prices are regularly monitored and price increases or decreases are instituted with the goal of maximizing revenue per machine. Laundry operating expenses decreased by $0.4 million or 2.7% to $13.2 million as compared to the three month period ended March 31, 1994. The decrease in Super Laundry revenues resulted in a corresponding reduction in laundry operating expenses of approximately $0.8 million. Offsetting this decrease is an increase in commission expense of approximately $0.2 million, which is based on increased route revenues. The remaining increase of $0.2 million is due to a general increase in expenses. General and administrative expenses were generally unchanged for the two periods. Depreciation and amortization expense decreased in the three month period ended March 31, 1995 by $0.5 million compared to the three month period ended March 31, 1994. The decrease was primarily the result of purchase accounting adjustments associated with the Coinmach Acquisition. As a result of the above, operating loss was approximately $0.2 million for each period. Interest expense for the three month period ended March 31, 1995 increased by $0.3 million or 30.9% compared to the three month period ended March 31, 1994, primarily due to an increase in the effective interest rate to approximately 11% from approximately 8%, due to the increase in the prime rate. Income taxes were insignificant in both periods and resulted from state and local taxes. TCC had no Federal income tax benefit in either period because of the valuation allowances established against deferred tax assets generated from net operating losses. FISCAL YEAR ENDED DECEMBER 31, 1994 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1993 Revenues were $73.9 million in fiscal 1994, an increase of $2.0 million or 2.8% compared to fiscal 1993. The favorable change is attributable to improvements in Super Laundry of approximately $1.5 million and improvements in route operations of approximately $0.5 million. The increase in Super Laundry revenue is primarily the result of access to more attractive financing options for Super Laundry customers. The increase in route revenues is due to a 3.8% increase in revenue per machine, partially offset by a 1% decrease in the machine base. The increase in revenue per machine was primarily due to the Company's price review program. Laundry operating expenses increased by $1.9 million or 3.7% to $54.7 million as compared to fiscal 1993. The increase is attributed to costs associated with the increase in Super Laundry revenue and increased laundry operating expenses of the route operations. General and administrative expenses decreased by $0.6 million or 11.3% in fiscal 1994 compared to fiscal 1993 due to decreased salaries, benefits and professional fees. Depreciation and amortization expense decreased in fiscal 1994 by $0.8 million or 4.9% compared to fiscal 1993. The decrease was primarily the result of certain assets acquired in the leveraged buyout of CIC in 1989 becoming fully depreciated in fiscal 1994. As a result, operating loss decreased by $1.5 million to $0.3 million or 81.8% for the year ended December 31, 1994. Income taxes were insignificant in both periods and resulted from state and local taxes. CIC had no Federal income tax benefit in either period because of the valuation allowances established against deferred tax assets generated from net operating losses. 9 Interest expense for fiscal 1994 decreased by $6.5 million or 61.8% compared to fiscal 1993 primarily due to the conversion of subordinated notes to common stock pursuant to CIC's prepackaged bankruptcy plan of reorganization filed on December 15, 1993. This decrease was partially offset by an increase of $0.3 million in interest expense resulting from an increase in interest rates on its long term debt obligations. CIC recorded a non-cash charge of $1.3 million in 1994 relating to the imputed value of an equity conversion feature related to management loans pursuant to CIC's plan of reorganization. Such feature was surrendered in connection with the Coinmach Acquisition. CIC recognized an extraordinary gain of $20.4 million on the early extinguishment of debt in 1994 in connection with CIC's plan of reorganization. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share" ("FAS 128"). This standard changes the method of calculating earnings per share and will be effective for periods ending after December 15, 1997. Earlier application is not permitted. However, when adopted all prior period earnings per share data presented will be required to be restated to conform with the new standard. The Company anticipates that the impact of FAS 128 will not be material on the calculation of earnings per share. Effective March 30, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting treatment for long- lived assets that are expected to be disposed of. The effect of the Company's adoption of FAS 121 did not have an effect on the Company's results of operations or financial condition for the 1997 Fiscal Year. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 is effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company has elected to account for stock-based compensation awards pursuant to the provisions of Accounting Principles Board Opinion No. 25, as permitted by FAS 123. LIQUIDITY AND CAPITAL RESOURCES The Company continues to have substantial indebtedness and debt service requirements. At March 28, 1997, the Company had outstanding long-term debt of approximately $345.5 million and stockholders' equity of approximately $22.0 million. FINANCING ACTIVITIES Senior Notes In December 1995, the Company issued 11 3/4% Senior Notes due 2005 pursuant to the terms of an indenture, between the Company and Fleet Bank of Connecticut (formerly Shawmut Bank Connecticut, National Association) (as amended, the "Indenture") in an aggregate principal amount of $196,655,000. On March 28, 1996, the Company consummated a registered exchange offer, pursuant to which all issued and outstanding 11 3/4% Senior Notes due 2005 were exchanged for Series B 11 3/4% Senior Notes due 2005 (the "Senior Notes"). The Senior Notes, which mature on November 15, 2005, are unsecured senior obligations of Coinmach Corporation, a wholly-owned subsidiary of Coinmach Laundry ("Coinmach Corporation") and are redeemable, at the Company's option, in whole or in part at any time or from time to time, on and after November 15, 2000, 10 upon not less than 30 nor more than 60 days notice, at the redemption prices set forth in the Indenture, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption. The Indenture contains a number of restrictive covenants and agreements, including covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on certain payments (in the form of the declaration or payment of certain dividends or distributions on the capital stock of Coinmach Corporation or its subsidiaries, the purchase, redemption or other acquisition of any capital stock of Coinmach Corporation, the voluntary prepayment of subordinated indebtedness, or an Investment (as defined in the Indenture) in any other person or entity); (iii) limitation on transactions with affiliates; (iv) limitation on liens; (v) limitation on sales of assets; (vi) limitation on sale and leaseback transactions; (vii) limitation on conduct of business; (viii) limitation on dividends and other payment restrictions affecting subsidiaries; and (ix) limitation on consolidations, mergers and sales of substantially all of the assets of Coinmach Corporation. The events of default under the Indenture include provisions that are typical of senior unsecured debt financings. Upon the occurrence and continuance of certain events of default, the trustee or the holders of not less than 25% in aggregate principal amount of outstanding Senior Notes may declare all unpaid principal and accrued interest on all of the Senior Notes to be immediately due and payable. Upon the occurrence of a Change of Control (as defined in the Indenture), each holder of Senior Notes will have the right to require that the Company purchase all or a portion of such holder's Senior Notes pursuant to the offer described in the Indenture, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. Redemption of 12 3/4% Senior Notes due 2001 On February 18, 1997, Coinmach Corporation redeemed its outstanding 12 3/4% Senior Notes due 2001 at a redemption price of 106.375% of the principal amount thereof, together with accrued interest from January 15, 1997 to February 18, 1997, in an aggregate amount of approximately $5.4 million. New Credit Facility On January 8, 1997, the Company entered into the Credit Agreement with Bankers Trust Company, First Union National Bank of North Carolina, Lehman Commercial Paper, Inc. and other lending institutions named therein (collectively, the "Banks"), which provides for the New Credit Facility. The New Credit Facility replaced the Company's then existing credit facility. The New Credit Facility, as amended effective June 2, 1997, and prior to any principal installment payments, consists of a $70 million revolving credit facility and a $190 million term loan facility, which is comprised of a Tranche A term loan in the amount of $30.0 million, payable quarterly commencing March 1997, and a Tranche B term loan in the amount of $160.0 million, payable semi-annually commencing June 1997. The New 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 $5 million. At March 28, 1997, $130 million was outstanding under the Credit Agreement. Effective June 2, 1997, the Credit Agreement was amended to, among other things, increase the Tranche B portion of the term loan facility to $160.0 million. Subject to the terms and conditions of the Credit Agreement, the Company may, at its option, convert Base Rate Loans (as defined in the Credit Agreement) into Eurodollar Loans (as defined in the Credit Agreement). Interest on the Company's borrowings under the Credit Agreement is payable at a rate per annum no greater than the sum of the Applicable Base Rate Margin plus the Base Rate or the sum of the Applicable Eurodollar Margin plus the Eurodollar Rate (in each case, as defined in the Credit Agreement). Indebtedness under the Credit Agreement is secured by all of the Company's real and personal property. Coinmach Laundry has guaranteed the indebtedness under the Credit Agreement and pledged to Bankers Trust Company, as Collateral Agent, its interests in all of the issued and outstanding shares of capital stock of Coinmach Corporation. 11 The Credit Agreement contains a number of restrictive covenants and agreements, including covenants with respect to limitations on (i) indebtedness; (ii) certain payments (in the form of the declaration or payment of certain dividends or distributions on the capital stock of Coinmach Laundry or its subsidiaries or the purchase, redemption or other acquisition of any capital stock of Coinmach Laundry or its subsidiaries); (iii) voluntary prepayments of previously existing indebtedness; (iv) Investments (as defined in the Credit Agreement); (v) transactions with affiliates; (vi) liens; (vii) sales or purchases of assets; (viii) conduct of business; (ix) dividends and other payment restrictions affecting subsidiaries; (x) consolidations and mergers; (xi) capital expenditures; (xii) issuances of certain equity securities of the Company; and (xiii) creation of subsidiaries. The Credit Agreement also requires that the Company satisfy certain financial ratios, including a maximum leverage ratio and a minimum consolidated interest coverage ratio. The Credit Agreement contains certain events of default, including the following: (i) the failure of the Company to pay any of its obligations under the Credit Agreement when due; (ii) certain failures by the Company to pay principal or interest on indebtedness or certain breaches or defaults by the Company in respect of certain indebtedness, in each case, after the expiration of any applicable grace periods; (iii) certain defaults by the Company in the performance or observance of the agreements or covenants under the Credit Agreement or related agreements, beyond any applicable cure periods; (iv) the falsity in any material respect of certain of the Company's representations or warranties under the Credit Agreement; (v) certain judgments against the Company; and (vi) certain events of bankruptcy or insolvency of the Company. OPERATING ACTIVITIES The Company's level of indebtedness will have several important effects on its future operations including, but not limited to, the following: (i) a significant portion of the Company's cash flow from operations will be required to pay interest on its indebtedness and will not be available for other purposes; (ii) the financial covenants contained in certain of the agreements governing the Company's indebtedness will require the Company to meet certain financial tests and will limit its ability to borrow additional funds or to dispose of assets; (iii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; and (iv) the Company's ability to adapt to changes in the coin-operated laundry equipment services industry and to economic conditions in general could be limited. 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 1997 Fiscal Year were approximately $213.0 million (including approximately $16.2 million of promissory notes). Of such amount, the Company spent approximately $171.5 million (including approximately $16.2 million of promissory notes) in acquisition and related transaction costs, including the Kwik Wash Acquisition and the Allied Acquisition, and approximately $12.4 million related to a net increase in the installed base of machines. The balance was used to maintain the existing base and for general corporate purposes. The full impact on revenues and EBITDA 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 the timing of the capital expended. The Company anticipates that capital expenditures, excluding acquisitions and internal growth, will be approximately $38.0 million for the twelve months ending March 31, 1998. While the Company estimates that it will generate sufficient cash flows from operations to finance anticipated capital expenditures, there can be no assurances that it will be able to do so. The 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. The Company is required to make monthly cash interest payments pursuant to the Credit Agreement 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 borrowings under the Senior Notes, the New Credit Facility, the Kwik Wash Note and the AW Notes and 12 to permit any necessary refinancings thereof. An inability of the Company, however, to comply with covenants or other conditions contained in the Indenture or in the Credit Agreement could result in an acceleration of all amounts due under the Senior Notes and the New Credit Facility. If the Company is unable to meet its debt service obligations, it could be required to take certain actions such as reducing or delaying capital expenditures, selling assets, refinancing or restructuring its indebtedness, selling additional equity capital or other actions. There is no assurance that any of such actions could be effected on commercially reasonable terms or on terms permitted under the Credit Agreement or the Indenture. CERTAIN ACCOUNTING TREATMENT The Company's depreciation and amortization expenses, aggregating approximately $46.3 million for the 1997 Fiscal Year, have the effect of reducing net income but not operating cash flow. In accordance with generally accepted accounting principles, 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 up to 15 years. Although such accounting treatment can have a favorable effect on operating cash flow by reducing taxes, such treatment also reduces net income. 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 generally is not seasonal. FORWARD LOOKING STATEMENTS This report and other reports and statements filed by the Company from time to time with the Securities and Exchange Commission (collectively, "SEC Filings") contain or may contain certain forward looking statements and information that are based on the beliefs of the Company's management as well as estimates and assumptions made by, and information currently available to, the Company's management. When used in SEC Filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions, as they relate to the Company or the Company's management, identify forward looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors, shifts in market demand, and other risks and uncertainties, including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, competitors, legislative, regulatory, judicial and other governmental authorities. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary significantly from those anticipated, believed, estimated, expected, intended or planned. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Audited consolidated financial statements and the notes thereto are contained in pages F-1 through F-78 hereto. 13 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ROSLYN, STATE OF NEW YORK ON NOVEMBER 21, 1997. COINMACH LAUNDRY CORPORATION /s/ STEPHEN R. KERRIGAN By: _________________________________ Stephen R. Kerrigan Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. /s/ STEPHEN R. KERRIGAN By: ____________________________ Date: November 21, Stephen R. Kerrigan 1997 Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/ MITCHELL BLATT By: ____________________________ Date: November 21, Mitchell Blatt 1997 Director, President and Chief Operating Officer /s/ ROBERT M. DOYLE By: ____________________________ Date: November 21, Robert M. Doyle 1997 Chief Financial Officer, Senior Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ JOHN E. DENSON By: ____________________________ Date: November 21, John E. Denson 1997 Senior Vice President-Corporate Development /s/ MICHAEL STANKY By: ____________________________ Date: November 21, Michael Stanky 1997 Senior Vice President 14 /s/ DAVID A. DONNINI By: ____________________________ Date: November 21, David A. Donnini 1997 Director /s/ JAMES N. CHAPMAN Date: November 21, By: ____________________________ 1997 James N. Chapman Director /s/ BRUCE V. RAUNER By: ____________________________ Date: November 21, Bruce V. Rauner 1997 Director /s/ STEPHEN G. CERRI Date: November 21, By: ____________________________ 1997 Stephen G. Cerri Director /s/ ARTHUR B. LAFFER By: ____________________________ Date: November 21, Arthur B. Laffer 1997 Director 15 INDEX TO FINANCIAL STATEMENTS
PAGE ---- COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES Consolidated balance sheets of Coinmach Laundry Corporation and Subsidiaries as of March 28, 1997 and March 29, 1996, and the related combined consolidated statements of operations, shareholders' equity (deficit), and cash flows for the year ended March 28, 1997, the six- month transition period ended March 29, 1996 and the period from April 5, 1995 to September 29, 1995 with accompanying notes and Report of Independent Auditors thereon.......................................... F-2 COINMACH CORPORATION (FORMERLY SOLON AUTOMATED SERVICES, INC.) Combined and consolidated balance sheets of Coinmach Corporation (formerly Solon) as of September 29, 1995 and September 30, 1994 and related combined and consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the two years ended September 29, 1995 with accompanying notes and Reports of Independent Auditors thereon............................... F-23 TCC (AS SUCCESSOR TO CIC) Consolidated balance sheet of CIC as of December 31, 1994 and related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the two-year period ended December 31, 1994 with accompanying notes and Independent Auditors' Report thereon.............................................. F-42 Consolidated balance sheet of CIC as of January 31, 1995 and related consolidated statements of operations and accumulated deficit and cash flows for the month ended January 31, 1995 with accompanying notes and Independent Auditors' Report thereon.................................. F-55 Consolidated balance sheet of TCC as of March 31, 1995 and related consolidated statements of operations and accumulated deficit and cash flows for the two months ended March 31, 1995 with accompanying notes and Independent Auditors' Report thereon.............................. F-67
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Coinmach Laundry Corporation We have audited the accompanying consolidated balance sheets of Coinmach Laundry Corporation and Subsidiaries (the "Company") as of March 28, 1997 and March 29, 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year ended March 28, 1997, the six-month transition period ended March 29, 1996 and the period from April 5, 1995 to September 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Coinmach Laundry Corporation and Subsidiaries at March 28, 1997 and March 29, 1996, and the consolidated results of their operations and their cash flows for the year ended March 28, 1997, the six-month transition period ended March 29, 1996, and for the period from April 5, 1995 to September 29, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Melville, New York May 13, 1997, except for Note 5b., as to which the date is June 2, 1997 F-2 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
MARCH 28, MARCH 29, ASSETS 1997 1996 - ------ --------- --------- Cash and cash equivalents.................................. $ 14,729 $ 19,858 Receivables, less allowance of $555 and $454............... 6,894 5,260 Inventories................................................ 7,959 4,443 Prepaid expenses........................................... 3,170 2,641 Advance rental payments.................................... 38,472 20,320 Property and equipment: Laundry equipment and fixtures........................... 135,656 89,394 Land, building and improvements.......................... 14,266 10,965 Trucks and other vehicles................................ 4,211 1,849 -------- -------- 154,133 102,208 Less accumulated depreciation............................ (42,017) (19,509) -------- -------- Net property and equipment................................. 112,116 82,699 Contract rights, net of accumulated amortization of $19,815 and $8,925................................................ 180,557 59,745 Goodwill, net of accumulated amortization of $5,574 and $2,386.................................................... 95,771 44,071 Other assets............................................... 13,253 10,111 -------- -------- Total assets............................................... $472,921 $249,148 ======== ======== MARCH 28, MARCH 29, LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1997 1996 - ---------------------------------------------- --------- --------- Accounts payable........................................... $ 8,941 $ 6,085 Accrued commissions........................................ 10,573 7,380 Accrued interest........................................... 9,712 7,745 Other accrued expenses..................................... 8,996 7,557 Deferred income taxes...................................... 65,650 18,924 11 3/4% senior notes....................................... 196,655 196,655 Credit facility............................................ 130,000 -- 9 7/8% promissory note..................................... 15,000 -- 12 3/4% senior notes....................................... -- 5,000 Other long-term debt....................................... 3,831 1,110 Stockholders' equity (deficit): Common stock............................................. 105 62 Capital in excess of par value........................... 53,160 17,841 Accumulated deficit...................................... (29,263) (18,719) -------- -------- 24,002 (816) Receivables from stockholders............................ (439) (492) -------- -------- Total stockholders' equity (deficit)....................... 23,563 (1,308) -------- -------- Total liabilities and stockholders' equity (deficit)....... $472,921 $249,148 ======== ========
See accompanying notes. F-3 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
SIX-MONTH YEAR TRANSITION APRIL 5, 1995 ENDED PERIOD ENDED TO MARCH 28, MARCH 29, SEPTEMBER 29, 1997 1996 1995 --------- ------------ ------------- Revenues................................ $206,852 $ 89,070 $89,719 Costs and expenses: Laundry operating expenses............ 139,446 60,536 62,905 General and administrative............ 4,613 1,844 2,351 Depreciation and amortization......... 46,316 18,212 18,423 Stock based compensation charge....... 2,152 -- -- Restructuring expenses................ -- -- 2,200 -------- -------- ------- 192,527 80,592 85,879 -------- -------- ------- Operating income........................ 14,325 8,478 3,840 Interest expense, net................... 26,859 11,999 11,818 -------- -------- ------- Loss before income taxes and extraordi- nary items............................. (12,534) (3,521) (7,978) -------- -------- ------- Provision (benefit) for income taxes: Currently payable..................... 200 50 420 Deferred.............................. (2,507) (1,048) (2,282) -------- -------- ------- (2,307) (998) (1,862) -------- -------- ------- Loss before extraordinary items......... (10,227) (2,523) (6,116) Extraordinary items, net of income tax benefit of $206 for the year ended March 28, 1997 and $5,305 for the six- month transition period ended March 29, 1996................................... (296) (8,925) -- -------- -------- ------- Net loss................................ $(10,523) $(11,448) $(6,116) ======== ======== ======= Loss per share: Before extraordinary items............ $ (1.11) Extraordinary items................... (.03) -------- Net loss per share...................... $ (1.14) ======== Pro forma loss per share: Before extraordinary items............ $ (.32) $ (.79) Extraordinary items................... (1.15) -- -------- ------- Pro forma net loss per share............ $ (1.47) $ (.79) ======== =======
See accompanying notes. F-4 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AND SHARES)
BALANCE BALANCE BALANCE APRIL 5, NET SEPTEMBER 29, RECAPITALIZATION MARCH 29, 1995 LOSS 1995 NET LOSS OF COMMON STOCK 1996 -------- ------- ------------- -------- ---------------- --------- Voting Class A common stock, par value $.01: Authorized shares-- 15,000,000 issued shares, end of period--0, 0 and 10,004,278............ $ -- $ -- $ -- $ -- $ -- $ -- Non-voting Class B common stock, par value $.01: Authorized shares-- 1,000,000 issued shares, end of period--0, 0 and 480,648............... -- -- -- -- -- -- Class A common stock, par value $.01: Authorized shares-- 1,959,021 issued shares, end of period--1,959,021, 1,783,584 and 0....... 19 -- 19 -- (1) 18 Class B common stock, par value $.01: Authorized shares-- 345,710 issued shares, end of each period-- 265,044, 265,044 and 0..................... 3 -- 3 -- -- 3 Class C common stock, par value $.01: Authorized shares-- 305,212 issued shares, end of period--0, 305,212 and 0......... -- -- -- -- 3 3 Class D common stock, par value $.01: Authorized shares-- 305,212 issued shares, end of each period--0. -- -- -- -- -- -- Class E common stock, par value $.01: Authorized shares-- 175,436 issued shares, end of period--0, 175,436 and 0................. -- -- -- -- 2 2 Class F common stock, par value $.01: Authorized shares-- 3,086,045 issued shares, end of period--0, 3,086,045 and 0................. -- -- -- -- 30 30 Class G common stock, par value $.01: Authorized shares-- 618,428 issued shares, end of period--0, 578,509 and 0................. -- -- -- -- 6 6 Series A Preferred stock, par value $.01: 10,000 authorized, issued shares, end of period-- 0....................... -- -- -- -- -- -- Capital in excess of par value................... 17,881 -- 17,881 -- (40) 17,841 Accumulated deficit...... (1,155) (6,116) (7,271) (11,448) -- (18,719) ------- ------- ------- -------- ---- -------- 16,748 (6,116) 10,632 (11,448) -- (816) Receivables from stockholders............ (492) -- (492) -- -- (492) ------- ------- ------- -------- ---- -------- Total stockholders' equity (deficit)........ $16,256 $(6,116) $10,140 $(11,448) $ -- $(1,308) ======= ======= ======= ======== ==== ========
See accompanying notes. F-5 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AND SHARES)
BALANCE MARCH 29, ISSUANCE REDEMPTION ISSUANCE NET 1996, OF OF OF ACTIVITY BALANCE BROUGHT RECLASSIFICATION PREFERRED PREFERRED COMMON STOCK STOCK BASED IN LOANS TO MARCH 28, FORWARD NET LOSS OF COMMON STOCK STOCK STOCK STOCK DIVIDEND COMPENSATION STOCKHOLDERS 1997 --------- -------- ---------------- --------- ---------- -------- -------- ------------ ------------ --------- Voting Class A common stock, par value $.01: Authorized shares-- 15,000,000 issued shares, end of period-- 0, 0 and 10,004,278...... $ -- $ -- $57 $ -- $ -- $ 43 $ -- $ -- $-- $ 100 Non-voting Class B common stock, par value $.01: Authorized shares-- 1,000,000 issued shares, end of period--0, 0 and 480,648......... -- -- 5 -- -- -- -- -- -- 5 Class A common stock, par value $.01: Authorized shares-- 1,959,021 issued shares, end of period-- 1,959,021, 1,783,584 and 0. 18 -- (18) -- -- -- -- -- -- -- Class B common stock, par value $.01: Authorized shares--345,710 issued shares, end of each period--265,044, 265,044 and 0... 3 -- (3) -- -- -- -- -- -- -- Class C common stock, par value $.01: Authorized shares--305,212 issued shares, end of period-- 0, 305,212 and 0............... 3 -- (3) -- -- -- -- -- -- -- Class D common stock, par value $.01: Authorized shares--305,212 issued shares, end of each period--0....... -- -- -- -- -- -- -- -- -- -- Class E common stock, par value $.01: Authorized shares--175,436 issued shares, end of period-- 0, 175,436 and 0............... 2 -- (2) -- -- -- -- -- -- -- Class F common stock, par value $.01: Authorized shares-- 3,086,045 issued shares, end of period--0, 3,086,045 and 0. 30 -- (30) -- -- -- -- -- -- -- Class G common stock, par value $.01: Authorized shares--618,428 issued shares, end of period-- 0, 578,509 and 0............... 6 -- (6) -- -- -- -- -- -- -- Series A Preferred stock, par value $.01: 10,000 authorized, issued shares, end of period-- 0............... -- -- -- 19,207 (19,207) -- -- -- -- -- Capital in excess of par value..... 17,841 -- -- (19,207) -- 53,764 (398) 1,160 -- 53,160 Accumulated deficit.......... (18,719) (10,523) -- -- -- -- (21) -- -- (29,263) ------- -------- --- ------- -------- ------- ----- ------ --- ------- (816) (10,523) -- -- (19,207) 53,807 (419) 1,160 -- 24,002 Receivables from stockholders..... (492) -- -- -- -- -- -- -- 53 (439) ------- -------- --- ------- -------- ------- ----- ------ --- ------- Total stockholders' equity (deficit). $(1,308) $(10,523) $-- $ -- $(19,207) $53,807 $(419) $1,160 $53 $23,563 ======= ======== === ======= ======== ======= ===== ====== === =======
See accompanying notes. F-6 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
SIX-MONTH TRANSITION YEAR PERIOD APRIL 5, 1995 ENDED ENDED TO MARCH 28, MARCH 29, SEPTEMBER 29, 1997 1996 1995 --------- ---------- ------------- OPERATING ACTIVITIES Net loss................................... $ (10,523) $(11,448) $ (6,116) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............. 46,316 18,212 18,423 Deferred income taxes..................... (2,507) (1,048) (2,000) Amortization of debt discount and deferred issue costs..................... 627 508 735 Stock based compensation.................. 2,152 -- -- Extraordinary charges for early extinguishment of debt, net of taxes..... 296 8,925 -- Increase or decrease in operating assets and liabilities, net of businesses acquired: (Increase) decrease in other assets..... (2,462) 24 (1,054) Increase in receivables, net............ (1,100) (1,489) (197) (Increase) decrease in inventories and prepaid expenses....................... (3,008) (1,100) 930 Increase (decrease) in accounts payable. 2,002 (6) (610) Increase (decrease) in accrued interest. 1,956 3,193 (25) Increase (decrease) in other accrued expenses, net.......................... 983 (3,434) 1,980 --------- -------- -------- Net cash provided by operating activities.. 34,732 12,337 12,066 --------- -------- -------- INVESTING ACTIVITIES Additions to property and equipment........ (29,779) (10,757) (9,550) Advance rental payments to location owners. (11,809) (3,462) (3,569) Additions to net assets related to acquisitions of businesses (net of promissory notes of $16,208 in 1997)...... (155,247) -- (11,925) Sales of property and equipment............ 137 57 5 --------- -------- -------- Net cash used in investing activities...... (196,698) (14,162) (25,039) --------- -------- -------- FINANCING ACTIVITIES Debt transactions: Proceeds from issuance of 11 3/4% senior notes.................................... -- 72,655 -- Proceeds from issuance of term loans from credit facility.......................... 130,000 -- -- Net (repayments) borrowings of bank and other borrowings......................... (325) (48,715) 6,126 Repayment of 12 3/4% senior notes......... (5,000) -- -- Principal payments on capitalized lease obligations.............................. (1,007) (262) (143) Deferred debt issuance costs.............. (178) (5,397) -- Debt extinguishment costs................. (319) (6,909) -- Equity transactions: Proceeds from public offering of common stock.................................... 52,894 -- -- Redemption of preferred stock............. (19,207) -- -- Dividend paid--preferred stock............ (21) -- -- Loans to stockholders..................... -- -- (154) Sale of common stock...................... -- -- 6,681 --------- -------- -------- Net cash provided by financing activities.. 156,837 11,372 12,510 --------- -------- -------- Net (decrease) increase in cash and cash equivalents............................... (5,129) 9,547 (463) Cash and cash equivalents, beginning of period.................................... 19,858 10,311 10,774 --------- -------- -------- Cash and cash equivalents, end of period... $ 14,729 $ 19,858 $ 10,311 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid.............................. $ 24,845 $ 8,500 $ 10,900 ========= ======== ========
See accompanying notes. F-7 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of Coinmach Laundry Corporation ("Coinmach Laundry") and Subsidiaries (the "Company") include the accounts of its wholly-owned subsidiary, Coinmach Corporation ("Coinmach") (formerly Solon Automated Services, Inc. ("Solon") and the consolidated accounts of The Coinmach Corporation ("TCC")). The Company was formed on April 5, 1995, at which time it acquired Solon (the "Solon Acquisition"), and is controlled by Golder Thoma Cressey Rauner, Inc. ("GTCR"). TCC was formed in January 1995 by an investor group, comprised principally of the same investors who formed the Company, and acquired Coinmach Industries Co. ("Industries") and Super Laundry Equipment Co. L.P. ("Super Laundry LP") on January 31, 1995 (the "TCC Acquisition"). Both the Solon Acquisition and the TCC Acquisition were accounted for as purchases and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the respective acquisition dates. As described in Note 2, Solon completed a merger with TCC on November 30, 1995. This transaction was accounted for in a manner similar to a pooling of interests. As a result of the common investor group's control over both Solon and TCC, the accompanying consolidated financial statements have been prepared to reflect the accounts of the Company, Solon and TCC and their wholly-owned subsidiaries on a consolidated basis since the date of common control, April 5, 1995. The Company is primarily engaged in providing coin-operated laundry equipment services to multi-family housing properties throughout the United States. The Company owns and operates approximately 337,000 coin-operated washers and dryers in over 30,000 multi-family housing units on routes located in 30 states and the District of Columbia and in 150 retail laundromats located throughout Texas. The Company's wholly-owned subsidiary, Super Laundry Equipment Corp. ("Super Laundry"), also is a construction and laundromat equipment distribution company. All material intercompany accounts and transactions have been eliminated in consolidation. FISCAL YEAR Prior to the merger of Solon and TCC, the Company's fiscal year was the fifty-two or fifty-three week period which ended on the Friday nearest September 30th. Effective with the merger of Solon and TCC, the Company changed its fiscal year end to the last Friday in March. The period from April 5, 1995 to September 29, 1995 is referred to as "1995", the period from September 30, 1995 to March 29, 1996 is referred to as "1996T" and the year ended March 28, 1997 is referred to as "1997". RECOGNITION OF LAUNDRY REVENUES The Company has agreements with various property owners which provide for the Company's installation and operation of laundry machines at various locations in return for a commission. These agreements provide for both contingent (percentage of revenues) and fixed commission payments. The Company reports revenues from laundry machines on the accrual basis and has accrued the cash computed to be in the machines at the end of the fiscal period. Super Laundry's customers generally sign sales contracts pursuant to which Super Laundry constructs and equips complete laundromat operations, including location identification, construction, plumbing, electrical F-8 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) wiring and all required permits. Revenue is recognized on the completed contract method. A contract is considered complete when all costs have been incurred and either the installation is operating according to specifications or has been accepted by the customer. The duration of such contracts is normally less than six months. Sales of laundromats amounted to approximately $18.8 million, $7.8 million and $7.9 million in 1997, 1996T, and 1995, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):
MARCH 28, MARCH 29, 1997 1996 --------- --------- Laundry equipment..................................... $6,198 $3,774 Machine repair parts.................................. 1,761 669 ------ ------ $7,959 $4,443 ====== ======
PROPERTY AND EQUIPMENT Property, equipment and leasehold improvements are carried at cost and are depreciated or amortized on a straight-line basis over the lesser of the estimated useful lives or lease life, whichever is shorter: Laundry equipment, installation costs and fixtures.......... 3 to 10 years Leasehold improvements and decorating costs................. 4 to 10 years Trucks and other vehicles................................... 3 to 4 years
Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is included in income. Maintenance and repairs are charged to operations currently, and replacements of laundry machines and significant improvements are capitalized. Depreciation expense was $22.6 million, $9.4 million and $9.5 million for 1997, 1996T and 1995, respectively. GOODWILL AND CONTRACT RIGHTS Goodwill, under purchase accounting, represents the excess of cost over fair value of net assets acquired. Goodwill recorded as a result of the Solon Acquisition on April 5, 1995 (see Note 2) is being amortized on a straight- line basis over 20 years. Goodwill recorded on acquisitions subsequent thereto is being amortized over 15 years on a straight-line basis. F-9 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Contract rights represent amounts expended for location contracts arising from the acquisition of laundry machines on location. These amounts, which arose solely from purchase price allocations, are amortized on a straight-line basis over the period of expected benefit ranging from 3 to 15 years based on independent appraisals or present valued future cash flows at prevailing discount rates. Management periodically evaluates the realizability of the goodwill and contract rights balances based upon the Company's expectations of undiscounted cash flows and operating income. Based upon present operations and strategic plans, management believes that no impairment of goodwill or contract rights has occurred. ADVANCE RENTAL PAYMENTS Advance rental payments to location owners are amortized on a straight-line basis over the contract term, which generally ranges from 5 to 10 years. INTEREST EXPENSE Interest expense is reported net of interest income of approximately $966,000, $277,000 and $148,000 for 1997 and 1996T and 1995, respectively. RECLASSIFICATION Certain 1996T balances have been reclassified to conform with the 1997 presentation. LOSS PER SHARE Loss per share for 1997 was calculated based upon the weighted average number of common shares outstanding of 9,232,530. Pro forma loss per share for 1996T and 1995 was calculated based upon the weighted average number of common shares of 7,774,017, which amount gives effect to the transactions discussed below. The Company's historical capitalization differs significantly from its capitalization effective with its July 23, 1996 initial public offering of stock (see Note 8a). Accordingly, historical net loss per common share for the six month transition period ended March 29, 1996 and the period from April 5, 1995 to September 29, 1995 is not considered meaningful and has not been presented herein; rather, a pro forma net loss per share is presented for these periods in the accompanying statement of operations. The calculation of the shares used in computing pro forma net loss per share includes the effect of the stock issued and options granted discussed further in Note 8a, as well as the redemption of preferred stock, as more fully described in Note 8c. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock sold or issued at prices below the initial public offering price per share in the twelve months preceding the initial public offering have been included in the calculation as if outstanding for 1996T and 1995. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This standard changes the method of calculating earnings per share and will be effective for periods ending after December 15, 1997. Earlier application is not permitted; however, when adopted, all prior period earnings per share data presented will be required to be restated to conform with the new standard. The Company has determined that the impact of SFAS No. 128 will not have a material effect on the calculations of earnings per share. EMPLOYEE STOCK OPTIONS The Company has a stock option program which is more fully described in Note 8d. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting F-10 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) for Stock Issued to Employees." Under the Company's stock option program, options are granted with an exercise price not less than the market price of the underlying common stock of the Company on the date of grant. Accordingly, no compensation expense is recognized in connection with the grant of these stock options. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123 defines a fair value method of accounting for the issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under APB No. 25, but are required to disclose in the financial statement footnotes, pro forma net (loss) income and per share amounts as if the Company had applied the new method of accounting for all grants made during 1997 and 1996. SFAS No. 123 also requires increased disclosures for stock-based compensation arrangements. Effective March 30, 1996, the Company adopted the disclosure requirements of SFAS No. 123. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. SFAS No. 109 requires that any tax benefits recognized for net operating loss carryforwards and other items be reduced by a valuation allowance where it is more likely than not that the benefits may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRMENT OF LONG-LIVED ASSETS Effective March 30, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The adoption of SFAS No. 121 did not have an effect on the results of operations or financial condition of the Company. 2. BUSINESS COMBINATIONS A. THE KWIK WASH ACQUISITION On January 8, 1997, pursuant to the terms and conditions of a Stock Purchase Agreement dated as of November 25, 1996, Coinmach completed the acquisition of 100% of the outstanding voting securities of each of KWL, Inc. ("KWL"), a Nevada corporation, and Kwik-Wash Laundries, Inc. ("Kwik Wash"), a Nevada corporation, for approximately $125 million in cash (excluding transaction expenses) and a $15 million promissory note issued by Coinmach Laundry (the "Kwik Wash Acquisition"). KWL and Kwik Wash are the sole partners of Kwik Wash Laundries, L.P. (the "Kwik Wash Partnership"), a Texas limited partnership. The Kwik Wash Partnership, based in Dallas, Texas, provides coin-operated laundry equipment services to multi- F-11 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. BUSINESS COMBINATIONS--(CONTINUED) family dwellings in Texas, Louisiana, Arkansas and Oklahoma and operates approximately 150 retail laundromats located throughout Texas. Simultaneously with the acquisition, KWL, Kwik Wash and the Kwik Wash Partnership merged with and into Coinmach. Concurrently with the Kwik Wash Acquisition, Coinmach entered into a new senior financing arrangement providing up to $200 million (the "New Credit Facility") (see Note 5). The New Credit Facility, proceeds of which were used in part to fund the Kwik Wash Acquisition, replaced the Company's then existing credit facility and will provide financing to support the Company's acquisition strategy. The Kwik Wash Acquisition has been accounted for as a purchase and, accordingly, assets and liabilities were recorded at fair value at the date of acquisition and the results of operations are included subsequent to that date. The excess of cost over the net tangible assets acquired was allocated to contract rights of approximately $123.3 million, goodwill of $49.4 million and deferred taxes payable of approximately $49.4 million. The following table reflects unaudited pro forma combined results of operations of the Company and Kwik Wash as if such acquisition had taken place at the beginning of each of the periods presented (in thousands except per share data):
SIX-MONTH TRANSITION YEAR PERIOD ENDED ENDED MARCH MARCH 29, 28, 1997 1996 -------- ---------- Revenues............................................. $255,605 $121,687 Loss before extraordinary items...................... (11,148) (3,190) Net loss............................................. (11,444) (12,115) Loss before extraordinary items per common share..... (1.21) (.41) Net loss per common share............................ (1.24) (1.56)
These unaudited pro forma results have been presented for comparative purposes only and include certain adjustments, such as increased interest expense on the related acquisition debt and additional amortization expense of intangible assets, offset by the capitalization of installation and decorating costs to conform to the accounting policy of the Company. In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the Kwik Wash Acquisition been consummated at the beginning of each period or the results of future operations of the combined companies under the ownership and management of the Company. B. OTHER ACQUISITIONS During the 1997 fiscal year, the Company made acquisitions of several small route businesses or assets of businesses with purchase prices aggregating approximately $26.3 million, of which the Company paid approximately $25.2 million in cash and $1.2 million in promissory notes issued by the Company, which are included in other long-term debt. Such promissory notes have a conversion option which allows the holder of the option to convert these promissory notes, after the one-year anniversary of the issue date, into shares of the Company's Class A Common Stock at the principal amount then outstanding at a conversion price equal to 115% of the average daily closing price per share of Common Stock over the twenty business day period immediately preceding the issue date. F-12 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. BUSINESS COMBINATIONS--(CONTINUED) C. THE SOLON ACQUISITION Solon entered into a Stock Purchase Agreement, dated as of March 7, 1995, with Ford Coin Laundries, Inc. ("Ford"), and certain other parties named therein, whereby Ford purchased all of Solon's outstanding Common Stock (the "Common Stock") and substantially all of Solon's Class A Common Stock (the "Class A Common Stock") (collectively, the "Shares"). The purchase price for the Shares was $11.5 million. The foregoing transaction closed on April 5, 1995. The source of funds used by Ford for the Shares was the cash proceeds from the sales by Ford to the Company of (i) Ford's non-voting Class A Common Stock (the "Ford Non-Voting Common Stock") pursuant to a Stock Purchase Agreement, dated April 4, 1995, and (ii) an option to purchase Ford's voting common stock (the "Ford Voting Common Stock") pursuant to a Letter Agreement dated April 4, 1995. As of April 5, 1995, Ford beneficially owned, and had the sole power to dispose of, the Shares. The Shares beneficially owned by Ford represented 100% of the outstanding Common Stock and approximately 97% of the outstanding Class A Common Stock. Pursuant to the Stock Purchase Agreement with Ford, the Company purchased from Ford all of the outstanding shares of Ford Non-Voting Common Stock. The purchase price for the Ford Non-Voting Common Stock was of $11.4 million. The sources of the funds used by the Company for the Ford Non-Voting Common Stock were certain shareholders of TCC, including GTCR. As of April 5, 1995, the Company beneficially owned, and had the sole power to dispose of, 1,000 shares of Ford Non-Voting Common Stock. Pursuant to the Letter Agreement dated April 4, 1995, Ford granted to the Company, among other things, an option (the "Option") to purchase, subject to the terms and conditions contained therein, all of the Ford Voting Common Stock, for an aggregate purchase price of $100,000. On April 28, 1995, the Company exercised the Option. The sources of funds used by the Company to exercise the Option were substantially the same sources used to purchase Ford Non-Voting Common Stock. As of April 28, 1995, the Company beneficially owned, and had the sole power to vote and dispose of, ten shares of Ford Voting Common Stock. D. THE TCC ACQUISITION TCC was incorporated in January 1995 and was capitalized primarily through an equity investment by an investor group led by the majority shareholder, GTCR, and senior management and bank financing. TCC was a holding company which was formed to acquire partnership interests in Industries and Super Laundry LP. On January 31, 1995, TCC acquired its partnership interests in Industries and Super Laundry from CIC I Acquisition Corp. ("CIC I"). The transaction resulted in TCC owning 100% interests in both Industries and Super Laundry LP. The aggregate purchase price for these interests was $8.57 million, paid in cash. The acquisition was accounted for using the purchase method of accounting. The fair value of assets acquired (based on an independent appraisal for certain assets) less liabilities assumed exceeded the purchase price by approximately $7.7 million. The excess was allocated against property, equipment and intangible assets ratably based on their respective fair values. F-13 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. BUSINESS COMBINATIONS--(CONTINUED) E. THE MERGER WITH TCC On November 30, 1995, Solon completed a merger ("Merger") with TCC through an exchange of stock. Shares of common stock of the Company were issued in exchange for all of the issued and outstanding shares of common stock of TCC. The Company then contributed its stock of TCC to Solon. Solon became the surviving corporation after the merger, whereupon it changed its name to Coinmach Corporation. Details of the results of operations of TCC and Solon for the periods prior to the Merger are as follows (in thousands):
APRIL 5, 1995 SEPTEMBER 30, TO 1995 TO SEPTEMBER 29, NOVEMBER 29, 1995 1995 ------------- ------------- REVENUES Solon......................................... $51,256 $17,909 TCC........................................... 38,463 13,018 ------- ------- Combined...................................... $89,719 $30,927 ======= ======= NET (LOSS) INCOME Solon......................................... $(5,496) $ (525) TCC........................................... (450) 49 ------- ------- Combined...................................... $(5,946) $ (476) ======= =======
The combined financial results presented above include an adjustment to decrease TCC's net loss by approximately $180,000 in 1995 and $70,000 for the period from September 30, 1995 to November 29, 1995, to conform its accounting policy for the capitalization of machine installation costs to that of Solon. Intercompany transactions between the two companies for the period presented were not material. 3. RECEIVABLES Receivables consist of the following (in thousands):
MARCH 28, MARCH 29, 1997 1996 --------- --------- Trade receivables..................................... $5,551 $3,113 Notes receivable...................................... 1,225 1,811 Finance lease receivables............................. 380 625 Other................................................. 293 165 ------ ------ 7,449 5,714 Allowance for doubtful accounts....................... 555 454 ------ ------ $6,894 $5,260 ====== ======
Notes receivable, which arise from the sale of laundromats, bear interest at a weighted average rate of approximately 10% per annum and mature through 1998. The notes are collateralized by the underlying laundry equipment. The Company periodically sells notes receivable arising from the sale of laundromats to third party finance companies. Included in other receivables are finance reserves, which arise when the Company sells notes and a portion of the proceeds are retained by the finance company. As the notes are collected, the finance companies remit a portion of the collections to the Company. Many of the notes receivable are sold with recourse to the Company (see Note 9). Control of the notes sold with recourse is surrendered by the Company on the date of transfer. The Company generally sells its receivables with recourse at cost, recognizing no gain or loss. F-14 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. RESTRUCTURING COSTS Restructuring charges for 1995 consist of costs aggregating approximately $2.2 million, which includes approximately $1.3 million of severance payments for 55 of Solon's management, administrative and regional personnel, approximately $300,000 of costs to relocate Solon's financial and administrative functions to Roslyn, New York, approximately $100,000 of costs to integrate certain financial and operating systems, and approximately $500,000 of costs related to the consolidation of certain of Solon's regional offices. Of the total restructuring costs of $2.2 million, approximately $300,000 was paid during the period ended September 29, 1995, approximately $1.3 million was paid during the six months ended March 29, 1996, and the remaining portion of approximately $600,000 was paid during the fiscal year ending March 28, 1997. The 55 employee terminations include 5 management employees, 17 corporate staff financial and administrative employees and 33 regional laundry operational employees. Notifications to employees were made on various dates through September 1995. 5. DEBT Debt consists of the following (in thousands):
MARCH MARCH 28, 1997 29, 1996 -------- -------- 11 3/4% Senior Notes due 2005.......................... $196,655 $196,655 12 3/4% Senior Notes due 2001.......................... -- 5,000 Credit facility........................................ 130,000 -- 9 7/8% Promissory Note due 2004........................ 15,000 -- Obligations under capital leases....................... 1,711 686 Other long-term debt with varying terms and maturities. 2,120 424 -------- -------- $345,486 $202,765 ======== ========
A. SENIOR NOTES On November 30, 1995, Coinmach completed an exchange offer with substantially all the holders of certain 12 3/4% Senior Notes due 2001 (the "Senior Notes") and certain 13 3/4% Senior Subordinated Debentures due 2002 (the "Subordinated Debentures"). Through December 14, 1995, Coinmach issued a total of $196.7 million of 11 3/4% Senior Notes due 2005 (the "Notes") which enabled it to complete this exchange offer, consummate the merger with TCC, retire its remaining debt, and provide additional working capital. Coinmach incurred costs of approximately $4.0 million, net of income taxes, related to a 5.5% premium paid to retire its Senior Notes and Subordinated Debentures, wrote-off the unamortized balance of the related original issue discount and deferred finance costs of approximately $1.3 million and $1.8 million, net of income taxes, respectively, and also incurred costs related to the retirement of a revolving credit facility of TCC of approximately $1.8 million, net of income taxes. The aggregate of the foregoing items totaling $8.9 million, net of income taxes, is shown as an extraordinary item in 1996T. Interest on the Notes is payable semi-annually on May 15 and November 15. The Notes are redeemable at the option of Coinmach at any time after November 15, 2000 at a price equal to 105 7/8% declining to par if redeemed after November 15, 2002. The Notes contain certain financial covenants and were exchanged for identical notes in a registered exchange offer in April 1996. Additionally, the Notes restrict the payment of certain dividends, distributions or other payments from Coinmach to Coinmach Laundry. In February 1997, Coinmach redeemed all of its outstanding Senior Notes at a redemption price of 106.375% of the principal amount thereof, together with accrued interest from January 15, 1997 to February 18, F-15 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. DEBT--(CONTINUED) 1997, in an aggregate amount of approximately $5.4 million. As part of the premium paid to redeem the Senior Notes, together with the writeoff of all unamortized financing costs associated with the Senior Notes, Coinmach recognized an extraordinary charge of $502,000 (net of a tax benefit of $206,000). B. CREDIT FACILITY On November 30, 1995, Coinmach entered into a revolving credit facility ("Credit Facility"), which provided up to a maximum of $35 million and which replaced certain credit facilities of both Solon and TCC. Availability under the Credit Facility was limited by an amount equal to one semi-annual interest payment on the Notes. Interest on the borrowings was payable monthly at a rate per annum no greater than the sum of LIBOR plus 2.50%. The Company was obligated to pay an unused line fee in an amount equal to 0.5% of the unused availability payable monthly in arrears. Borrowings under the Credit Facility were secured by real and personal property of the Company and also required the Company, among other things, to maintain certain financial ratios and restrict additional investments and indebtedness. On January 8, 1997, the Company entered into a senior financing arrangement under the New Credit Facility with Bankers Trust Company, First Union National Bank of North Carolina, Lehman Commercial Paper, Inc. and certain other lending institutions named therein (collectively, the "Banks"), replacing the Company's then existing credit facility. The New Credit Facility, as amended effective June 2, 1997 and prior to any principal installments made, consists of a $70 million revolving credit facility and a $190 million term loan facility, which is comprised of a Tranche A term loan in the amount of $30 million and a Tranche B term loan in the amount of $160 million. The Tranche B term loan was increased by $60 million effective June 2, 1997. The New Credit Facility also provides for up to $10 million of letter of credit financing and short term borrowings under a swing line facility of up to $5 million. Interest on the Company's borrowings under the New Credit Facility is payable quarterly in arrears with respect to Base Rate Loans and the last day of each applicable interest period with respect to Eurodollar Loans and at a rate per annum no greater than the sum of the Applicable Base Rate Margin plus the Base Rate or the sum of the Applicable Eurodollar Margin plus the Eurodollar Rate (in each case, as defined in the New Credit Facility). Indebtedness under the New Credit Facility is secured by all of the Company's real and personal property. The Company has guaranteed the indebtedness under the New 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, as defined, and customary restrictive covenants and agreements, the New 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. Debt outstanding under the New Credit Facility as of March 28, 1997, consisted of the following (in thousands): Term loan A, quarterly payments of $750 commencing March 31, 1997, and increasing to $1,000 March 31, 1998, $1,250 March 31, 1999, and $2,000 March 31, 2002. (Interest rate of 7.6875% at March 28, 1997)............................................................. $ 30,000 Term loan B, semi-annual payments of $500 commencing June 30, 1997 with the final three payments of $31,333 on June 30, 2003, December 31, 2003 and June 30, 2004. (Interest rate of 8.125% at March 28, 1997)............................................................. 100,000 Revolving line of credit........................................... -- -------- $130,000 ========
F-16 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. DEBT--(CONTINUED) C. PROMISSORY NOTE Pursuant to the Kwik Wash Acquisition, Coinmach Laundry issued a $15.0 million 9 7/8% promissory note due June 15, 2004. Annual payments (in thousands) of $1,000 commence January 15, 1998 and increasing to $2,000 January 15, 2000, $3,000 January 15, 2003 and $4,000 June 15, 2004. 6. RETIREMENT SAVINGS PLANS Coinmach maintains several defined contribution plans (including the Coinmach Plan, Solon Plan and Kwik Wash Plan collectively, the "Plans") meeting the guidelines of Section 401(k) of the Internal Revenue Code. All of the Plans require employees to meet certain age, employment status and minimum entry requirements as allowed by law. Contributions to the Plans for 1997, 1996T and 1995 amounted to approximately $140,000, $43,000 and $43,000, respectively. The Company does not provide any other post-retirement benefits. 7. INCOME TAXES The components of the Company's net deferred tax liabilities were as follows (in thousands):
MARCH 28, MARCH 29, 1997 1996 --------- --------- Deferred tax liabilities: Accelerated depreciation and contract rights........ $73,809 $26,537 Other, net.......................................... 1,516 1,449 ------- ------- 75,325 27,986 ------- ------- Deferred tax assets: Net operating loss carryforwards.................... 9,544 8,549 Stock compensation expense.......................... 476 -- Other............................................... 115 973 Valuation allowance for deferred tax assets......... (460) (460) ------- ------- 9,675 9,062 ------- ------- Net deferred tax liabilities.......................... $65,650 $18,924 ======= =======
Deferred taxes arise primarily from timing differences resulting from using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes, and contract rights acquired which are not deductible for tax purposes. As of April 5, 1995, the deferred tax asset and related valuation allowance relating to Solon were netted and reduced to $2.6 million to reflect the net operating loss available pursuant to limitations imposed under provisions of the Internal Revenue Code regarding changes in ownership. In addition, as of April 5, 1995, TCC had recorded a deferred tax asset of $460,000 with a valuation allowance of the same amount. The deferred tax assets recorded subsequently do not reflect a valuation allowance because the loss can be utilized against the deferred tax liabilities in the carryforward period. The net operating loss carryforwards, which expire between fiscal years 2001 through 2008, consist of approximately $7 million (after the limitation) relating to Solon and approximately $16.3 million relating to the Company. F-17 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES--(CONTINUED) The benefit for income taxes consists of (in thousands):
YEAR PERIOD APRIL 5, 1995 ENDED ENDED TO MARCH 28, MARCH 29, SEPTEMBER 29, 1997 1996 1995 --------- --------- ------------- Federal................................. $(2,039) $(5,215) $(1,760) State................................... (474) (1,088) (102) ------- ------- ------- $(2,513) $(6,303) $(1,862) ======= ======= =======
The effective income tax rate differs from the amount computed by applying the U.S. federal statutory rate to loss before taxes as a result of state taxes and permanent book/tax differences as follows (in thousands):
YEAR PERIOD APRIL 5, 1995 ENDED ENDED TO MARCH 28, MARCH 29, SEPTEMBER 29, 1997 1996 1995 --------- --------- ------------- Expected tax benefit................... $(4,563) $(1,201) $(2,655) State tax benefit, net of federal tax- es.................................... (308) (170) (320) Permanent book/tax differences: Goodwill............................. 1,100 373 1,000 Stock compensation expense........... 311 -- -- Other................................ 947 -- 113 ------- ------- ------- Tax provision/(benefit)................ $(2,513) $ (998) $(1,862) ======= ======= =======
The Company made cash payments for income taxes of approximately $204,000 and $36,000 for 1997 and 1996T, respectively. 8. STOCKHOLDERS' EQUITY A. INITIAL PUBLIC OFFERING On July 23, 1996, the Company completed its initial public offering (the "Offering") of 4,120,000 shares of its Common Stock at an initial public offering price of $14.00 per share. The Company's Registration Statement for 4,000,000 shares of Common Stock was filed with the Securities and Exchange Commission on May 13, 1996 and subsequently declared effective on July 17, 1996. On July 18, 1996, the Company filed an additional registration statement on Form S-1 with respect to the registration of an additional 120,000 shares of Common Stock, which registration statement was effective upon filing. In connection with the Offering, the underwriters were granted a 30-day option to purchase up to an aggregate of 618,000 additional shares of Common Stock to cover over-allotments (the "Over-Allotment Option"), which Over- Allotment Option was exercised on August 16, 1966 with respect to the purchase of an additional 63,642 shares of Common Stock. Proceeds from the Offering were approximately $54.5 million (after giving effect to the exercise of the Over-Allotment Option), after underwriting discounts and commissions and before expenses. After giving effect to the redemption of the Preferred Stock (as described below), proceeds from the Offering were approximately $35.3 million, before expenses. Prior to the Offering, the Company issued, in privately negotiated transactions, 79,029 shares of its Class B common stock to certain members of management. The Company recorded a stock based compensation charge F-18 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. STOCKHOLDERS' EQUITY--(CONTINUED) in an amount of approximately $887,000 attributable to the issuance of such stock in 1997. In addition, approximately $103,000 of outstanding receivables relating to loans to management in connection with prior purchases of the Company's common stock were forgiven and have been accounted for as a stock- based compensation charge in 1997. B. RECLASSIFICATION AND STOCK SPLIT In connection with the Offering, the Company approved a reclassification (the "Reclassification") of all of its capital stock pursuant to which all seven classes of the previously issued and outstanding capital stock of the Company prior to the Offering were converted into a class of preferred stock, a class of voting common stock and a class of non-voting common stock. As part of the Reclassification, holders of the Company's Class A common stock, Class E common stock and Class F common stock immediately prior to the Offering (collectively, the "Preference Shares") also received a distribution consisting of shares of Common Stock and shares of Series A preferred stock, par value $.01 per share (the "Preferred Stock"), representing an amount equal to the sum of: (a) preferred dividends on such Preference Shares in an amount equal to the accrued yield (at a rate of 8% per annum, compounded quarterly) on the original investment in such Preference Shares through July 23, 1996; and (b) an amount equal to the original investment in such Preference Shares. Holders of Preference Shares who are members of the Company's management received an aggregate of 28,425 shares of Common Stock, and holders of the Preference Shares who were not members of the Company's management received an aggregate of 1,000 shares of Preferred Stock. In connection with the Reclassification, the Company also approved an approximate 23-to-1 stock split (the "Stock Split") payable to shareholders of record of the Company on July 12, 1996. C. REDEMPTION OF PREFERRED STOCK Immediately following the Offering, approximately $19.2 million of the proceeds of the Offering were used by the Company to retire all of the issued and outstanding shares of Preferred Stock. D. STOCK OPTION PLAN Prior to the 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 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 or options which do not qualify as 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. All options granted under the Stock Option Plan vest over four years in five equal installments (20% immediately) and expire ten years from the date of grant. The Company has granted 181,250 options to various employees of the Company pursuant to the Stock Option Plan, through March 28, 1997. On July 23, 1996, in connection with the Offering, the Company granted certain nonqualified options (the "Options") to certain members of management (collectively, the "Option Holders") to purchase up to 735,618 shares of Common Stock at 85% of the initial offering price of the Common Stock. On September 17, 1996, for the purpose of preserving the Option Holders' percentage interest of Common Stock represented by the Options (which percentage interest was decreased as a result of the exercise of the Over- Allotment Option), the Company granted to the Option Holders additional nonqualified stock options to purchase up to 3,819 shares of Common Stock (the "Additional Options"). The Options and Additional Options vest in equal annual installments (20% F-19 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. STOCKHOLDERS' EQUITY--(CONTINUED) vested immediately on the date of grant and the remainder over a four year period) commencing on July 23, 1996, the effective date of the Offering. With respect to Options and Additional Options granted to employees of Coinmach, Coinmach will record the difference between the exercise price and the initial offering price of Common Stock as a stock-based compensation charge over the applicable vesting period. On September 17, 1996, the Company granted to certain directors each of whom was appointed by the Board of Directors of the Company on such date to serve as independent directors, 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. Coinmach will record 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 vesting period. For the year ended March 28, 1997, the Company has recorded a stock-based compensation charge of approximately $1,162,000 relating to the Options, the Additional Options and the Independent Director Options. The Company has elected to comply with APB No. 25 and related interpretations in accounting for its employee stock options because the alternate fair value accounting provided for under SFAS No. 123 requires use of option valuation models which were not developed for use in valuing such employee stock options. Under APB No. 25, compensation expense is recognized only when the exercise price of the Company's employee stock options is less than the market price of the underlying stock on the date of grant. In accordance with SFAS No. 123, pro-forma information regarding net loss and loss per common share has been determined as if the Company had accounted for its employee stock options under the fair value method required by SFAS No. 123. The fair value for these options was estimated at the date of each grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997: risk-free interest rate of 6.6%; dividend yields of 0%, volatility factor of the expected market price of the Company's common stock of 24.5% and a weighted-average expected life of the options of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options due to changes in subjective input assumptions which may materially affect the fair value estimate, and because the Company's employee stock options have characteristics significantly different from those of traded options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma net loss and net loss per share as of March 31, 1997 is as follows: Pro forma net loss......................................... $(11,584,000) Pro forma net loss per share............................... $ (1.25)
SFAS No. 123 is applicable only to options granted subsequent to March 30, 1996 (no options were granted in fiscal 1996). F-20 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. STOCKHOLDERS' EQUITY--(CONTINUED) Information with respect to options for the year ended March 28, 1997 is as follows:
WEIGHTED AVERAGE WEIGHTED FAIR AVERAGE VALUE OF EXERCISE OPTIONS OPTIONS PRICE GRANTED --------- -------- -------- Options outstanding--beginning of year -- $ -- $ -- Options granted: Nonqualified options issued at market price...... 181,250 14.00 4.87 Directors' options issued at below market price.. 120,000 14.00 9.36 Nonqualified options issued at below market price........................................... 739,437 11.90 6.00 Options exercised.................................. -- -- -- Options cancelled and expired...................... -- -- -- --------- ------ ----- Options outstanding--end of year................... 1,040,687 $12.51 $6.17 ========= ====== ===== Options exercisable at end of year................. 214,151 $12.55 $6.26 ========= ====== =====
Exercise prices for options outstanding as of March 28, 1997 were as follows:
NUMBER OF RANGE OF OPTIONS EXERCISE PRICES - --------- ---------------- 1,040,687 $11.90 to $14.00
The weighted average remaining contractual life of those options is approximately 9.2 years. Shares of Common Stock reserved for future issuance as of March 28, 1997 are as follows:
NUMBER OF SHARES --------- Stock options................................................... 1,968,584 Conversion shares............................................... 480,648 Convertible notes............................................... 56,466 --------- 2,505,698 =========
9. COMMITMENTS AND CONTINGENCIES Rental expense for all operating leases, which principally cover office facilities, laundromats and vehicles, was approximately $2,307, $1,235 and $1,139 for 1997, 1996T and 1995, respectively (in thousands). Future minimum rental commitments under all noncancellable operating leases as of March 28, 1997, are as follows (in thousands): 1998............................................................. $ 4,140 1999............................................................. 3,668 2000............................................................. 3,056 2001............................................................. 2,287 2002............................................................. 1,218 2003 and future periods.......................................... 1,096 ------- $15,465 =======
F-21 COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. COMMITMENTS AND CONTINGENCIES--(CONTINUED) The Company is contingently liable on receivables sold with recourse to finance companies. The total amount of such receivables outstanding as of March 28, 1997 is approximately $1.6 million. The Company is party to various legal proceedings incidental to its business. Although the ultimate disposition of these proceedings is not presently determinable, management does not believe that adverse determinations in any or all such proceedings would have a material adverse effect upon the financial condition or results of operations of the Company. In connection with insurance coverages, which include workers compensation, general liability and other coverages, annual premiums are subject to limited retroactive adjustment based on actual loss experience. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS Under the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," the Company is required to disclose fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The carrying amounts of cash and cash equivalents, receivables, the New Credit Facility, the promissory note related to the Kwik Wash Acquisition and other long-term debt approximates their fair market value at March 28, 1997. The carrying amount and related estimated fair value for the Company's Senior Notes at March 28, 1997 (the carrying amount approximated the estimated fair market at March 29, 1996) are as follows (in thousands):
CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- 11 3/4% Senior Notes.................................. $196,655 $216,320
The fair value of the Senior Notes has been determined through information obtained from quoted market prices. 11. OTHER ASSETS In connection with the Company's establishment of a corporate development office in Charlotte, North Carolina and the relocation of an executive officer of the Company to such office in September 1996, the Company extended a loan to such officer in the principal amount of $500,000 payable in five equal annual installments commencing in July 1997, with interest accruing at a rate of 7.5% per annum. The amount of such loan is included in other assets as of March 28, 1997. 12. SUBSEQUENT EVENTS Through May 1997, the Company completed certain acquisitions of businesses or assets of businesses, with purchase prices aggregating approximately $46.0 million, utilizing funds available under the New Credit Facility. F-22 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Coinmach Corporation We have audited the accompanying combined consolidated balance sheet of Coinmach Corporation and Subsidiaries (formerly Solon Automated Services, Inc., which was combined with The Coinmach Corporation and Subsidiaries, a company under common control, beginning April 5, 1995) (the "Company") as of September 29, 1995, and the related combined consolidated statements of operations, shareholders' equity (deficit), and cash flows for the period from April 5, 1995 to September 29, 1995 ("Successor period") and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the period from October 1, 1994 to April 4, 1995 ("Predecessor period"). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined consolidated financial position of Coinmach Corporation and Subsidiaries at September 29, 1995, and the combined consolidated results of its operations and its cash flows for the Successor period from April 5, 1995 to September 29, 1995 and the consolidated results of its operations and its cash flows for the Predecessor period from October 1, 1994 to April 4, 1995, in conformity with generally accepted accounting principles. As more fully described in Note 2 to the combined consolidated financial statements, SAS Acquisitions Inc. purchased Solon Automated Services, Inc. ("Solon") as of April 5, 1995 in a business combination accounted for as a purchase. Subsequent thereto, on November 30, 1995, The Coinmach Corporation, a company under common control with Solon, was merged into Solon, who thereupon changed its name to Coinmach Corporation, in a business combination accounted for as though it were a pooling of interests. As a result, the combined and consolidated financial statements for the Successor are presented on a different basis of accounting than that of the Predecessor and, therefore, are not comparable. /s/ Ernst & Young LLP Melville, NY March 20, 1996 F-23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Solon Automated Services, Inc.: We have audited the consolidated balance sheet of Solon Automated Services, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1994 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Solon Automated Services, Inc. and subsidiaries as of September 30, 1994, and the results of their operations and their cash flows for the fiscal year then ended, in conformity with generally accepted accounting principles. As further discussed in Note 1 to the consolidated financial statements, effective October 2, 1993, the Company implemented the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /s/ Arthur Andersen LLP Philadelphia, Pa., December 19, 1994 F-24 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) COMBINED AND CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE)
SEPTEMBER 29 SEPTEMBER 30 1995 1994 ------------ ------------ SUCCESSOR PREDECESSOR ASSETS Cash and cash equivalents............................ $ 9,282 $ 7,241 Receivables, less allowance of $360 and $34.......... 4,268 1,702 Inventories.......................................... 3,902 1,257 Prepaid expenses..................................... 2,084 833 Advance rental payments.............................. 19,772 17,646 Property and equipment: Laundry equipment and fixtures..................... 81,599 84,576 Land, building and improvements.................... 8,027 13,239 Trucks and other vehicles.......................... 1,400 254 -------- -------- 91,026 98,069 Less accumulated depreciation.................... 10,320 49,342 -------- -------- Net property and equipment....................... 80,706 48,727 Contract rights, net of accumulated amortization of $4,869 and $15,171.................................. 63,801 15,432 Goodwill, net of accumulated amortization of $1,226 and $9,694.......................................... 45,231 45,881 Other assets, principally debt issuance costs........ 10,897 4,870 -------- -------- Total assets..................................... $239,943 $143,589 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable..................................... $ 6,220 $ 3,186 Accrued commissions.................................. 8,456 4,553 Accrued interest..................................... 4,551 4,657 Other accrued expenses............................... 10,241 3,395 Deferred income taxes................................ 25,277 8,032 12 3/4% senior notes................................. 99,000 100,000 13 3/4% senior subordinated debentures, net of unamortized discount of $1,326 and $1,513................................... 28,674 28,487 Long-term credit facility............................ 43,477 Other long-term debt................................. 264 Shareholders' equity (deficit) Common stock, par value $.01: Authorized shares--1,000 and 20,000,000 Issued shares--100 and 12,174,257.................. -- 122 Class A common stock, par value $.01: 3,247,885 shares authorized and issued in 1994..... -- 33 Capital in excess of par value....................... 23,222 14,221 Accumulated deficit.................................. (7,101) (23,097) -------- -------- 16,121 (8,721) Receivables from shareholders........................ (2,338) -- -------- -------- Total shareholders' equity (deficit)................. 13,783 (8,721) -------- -------- Total liabilities and shareholders' equity (defi- cit)................................................ $239,943 $143,589 ======== ========
See accompanying notes. F-25 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
APRIL 5, 1995 OCTOBER 1, TO 1994 TO YEAR ENDED SEPTEMBER 29, APRIL 4, SEPTEMBER 30, 1995 1995 1994 ------------- ----------- ------------- SUCCESSOR PREDECESSOR PREDECESSOR Revenues............................... $89,719 $52,207 $104,553 Costs and expenses: Laundry operating expenses........... 62,905 33,165 66,527 Depreciation and amortization........ 18,423 10,304 21,347 General and administrative........... 2,458 1,539 2,839 Gain on sale of equipment............ -- -- (109) Restructuring costs.................. 2,200 -- -- ------- ------- -------- 85,986 45,008 90,604 ------- ------- -------- Operating income....................... 3,733 7,199 13,949 Interest expense, net................ 11,541 8,928 18,105 ------- ------- -------- Loss before income taxes and extraordinary item.................... (7,808) (1,729) (4,156) ------- ------- -------- Provision (benefit) for income taxes: Currently payable.................... 420 270 200 Deferred............................. (2,282) (220) 2,562 ------- ------- -------- (1,862) 50 2,762 ------- ------- -------- Loss before extraordinary item......... (5,946) (1,779) (6,918) Extraordinary item, net of income taxes of $0......................... -- 848 -- ------- ------- -------- Net loss............................... $(5,946) $(2,627) $ (6,918) ======= ======= ======== Loss per share: Before extraordinary item............ $ -- $ (.12) $ (.44) Extraordinary item................... -- (.05) -- ------- ------- -------- Net loss per share..................... $ -- $ (.17) $ (.44) ======= ======= ========
See accompanying notes. F-26 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS OF DOLLARS)
CAPITAL IN COMMON CLASS A COMMON EXCESS OF ACCUMULATED RECEIVABLES FROM TOTAL SHAREHOLDERS' STOCK STOCK PAR VALUE DEFICIT SHAREHOLDER EQUITY (DEFICIT) ------ -------------- ---------- ----------- ---------------- ------------------- Balance, October 1, 1993................... $ 124 $ 33 $14,386 $(16,179) $ -- $(1,636) Net loss................ -- -- -- (6,918) -- (6,918) Repurchase of 270,000 shares of common stock.................. (3) -- (267) -- -- (270) Contribution to retirement savings plan................... 1 -- 102 -- -- 103 ------------------------------------------------------------------------------------- Balance, September 30, 1994................... 122 33 14,221 (23,097) -- (8,721) Net loss--Predecessor period................. -- -- -- (2,627) -- (2,627) Repurchase of 45,459 shares of common stock.................. -- -- (68) -- -- (68) Purchase accounting adjustments............ -- -- (2,308) 25,724 -- 23,416 Recapitalization of common stock........... (122) (33) 155 -- -- -- Merger of TCC........... -- -- 11,222 (1,155) (338) 9,729 Advance to SAS.......... -- -- -- -- (2,000) (2,000) Net loss--Successor period................. -- -- -- (5,946) -- (5,946) ------------------------------------------------------------------------------------- Balance, September 29, 1995................... $ -- $ -- $23,222 $ (7,101) $(2,338) $13,783 ------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------
See accompanying notes. F-27 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
APRIL 5, 1995 OCTOBER 1, TO 1994 TO YEAR ENDED SEPTEMBER 29, APRIL 4, SEPTEMBER 30, 1995 1995 1994 ------------- ----------- ------------- SUCCESSOR PREDECESSOR PREDECESSOR OPERATING ACTIVITIES Net loss.............................. $ (5,946) $(2,627) $ (6,918) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization....... 18,423 10,304 21,347 Deferred income taxes............... (2,000) (220) 2,649 Amortization of debt discount and deferred issue costs............... 735 440 878 Decrease (increase) in other assets............................. (717) 106 (233) Decrease (increase) in receivables, net................................ (73) 164 78 Decrease (increase) in inventories and prepayments.................... 930 (676) 2,074 Increase (decrease) in accounts payable............................ (668) 1,725 (2,173) Decrease in accrued interest........ (25) (81) (24) Increase in other accrued expenses, net................................ 1,980 1,081 236 -------- ------- -------- Net cash provided by operating activities........................... 12,639 10,216 17,914 -------- ------- -------- INVESTING ACTIVITIES Additions to property and equipment... (9,550) (4,815) (11,224) Advance payments to location owners... (3,569) (2,129) (5,555) Sales of property and equipment....... 5 407 16 -------- ------- -------- Net cash used in investing activities........................... (13,114) (6,537) (16,763) -------- ------- -------- FINANCING ACTIVITIES Advance to SAS........................ (2,000) -- -- Repurchase of senior notes............ -- (1,000) -- Net borrowings (repayments) of bank and other borrowings................. 1,126 -- -- Principal payments of capitalized lease obligations.................... (143) -- -- Repurchases of common stock........... -- (68) (270) -------- ------- -------- Net cash used in financing activities........................... (1,017) (1,068) (270) -------- ------- -------- Net increase (decrease) in cash....... (1,492) 2,611 881 Cash and cash equivalents, beginning of period............................ 10,774 7,241 6,360 -------- ------- -------- Cash and cash equivalents, end of period............................... $ 9,282 $ 9,852 $ 7,241 ======== ======= ========
See accompanying notes. F-28 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 29, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION AND CONSOLIDATION The accompanying successor financial statements combine the consolidated accounts of Coinmach Corporation and Subsidiaries, formerly Solon Automated Services, Inc. ("Solon") with the consolidated accounts of The Coinmach Corporation ("TCC") (collectively, the "Company") for the periods under common control. The Predecessor financial statements reflect the consolidated accounts of Solon only. Solon was acquired on April 5, 1995 by SAS Acquisitions, Inc. ("SAS") (the "Solon Acquisition") a company controlled by Golder Thoma Cressey Rauner ("GTCR"). TCC was formed in January 1995 by an investor group, comprised principally of the same investors who formed SAS, and acquired Coinmach Industries Co. and Super Laundry Equipment Co. L.P. on January 31, 1995 (the "TCC Acquisition"). Both the Solon Acquisition and the TCC Acquisition were accounted for as purchases and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the respective acquisition dates. As described in Note 2, Solon completed a merger with TCC on November 30, 1995. This transaction was accounted for in a manner similar to a pooling of interests. As a result of the common investor groups control over both Solon and TCC, the accompanying financial statements have been prepared to reflect the accounts of Solon and TCC and their wholly-owned subsidiaries on a combined basis since the date of common control, April 5, 1995. References to the Successor refer to the Company during the common control period, while references to the Predecessor refer to Solon for prior periods. The Predecessor period from October 1, 1994 to April 4, 1995 is referred to as 1995P while the Successor period from April 5, 1995 to September 29, 1995 is referred to as 1995S. As a result of the acquisition of Solon by SAS and the subsequent merger with TCC, the combined consolidated financial statements for the Successor are presented on a different basis of accounting than that for the Predecessor and therefore, are not comparable. The Company is primarily engaged in providing coin-operated laundry equipment services to multi-family housing complexes throughout much of the United States. The Company owns and operates over 220,000 coin-operated washers and dryers on routes in over 20,000 multi-family housing units in 20 states and the District of Columbia. Such routes are located throughout the New York Metropolitan, Mid-Atlantic, Southeast and South-Central regions of the United States. The Company, through its subsidiary, Super Laundry, also is a supplier of coin-operated laundromat equipment and turnkey laundromat retail stores in the New York Metropolitan area. Certain reclassifications have been made to the 1994 financial statements to conform to the 1995 presentation. All material intercompany accounts and transactions have been eliminated in consolidation. FISCAL YEAR Prior to the merger with TCC, Solon's fiscal year was the fifty-two or fifty- three week period which ended on the Friday nearest September 30th. The fiscal years ended September 29, 1995 and September 30, 1994 are fifty-two week periods. Effective with the merger of Solon and TCC, the Company has changed its fiscal year end to the Friday nearest to March 31. F-29 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RECOGNITION OF LAUNDRY REVENUES The Company has agreements with various property owners which provide for the Company's installation and operation of laundry machines at various locations in return for a commission. These agreements provide for both contingent (percentage of revenues) and fixed commission payments. The Company reports revenues from laundry machines on the accrual basis and has accrued the cash computed to be in the machines at the end of the fiscal period. Super Laundry's customers generally sign sales contracts pursuant to which Super Laundry constructs and equips complete laundromat operations, including location identification, construction, plumbing, electrical wiring and all required permits. Revenue is recognized on the completed contract method. A contract is considered complete when all costs have been incurred and either the installation is operating according to specifications or has been accepted by the customer. The duration of such contracts is normally less than six months. Sales of laundromats were approximately $7.9 million for 1995S. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):
SEPTEMBER 29, 1995 SEPTEMBER 30, 1994 ------------------ ------------------ SUCCESSOR PREDECESSOR Machine repair parts................. $1,941 $1,257 Laundry equipment.................... 1,961 -- ------ ------ $3,902 $1,257 ====== ======
PROPERTY AND EQUIPMENT Property and equipment are carried at cost and are depreciated on a straight- line basis over the following estimated useful lives: Laundry equipment and fixtures............................... 3 to 10 years Improvements................................................. 4 to 10 years Trucks and other vehicles.................................... 3 to 4 years
Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is included in income. Maintenance and repairs are charged to operations currently, and replacements of laundry machines and significant improvements are capitalized. F-30 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Depreciation expense was $9.5 million, $6.2 million and $13.0 million for 1995S, 1995P, and fiscal year 1994, respectively. On April 5, 1995, TCC revised its estimate of the useful life of its laundry equipment from 5 to 8 years. The effect of this change in estimate was to decrease loss before extraordinary item and net loss for the Successor period by approximately $470,000. GOODWILL Goodwill as of September 30, 1994 represents the excess of cost over fair value of net assets acquired, arising primarily as a result of the purchase of Solon in 1987 by an investor group. Goodwill as of September 29, 1995 represents the excess of cost over fair value of net assets acquired arising from the purchase of Solon on April 5, 1995 (see Note 2). Goodwill was amortized on a straight-line basis over 40 years for the Predecessor and is being amortized over 20 years for the Successor. Management periodically evaluates the realizability of the goodwill balance based upon the Company's expectations of nondiscounted cash flows and operating income. Based upon present operations and strategic plans, management believes that no impairment of goodwill has occurred. CONTRACT RIGHTS Contract rights represent amounts expended for location contracts arising from the acquisition of laundry machines on location. These amounts, which arose solely from purchase price allocations, are amortized on a straight-line basis over the period of expected benefit of approximately 13 years for the Predecessor, and ranging from 3 to 15 years for the Successor based on independent appraisals. ADVANCE RENTAL PAYMENTS Advance payments to location owners are amortized on a straight-line basis over the contract term, which generally ranges from 5 to 10 years. INTEREST EXPENSE Interest expense is reported net of interest income of $148,000, $112,000 and $75,000 for 1995S, 1995P, and fiscal year 1994, respectively. LOSS PER SHARE In the 1995P period and in fiscal 1994, loss per share for the Predecessor company was calculated based upon the weighted average number of common shares and Class A common shares outstanding. Stock options outstanding, which are common stock equivalents, have not been included as they are antidilutive. Weighted average shares outstanding were 15,455,000 for 1995P and 15,559,000 for fiscal 1994. Loss per share data is not presented for the 1995S period as Solon became a wholly-owned subsidiary of GTCR. TRANSACTIONS WITH AFFILIATES During 1995S, the Company reimbursed its parent company $114,000 for certain restructuring costs. F-31 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES Effective October 2, 1993, Solon implemented the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). The accounting change had an immaterial effect on the consolidated financial statements. Statement 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Statement 109 requires that any tax benefits recognized for net operating loss carryforwards and other items be reduced by a valuation allowance where it is more likely than not that the benefits may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company is required to adopt Statement 121 effective March 30, 1996 and, based on current circumstances, does not believe the effect of adoption will be material. 2. BUSINESS COMBINATIONS THE SOLON ACQUISITION Solon entered into a Stock Purchase Agreement, dated as of March 7, 1995, with Ford Coin Laundries, Inc. ("Ford"), Kwik Wash Laundries, Inc. ("Kwik Wash"), and certain stockholders of the Predecessor company (the "Sellers"), whereby Ford purchased from the Sellers all of the Solon's outstanding Common Stock (the "Common Stock") and substantially all of the Solon's Class A Common Stock (the "Class A Common Stock") (collectively, the "Shares"). The purchase price for the Shares was $.7457 per share, for an aggregate purchase price of $11.5 million. The foregoing transaction closed and the purchase price was funded on April 5, 1995. The source of funds used by Ford for the Shares was the cash proceeds from the sales by Ford to (i) SAS of the Ford Non-Voting Common Stock, pursuant to a Stock Purchase Agreement, dated April 4, 1995, and (ii) to the holders of the Ford Voting Common Stock (collectively, the "Ford Holders"), an option pursuant to a Letter Agreement dated April 4, 1995. As of April 5, 1995, Ford beneficially owned, and had the sole power to dispose of, the Shares. The Shares beneficially owned by Ford represented 100% of the outstanding Common Stock and approximately 97% of the outstanding Class A Common Stock. Pursuant to the Stock Purchase Agreement with Ford, SAS purchased from Ford all of the outstanding shares of Ford's non-voting Class A Common Stock (the "Ford Non-Voting Common Stock"). The purchase price for the Ford Non-Voting Common Stock was $11,400 per share, for an aggregate purchase price of $11.4 million. The sources of the funds used by SAS for the Ford Non-Voting Common Stock were certain shareholders of TCC, including Golder Thoma Cressey Rauner Fund IV, L.P. ("GTCR"). As of April 5, 1995, SAS beneficially owns, and has the sole power to dispose of, 1,000 shares of the Ford Non-Voting Common Stock. F-32 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to the Letter Agreement dated April 4, 1995, with the Ford Holders and TCC, the Ford Holders granted to SAS, among other things, an option (the "Option") to purchase from the Ford Holders, subject to the terms and conditions contained therein, all of the voting shares of Ford's Common Stock (the "Ford Voting Common Stock"), for an aggregate purchase price of $100,000. On April 28, 1995, SAS exercised the Option. The sources of funds used by SAS to exercise the Option were substantially the same sources used to purchase the Ford Non-Voting Common Stock. As of April 28, 1995, SAS beneficially owns, and has the sole power to vote and dispose of, ten shares of the Ford Voting Common Stock. Current shareholders of TCC and their affiliates were entitled to participate in the equity of entities that control Solon on a pro rata basis generally in accordance with their respective equity interests in TCC. Solon incurred costs aggregating $848,000 in connection with the foregoing transactions (collectively, the "Change of Control"), including a total of $387,000 in lump sum payments made to fourteen management employees pursuant to certain contractual arrangements relating to the Change of Control. The total costs have been reflected as an extraordinary item in the accompanying financial statements. The Stock Purchase Agreement was accounted for as a purchase and, according to a practice known as "push-down" accounting, as of April 5, 1995, Solon adjusted its consolidated assets and liabilities to their estimated fair values, based on preliminary independent appraisals, evaluations, estimations and other studies. Reflected below is a summary of these adjustments (in thousands): Increase in property and equipment............................... $ 9,065 Increase in contract rights...................................... 34,063 Increase in goodwill............................................. 1,268 Increase in deferred income taxes................................ (19,465) Other............................................................ (1,515) -------- Increase in shareholders' equity................................. $ 23,416 ========
THE TCC ACQUISITION TCC was incorporated in January 1995 and was capitalized primarily through an equity investment by an investor group led by the majority shareholder, GTCR, and senior management and bank financing. TCC is a holding company which was formed to acquire partnership interests in Coinmach Industries Co. ("Industries") and Super Laundry Equipment Co. L.P. ("Super Laundry"). On January 31, 1995, TCC acquired its partnership interests in Industries and Super Laundry from CIC I Acquisition Corp. ("CIC I"). The transaction resulted in TCC owning 100% interests in both Industries and Super Laundry. The aggregate purchase price for these interests was $8.57 million, paid in cash. The acquisition was accounted for using the purchase method of accounting. The fair value of assets acquired (based on an independent appraisal for certain assets) less liabilities assumed exceeded the purchase price by approximately $7.7 million. The excess was allocated to property, equipment and intangible assets ratably based on their respective fair values. F-33 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) THE MERGER WITH TCC On November 30, 1995, Solon completed a merger ("Merger") with TCC and Solon through an exchange of stock. Shares of common stock of SAS were issued in exchange for all of the issued and outstanding shares of common stock of TCC. SAS then contributed its stock of TCC to Solon. Solon became the surviving corporation after the merger, whereupon it changed its name to Coinmach Corporation. Details of the results of operations of TCC and Solon for the period prior to the merger are as follows (in thousands):
APRIL 5, 1995 TO SEPTEMBER 29, 1995 ---------------------------------------- SOLON TCC COMBINED ----------- ----------- -------------- Revenues............................. $ 51,256 $ 38,463 $ 89,719 Operating income..................... 1,410 2,323 3,733 Net loss............................. (5,496) (450) (5,946)
The combined financial results presented above include an adjustment to decrease TCC's net loss by approximately $185,000, to conform its accounting policy for the capitalization of machine installation costs to that of Solon. Intercompany transactions between the two companies for the period presented were not material. 3. RECEIVABLES Receivables consist of the following (in thousands):
SEPTEMBER 29, 1995 SEPTEMBER 30, 1994 ------------------ ------------------ SUCCESSOR PREDECESSOR Trade receivables...................... $1,529 $ 236 Notes receivable....................... 1,783 -- Finance lease receivables.............. 905 816 Other.................................. 411 684 ------ ------ 4,628 1,736 Allowance for doubtful accounts........ 360 34 ------ ------ $4,268 $1,702 ====== ======
Notes receivable, which arise from the sale of laundromats, bear interest at a weighted average rate of approximately 10% per annum and mature through 1998. The notes are collateralized by the underlying laundry equipment. The Company periodically sells notes receivable arising from the sale of laundromats to third party finance companies. Included in other receivables are finance reserves, which arise when the Company sells notes and a portion of the proceeds are retained by the finance company. As the notes are collected, the finance companies remit a portion of the collections to the Company. Many of the notes receivable are sold with recourse to the Company (see Note 7). Control of the notes sold with recourse is surrendered by the Company on the date of transfer. The Company generally sells its receivables with recourse at cost; recognizing no gain or loss. Finance lease receivables relate to lease agreements that the Company has entered into with one customer. Pursuant to the agreements, the Company installs and services laundry equipment at apartment complexes owned and operated by the customer. The difference between the aggregate lease rentals and the cost of the related equipment is earned over the terms of the leases, which range from 40 to 60 months. Annual future payments due under these leases at September 29, 1995, are as follows (in thousands) 1996--$232; 1997-- $222; 1998--$185; 1999--$126; 2000--$81 and 2001--$59. F-34 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. SALE OF EQUIPMENT Effective September 30, 1994, Solon sold approximately 600 machines for a total of $407,000 resulting in a pretax gain of $109,000 and a related tax of $84,000. Prior to the sale, these machines contributed revenues of $343,000 and operating income of $78,000 for fiscal year 1994. 5. RESTRUCTURING COSTS Restructuring charges consist of one-time costs aggregating approximately $2.2 million, which include approximately $1.3 million of severance payments for 55 of Solon's management, administrative and regional personnel, approximately $300,000 of costs to relocate Solon's financial and administrative functions to Roslyn, New York, approximately $100,000 of costs to integrate certain financial and operating systems, and approximately $500,000 of costs related to the consolidation of certain of Solon's regional offices. Of the total restructuring costs of $2.2 million, approximately $300,000 was paid during the period ended September 29, 1995, approximately $1.4 million is expected to be paid during the six months ending March 29, 1996, and the remaining portion of approximately $500,000 is expected to be paid during the fiscal year ending March 28, 1997. The 55 employee terminations include 5 management employees, 17 corporate staff financial and administrative employees and 33 regional laundry operational employees. Notifications to employees were made on various dates through September 1995. 6. DEBT Substantially all of the Company's debt was retired on November 30, 1995 through an exchange offer (see Note 12). On June 18, 1992, Solon sold in concurrent private offerings (i) $100 million principal amount of 12 3/4% Senior Notes due 2001 (the "Senior Notes") and (ii) $30 million principal amount of 13 3/4% Senior Subordinated Debentures due 2002 (the "Debentures") with 3,247,885 shares (the "Shares") of the newly granted Class A Common Stock. Effective November 6, 1992, Solon completed an exchange offer whereby the holders of the Senior Notes and Senior Subordinated Debentures exchanged such securities for securities with similar terms and form which were registered under the Securities Act of 1933. Interest was payable semiannually on January 15 and July 15 for the Senior Notes and April 15 and October 15 for the Subordinated Debentures. The Senior Notes were entitled to mandatory sinking fund payments of $15 million on July 15, 1998 and July 15, 1999, and $20 million on July 15, 2000. In addition, Solon was obligated annually to offer to purchase Senior Notes at par in an amount equal to 75% of its excess cash flow (as defined) and the proceeds of asset dispositions ("Annual Mandatory Purchases"). Solon would have received credit against Annual Mandatory Purchases for any amounts paid in open market or other purchases. Solon would have received a credit against the sinking fund payment requirements for the principal amount of Senior Notes acquired. No annual mandatory purchases have been required in 1994. The Debentures had no mandatory principal repayment requirements until they matured on October 15, 2002. The Senior Notes were redeemable at Solon's option at a price equal to 106 3/8% after January 15, 1997, declining to par if redeemed after January 15, 1999. The Subordinated Debentures were redeemable at a price equal to 106 7/8% after October 15, 1997, declining to par if redeemed after October 15, 1999. During November 1994, Solon purchased in the open market and immediately retired $1.0 million of the Senior Notes. The estimated fair value of Solon's Senior Notes and Subordinated Debentures at September 29, 1995, based upon limited quoted market activity, approximated its recorded value. F-35 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Debt issue costs totaling $5.4 million incurred in connection with the 1992 debt offerings are included in other assets and were being amortized over the term of the Senior Notes and Debentures. Accumulated amortization is $2.2 million and $1.5 million at September 29, 1995 and September 30, 1994, respectively. On December 30, 1992, Solon entered into a loan and security agreement ("Credit Facility") which provided for a three-year revolving line of credit in the amount of up to $5 million. Interest on the borrowing was based on prime plus 2.875%, but in no event would the interest be less than the greater of 8% per annum or $15,000 per month. Solon was also required to pay a monthly service fee of $2,000 and an annual facility fee of 1% of the $5 million available under the Credit Facility. Borrowings under the Credit Facility were secured by accounts receivable, bank deposit accounts, equipment and general intangibles of Solon. Additionally, Solon was required to maintain a joint cash depository account with the lender. All cash collections were required to be deposited in this account before being transferred to Solon's account. Amounts borrowed and repaid during fiscal 1995 and 1994 totaled $2.0 million and $10.1 million, respectively. No borrowings were outstanding under the Credit Facility at September 29, 1995 and September 30, 1994. Debt outstanding under the long-term credit facility and other debt of TCC as of September 29, 1995, consists of the following (in thousands): Revolving line of credit, due January 31, 2000. Interest at prime plus 1.25% (10.25% at September 29, 1995)....................... $ 2,880 Term loan A, quarterly payments of $250 commencing April 1, 1996, and increasing to $500 April 1, 1997, $1,250 April 1, 1998 and $1,500 April 1, 1999. Interest at prime plus 1.25% (10.25% at September 29, 1995)............................................. 14,000 Term loan B, quarterly payments of $1,750 commencing April 1, 2000 and increasing to $2,000 April 1, 2001 with the final two payments of $1,750 on April 1, 2002 and July 1, 2002. Interest at prime plus 1.75% (10.75% at September 29, 1995).............. 18,500 Term loan C, due July 1, 2002. Interest at 12.5%................. 7,500 ------- 42,880 Other debt....................................................... 597 ------- $43,477 =======
The long-term credit facility provided for $40 million in term loans and $10 million in aggregate for revolving credit and acquisition loan facilities. The revolving line of credit agreement provided for up to $5 million in borrowings, including letters of credit up to a maximum of $1 million. There was a one-half of one percent fee per annum on the unused portion of this facility and a two percent letter of credit fee. The long-term credit facility also provided for acquisition loans of up to $5 million. The acquisition loans were to be used to finance acquisitions or capital expenditures attributed to growth. Any amounts outstanding under the acquisition line as of January 31, 2000 were to be repaid in equal quarterly installments through July 1, 2002. Borrowings under the acquisition line bear interest at prime plus 1.75%. There were no acquisition loans outstanding as of September 29, 1995. F-36 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Financing Agreement relating to the long-term credit facility required TCC, among other things, to maintain certain financial ratios and restricted additional investments and indebtedness. Management believes TCC was in compliance with all covenants contained in this Financing Agreement. Loans outstanding under this agreement were subject to prepayment upon the occurrence of certain events such as asset dispositions, public offerings and the generation of excess cash flow, as defined. TCC may be subject to prepayment penalty on any fixed rate borrowings. Industries and Super Laundry are the borrowers under the Financing Agreement. The facility is guaranteed by TCC. Borrowings are secured by all of the assets of TCC. Other debt includes payments due under noncompete agreements. Maturities of debt for TCC at September 29, 1995 are contractually payable as follows (in thousands): Years ending September: 1996............................................................. $ 873 1997............................................................. 1,724 1998............................................................. 3,500 1999............................................................. 5,500 2000............................................................. 7,630 Thereafter....................................................... 24,250 ------- $43,477 =======
The Company made cash payments for interest of $10.9 million, $8.5 million and $17.1 million for 1995S, 1995P, and fiscal year 1994, respectively. 7. RETIREMENT SAVINGS PLAN Effective October 1, 1987, Solon formed the Solon Automated Services Retirement Savings Plan (the "Plan"). The Plan is a defined contribution plan available to all full-time Solon employees who have completed one year of service. Under the terms of the Plan, Solon matches employee contributions at a percentage determined annually by the Board of Directors. Solon provided for matching contributions of 25% in each of 1995 and 1994. During fiscal 1994, Solon issued $103,000 of its Common Stock to satisfy its accrued obligations to the Plan. The number of shares issued to the Plan is based upon the appraised value of the stock which is determined annually by an independent appraiser. During fiscal 1995, Solon made a cash contribution of $80,000 to satisfy its fiscal 1994 obligations to the Plan. Solon will fund the fiscal 1995 Company match through a cash contribution in 1996. TCC has established a defined contribution plan for substantially all of its employees. TCC's contributions to the plan for 1995S amounted to approximately $42,500. The Company has no obligations for other postretirement benefits. 8. STOCK OPTION PLAN Solon adopted a stock option plan (the "Plan") in September 1987. The Plan authorized the granting of incentive stock options, nonqualified options, or a combination of the foregoing, to certain key employees and directors. F-37 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under the terms of the Plan, 1,250,000 common shares were reserved for issuance upon exercise of options. Shares for options that had expired or had been surrendered or canceled without having been exercised may again have been optioned under the Plan. Each option granted was exercisable into one common share of Solon. In general, 50% of stock options granted became exercisable five years after the date of grant, with 12 1/2% of the options becoming exercisable in each of the subsequent four years. As of September 29, 1995 and September 30, 1994, there was a total of 212,000 and 970,000 stock options outstanding, respectively, exercisable at prices between $.98 and $1.23 per common share. No options had been exercised since Solon adopted the Plan. As a result of the merger with TCC, the Plan was canceled; participants in the Plan received in aggregate consideration of approximately $34,000. 9. INCOME TAXES As of September 29, 1995 and September 30, 1994, the components of the Company's net deferred tax liabilities were as follows (in thousands):
SEPTEMBER 29, SEPTEMBER 30, 1995 1994 ------------- ------------- SUCCESSOR PREDECESSOR DEFERRED TAX LIABILITIES: Accelerated tax depreciation................... $26,804 $ 9,239 Other, net..................................... 3,355 2,293 ------- ------- 30,159 11,532 ------- ------- DEFERRED TAX ASSETS: Net operating loss carryforwards............... 4,600 7,200 Book over tax depreciation..................... 742 -- Valuation allowance for deferred tax assets.... (460) (3,700) ------- ------- 4,882 3,500 ------- ------- Net deferred tax liabilities..................... $25,277 $ 8,032 ======= =======
As of April 5, 1995, the deferred tax asset and related valuation allowance relating to Solon were netted and reduced to $2.6 million to reflect the net operating loss available pursuant to limitations imposed under provisions of the Internal Revenue Code regarding changes in ownership. In addition, as of April 5, 1995, TCC recorded a deferred tax asset of $460,000 with a valuation allowance of the same amount. The deferred tax asset recorded in the Successor period does not reflect a valuation allowance because the loss can be utilized against the deferred tax liabilities in the carryforward period. The net operating loss carryforwards, which expire between fiscal years 2001 through 2007, consist of approximately $7 million (after the limitation) relating to the Predecessor company and approximately $5 million relating to the Successor company. During the fourth quarter of fiscal 1994, Solon evaluated the realizability of previously recorded deferred tax assets and concluded that due to certain transactions which have occurred subsequent to October 1, 1993, it was more likely than not that such assets would not be fully realizable. Accordingly, Solon established a $3.7 million valuation allowance as of September 30, 1994. The charge for this valuation allowance is included in the deferred tax provision in the accompanying Consolidated Statement of Operations. F-38 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. INCOME TAXES The provision (benefit) for income taxes consists of (in thousands):
APRIL 5, 1995 OCTOBER 1, TO 1994 TO YEAR ENDED SEPTEMBER 29, APRIL 4, SEPTEMBER 30, 1995 1995 1994 ------------- ----------- ------------- SUCCESSOR PREDECESSOR PREDECESSOR Federal............................... $(1,760) $ -- $2,517 State................................. (102) 50 245 ------- ----- ------ $(1,862) $ 50 $2,762 ======= ===== ======
Deferred taxes relate primarily from timing differences resulting from using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes. 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):
APRIL 5, 1995 OCTOBER 1, TO 1994 TO YEAR ENDED SEPTEMBER 29, APRIL 4, SEPTEMBER 30, 1995 1995 1994 ------------- ----------- ------------- SUCCESSOR PREDECESSOR PREDECESSOR Expected tax benefit................. $(2,655) $(588) $(1,413) State tax benefit, net of federal taxes............................... (320) (69) (55) Permanent book/tax differences: Goodwill and other................... 1,113 394 530 Valuation allowance.................. -- 313 3,700 ------- ----- ------- Recorded tax provision/(benefit)..... $(1,862) $ 50 $ 2,762 ======= ===== =======
The Company made cash payments for income taxes of approximately $280,000 and $29,000 for 1995S and fiscal year 1994, respectively. There were no income tax payments made in 1995P. 10. COMMON STOCK Solon and its stockholders had entered into a Stockholders' Agreement dated as of September 28, 1987. Pursuant to this Agreement, Solon was required to purchase shares of its common stock from selling management stockholders or their estates in the event of death, disability, termination of employment, and certain other circumstances. Pursuant to the terms of the Stockholders' Agreement, such purchases were made based on the higher of the stockholders' cost or by an earnings related formula defined in the Agreement. During fiscal 1994 Solon acquired 270,000 shares, pursuant to this Agreement at a total cost of $270,000, from management stockholders. Such shares have been retired and canceled. The Stockholders' Agreement was terminated effective July 12, 1994. Class A Common stockholders have no voting rights other than on matters involving consolidation or merger, sale or transfer of all or substantially all assets or any liquidation, dissolution or winding up of Solon. Solon's Certificate of Incorporation provides that immediately prior to the closing of any initial public offering of Common Stock, all outstanding shares of Class A Common Stock will be deemed to have been converted into a like number of shares of Common Stock. F-39 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On November 30, 1995, the Company effected a recapitalization, whereby it reduced its authorized $.01 par value common stock to 1,000 shares and issued 100 shares to the holders of the then outstanding stock. All references in the Successor period reflect this recapitalization. Receivables from shareholders reflect advances to SAS of $2,000,000 and notes receivable from management who are shareholders of SAS of $338,000. Such amounts have been reflected as reductions of shareholders' equity in the accompanying Successor period balance sheet. 11. COMMITMENTS AND CONTINGENCIES Rental expense for all operating leases, which principally cover office facilities and vehicles, was $1,139,000, $807,000 and $1,577,000 for 1995S, 1995P, and fiscal year 1994, respectively. The following is a schedule of the future minimum rental commitments under all noncancelable leases as of September 29, 1995 (in thousands): 1996............................................................... $1,885 1997............................................................... 1,359 1998............................................................... 943 1999............................................................... 534 2000 and future periods............................................ 1,217 ------ $5,938 ======
The Company is contingently liable on receivables sold with recourse to finance companies by TCC. The total amount of such receivables outstanding as of September 29, 1995 is approximately $4 million. The Company is party to various legal proceedings incidental to its business. Although the ultimate disposition of these proceedings is not presently determinable, management does not believe that adverse determinations in any or all such proceedings would have a material adverse effect upon the financial condition or results of operations of the Company. In connection with insurance coverages, which include workers compensation, general liability and other coverages, annual premiums are subject to limited retroactive adjustment based on actual loss experience. As of September 30, 1994, Solon had a program pursuant to which change of control and severance payments would be made to 14 management employees following any sale of all of the Common Stock held by nonemployee stockholders. Change of control payments were based on annual salaries at the time of such sale. Severance payments were provided if, following any such sale, the participant was not retained in a position comparable to that held prior to the sale for a period between three to four months. In connection with the change in control described in Note 2, payments aggregating $387,000 were made pursuant to this program. 12. SUBSEQUENT EVENT On November 30, 1995, the Company completed an exchange offer with substantially all the holders of the Senior Notes and Subordinated Debentures. Through December 14, 1995, the Company issued a total of $196.7 million of 11 3/4% Senior Notes due 2005 (the "Notes") which enabled the Company to complete this exchange offer, consummate the merger with TCC and retire its remaining debt, and provide additional working capital. The Company incurred costs of $4.2 million, net of income taxes, related to a 5.5% premium paid to retire its F-40 COINMACH CORPORATION AND SUBSIDIARIES (FORMERLY SOLON AUTOMATED SERVICES, INC.) NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Senior Notes and Subordinated Debentures and wrote-off the unamortized balance of the related original issue discount and deferred finance costs of approximately $800,000 and $1.9 million, net of income taxes, respectively. The Company also incurred costs related to the retirement of a revolving credit facility of TCC of approximately $1.9 million, net of income taxes. Interest on the Notes is payable semi-annually on May 15 and November 15. The Notes are redeemable at the option of the Company at any time after November 15, 2000 at a price equal to 105 7/8% declining to par if redeemed after November 15, 2002. The Notes contain certain financial covenants and a registration rights agreement, whereby the Company has agreed to file a Registration Statement with the Securities and Exchange Commission. On November 30, 1995, the Company entered into a new revolving credit facility, ("New Credit Facility"), which provides up to a maximum of $35.0 million. Availability under the New Credit Facility is limited by an amount equal to one semi-annual interest payment on the Notes. Interest on the borrowings is payable monthly at a rate per annum no greater than the sum of LIBOR plus 2.50%. The Company is obligated to pay an unused line fee in an amount equal to 0.5% of the unused availability payable monthly in arrears. Borrowings under the New Credit Facility are secured by real and personal property of the Company. F-41 LETTERHEAD OF KPMG PEAT MARWICK INDEPENDENT AUDITORS' REPORT The Board of Directors CIC I Acquisition Corp.: We have audited the accompanying consolidated balance sheets of CIC I Acquisition Corp. and subsidiaries (the Company) as of December 31, 1994, and the related consolidated statements of operations, stockholders' deficiency and cash flows for each of the years in the two-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 14 of the accompanying notes to the consolidated financial statements, on January 31, 1995, the Company sold its partnership interests in its operating subsidiaries to a new corporation, The Coinmach Corporation. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CIC I Acquisition Corp. and subsidiaries as of December 31, 1994, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP New York, New York April 28, 1995 F-42 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1994 (DOLLARS IN THOUSANDS)
1994 -------- ASSETS Cash................................................................. $ 987 Receivables, net of reserves of $473................................. 4,198 Inventories.......................................................... 2,154 Prepaid commissions.................................................. 3,264 Property and equipment: Laundry equipment.................................................. 21,487 Leasehold improvements............................................. 10,438 Office equipment................................................... 1,900 Automobiles and trucks............................................. 2,903 -------- 36,728 Less accumulated depreciation...................................... 20,443 -------- Net property and equipment....................................... 16,285 Goodwill, net of accumulated amortization of $1,845.................. 6,710 Other intangibles, net of accumulated amortization of $8,678......... 2,209 Other assets......................................................... 1,117 -------- $ 36,924 ======== LIABILITIES AND COMMON STOCKHOLDERS' DEFICIENCY Accounts payable..................................................... $ 2,365 Accrued expenses..................................................... 2,012 Accrued interest..................................................... -- Commissions payable.................................................. 3,156 Long-term debt (including $350 of management loans).................. 42,184 Other long-term liabilities.......................................... 488 Minority interest.................................................... 135 Common stockholders' deficiency: Common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 87,000 shares in 1994 and 148,729 shares in 1993.. 1 Consideration to continuing predecessor interests in excess of book value............................................................... -- Additional paid-in capital........................................... 39,869 Accumulated deficit.................................................. (53,286) -------- Total stockholders' deficiency..................................... (13,416) -------- $ 36,924 ========
The accompanying notes are an integral part of these consolidated financial statements. F-43 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS)
1994 1993 ------- -------- Revenues..................................................... $73,857 $ 71,859 Laundry operating expenses................................... 54,737 52,805 General and administrative expenses.......................... 4,938 5,570 Depreciation and amortization of property and equipment...... 7,785 8,011 Amortization of intangibles and other assets................. 6,719 7,245 ------- -------- Operating loss............................................... (322) (1,772) Interest expense............................................. 4,012 3,685 Interest expense--subordinated notes......................... 0 6,824 Non-cash charges related to management loans................. 1,341 0 ------- -------- Loss before income taxes and extraordinary item.............. (5,675) (12,281) Income taxes................................................. 27 17 ------- -------- Loss before extraordinary item............................... (5,702) (12,298) Extraordinary item--early extinguishment of debt............. 20,420 0 ------- -------- Net (loss) income............................................ $14,718 $(12,298) ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-44 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS)
CONSIDERATION TO COMMON STOCK CONTINUING PREDECESSOR ADDITIONAL TOTAL ---------------- INTERESTS IN EXCESS PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT OF BOOK VALUE CAPITAL DEFICIT DEFICIENCY -------- ------ ---------------------- ---------- ----------- ------------- Balance January 1, 1993................... 148,729 $ 1 $(11,756) $ 0 $(42,240) $(53,995) Accrued preferred dividends.............. (1,710) (1,710) Net loss................ (12,298) (12,298) -------- --- -------- ------- -------- -------- Balance December 31, 1993................... 148,729 1 (11,756) 0 (56,248) (68,003) Net income.............. 14,718 14,718 Effects of restructuring transaction (see note 7): Shares surrendered pursuant to restructuring.......... (148,729) (1) 11,756 (11,756) (1) Shares issued pursuant to restructuring....... 87,000 1 24,164 24,165 Surrender of preferred stock.................. 14,364 14,364 Non-cash charge related to issuance of management loan........ 1,341 1,341 -------- --- -------- ------- -------- -------- Balance December 31, 1994................... 87,000 $ 1 $ 0 $39,869 $(53,286) $(13,416) ======== === ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-45 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS)
1994 1993 -------- -------- Cash flows from operating activities: Net (loss) income........................................ $ 14,718 $(12,298) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization.......................... 14,504 15,256 Minority interest in loss of consolidated subsidiary... (10) (19) Provision for bad debts................................ 229 73 Increase in accrued interest........................... 0 6,824 Non-cash charges relating to management loans.......... 1,341 0 Non-cash portion of extraordinary item................. (23,487) 0 Changes in assets and liabilities: Change in receivables................................ 732 (160) Change in prepaid commissions, net of commissions payable............................................. (1,236) (1,600) (Increase) decrease in inventories................... (349) 500 (Increase) decrease in other assets.................. 2,766 (2,025) (Decrease) increase in accounts payable and accrued expenses............................................ (484) 1,185 -------- -------- Net cash provided by operating activities............ 8,724 7,736 -------- -------- Cash flows from investing activities: Purchase of laundry equipment............................ (4,710) (4,089) Purchase of fixed assets................................. (1,861) (1,790) Additions to intangibles................................. (6) (240) -------- -------- Net cash used in investing activities.................. (6,577) (6,119) -------- -------- Cash flows from financing activities: Net repayments under revolving credit facility........... (2,019) (857) Payment of other debt.................................... (474) (200) Management loans......................................... 350 0 Principal payments of capital lease obligations.......... (404) (348) -------- -------- Net cash used in financing activities.................. (2,547) (1,405) -------- -------- Net (decrease) increase in cash........................ (400) 212 Cash at beginning of period................................ 1,387 1,175 -------- -------- Cash at end of period...................................... $ 987 $ 1,387 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-46 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) (1)ORGANIZATION AND BASIS OF PRESENTATION See note 14 for subsequent event. CIC I Acquisition Corp. ("CIC" or "Company") is a holding company that owns Coinmach Industries Co. ("Coinmach") and Super Laundry Equipment Co. L.P. ("Super Laundry"). CIC was formed in 1989 expressly for the purpose of acquiring an 85% general partnership interest in Coinmach and all of the common stock of Super Laundry Equipment Corp., a predecessor company to Super Laundry. Coinmach is principally engaged in providing laundry equipment and related services to multi-family housing complexes in the New York metropolitan area. Super Laundry is principally a supplier of coin-operated laundromat equipment, and turnkey laundromat retail stores in the New York metropolitan area. On January 31, 1995, the Company sold its partnership interest in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation (see note 14). On December 15, 1993, CIC, on a stand alone basis, completed a "pre- packaged" voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Plan"), which was approved by 100% of the Company's shareholders and creditors. Neither Coinmach nor Super Laundry were parties to this agreement. The Plan provided for the Company's existing senior subordinated notes, junior subordinated promissory notes, preferred stock and common stock to be exchanged for 87,000 shares of common stock valued at $24,163. The Plan, which was confirmed and court approved on January 21, 1994, and became effective February 4, 1994, has been reflected in the 1994 financial statements and has been recorded in accordance with the guidelines provided by the Financial Accounting Standards Board (FASB 15 "Accounting for Troubled Debt Restructuring"). Pursuant to the Plan, the Company also amended its then existing revolving and term loan agreement (see note 6(a)). As a result of the above, the Company recognized an extraordinary gain, net of legal fees and other direct costs of $20,420 on the early extinguishment of the debt. The Company also incurred $1,341 in non-cash expenses related to the estimated fair value of the equity conversion feature of debt issued pursuant to the Plan (see note 6). In addition, the minority partners in Coinmach extinguished their ownership positions and the Company now effectively owns 100% of Coinmach (see note 7). (2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CIC, Coinmach and Super Laundry. All significant intercompany balances and transactions have been eliminated in consolidation. (b)INVENTORIES Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Inventories include laundry equipment, spare parts and construction costs. (c)REVENUE RECOGNITION Super Laundry's customers generally sign sales contracts whereby Super Laundry will construct and equip a complete laundromat operation, including location identification, construction, plumbing, electrical wiring and all required permits. Revenue is recognized on the completed contract method. A contract is considered F-47 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) complete when all costs have been incurred and either the installation is operating according to specifications or has been accepted by the customer. The duration of such contracts is normally less than six months. Sales of laundromats were approximately $14,579 and $13,054 for the years ended December 31, 1994 and 1993, respectively. (d)PROPERTY AND EQUIPMENT Laundry equipment, consisting primarily of commercial washers and dryers, and fixed assets, are stated at cost. The cost of remanufacturing equipment is included in the cost of laundry equipment. The cost of laundry room improvements is included in leasehold improvements. The Company capitalized remanufacturing and laundry room improvement costs of approximately $2,848 and $2,639 for the years ended December 31, 1994 and 1993, respectively. Depreciation of laundry equipment and fixed assets is calculated using the straight-line method over their estimated useful lives, generally five years. Leasehold improvements are amortized using the straight line method over the shorter of the lease term or estimated useful life of the asset. The Company's policy is to write-off fully depreciated assets and the related accumulated depreciation and amortization. Depreciation expense was approximately $7,785 and $8,011 for the years ended December 31, 1994 and 1993, respectively. The Company reviews the undiscounted cash flows of its laundry locations in assessing whether its property and equipment (primarily laundry equipment and laundry room improvements) may be impaired. The Company does not believe that the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of" will have a material impact on the Company's financial position or results of operations. (e)PREPAID COMMISSIONS The Company capitalizes contractually required advance commissions and certain incentive payments paid in connection with the acquisition of its contractual rights to laundry room locations. Such amounts are amortized on a straight-line basis over the life of the related lease or the related contractual agreement. Amortization expense on prepaid commissions amounted to approximately $593 and $557 for the years ended December 31, 1994 and 1993, respectively. (f)CONTRACTS RIGHTS Contract rights represent amounts expended for location contracts arising from the acquisition of laundry machines on location. These amounts are amortized on a straight-line basis over the remaining life of the corresponding contract. Amortization expense on contract rights was $3,443 and $4,075 for the years ended December 31, 1994 and 1993, respectively. (g)INTANGIBLES Intangibles, consisting principally of covenants not to compete, computer software and deferred financing costs are amortized over their estimated useful lives. Amortization expense on intangibles amounted to approximately $2,375 and $2,100 for the years ended December 31, 1994 and 1993, respectively. (h)GOODWILL Goodwill is being amortized, using the straight-line method, over 40 years. Amortization expense on goodwill amounted to $308 and $301 for the years ended December 31, 1994 and 1993, respectively. The Company periodically evaluates the recoverability of goodwill based on the undiscounted cash flows of the businesses acquired. F-48 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) (i)INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Statement 109 required a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted Statement 109 as of January 1, 1993, the effect of which was not material to the Company's consolidated financial statements. (3)RECEIVABLES Receivables consist of the following:
1994 ------ Accounts receivable............................................. $1,627 Notes receivable................................................ 2,437 Finance reserves................................................ 607 ------ 4,671 Allowance for doubtful accounts................................. (473) ------ $4,198 ======
At December 31, 1994, notes receivable bear interest at a weighted average interest rate of approximately 10% and mature through 1998. The notes are collateralized by the underlying laundry equipment. The Company periodically sells notes receivable arising from the sale of laundromats to third party finance companies. Finance reserves arise when the Company sells notes and a portion of the proceeds are retained by the finance company. As the notes are collected, the finance companies remit a portion of the collections to the Company. Many of the notes receivable are sold with recourse to the Company (see note 8). Control of the notes sold with recourse is surrendered by the Company on the date of transfer. The Company generally sells its receivables with recourse at cost, recognizing no gain or loss. (4)TRANSACTIONS WITH AFFILIATES The company sold certain trade notes receivable to Cointrol Credit Co., L.P. ("Credit"), a company created in 1991 and owned by certain officers and directors of the Company and outside investors. All such notes were sold to yield a fair market rate of return as determined by rates available from unrelated finance companies for similar notes. The aggregate outstanding balance of all notes sold to Credit as of December 31, 1994 was $641. These notes are with recourse to the Company and mature through 1998. In April 1995, the Company entered into an agreement with Credit to repurchase the remaining receivables outstanding at their then face value. F-49 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) (5)INTANGIBLES Intangibles consist of the following:
ESTIMATED 1994 USEFUL LIVES ------- ------------ Covenants not to compete........................... $ 4,313 5 years Computer software.................................. 4,050 5 years Deferred financing costs........................... 1,552 Life of debt Other.............................................. 972 5 years ------- 10,887 Accumulated amortization........................... 8,678 ------- $ 2,209 =======
(6)LONG-TERM DEBT Long Term debt consists of the following:
1994 ------- Revolving line of credit, due February 28, 1995, interest at prime plus 1.75% (a).......................................... $25,848 Term loan, due February 28, 1995 (a)........................... 15,000 Senior subordinated notes, originally due October 1999, interest at 14.5% (c)......................................... -- Junior subordinated promissory notes, originally due October 2000 (d)...................................................... -- Management loans, due February, 2004, interest at prime plus 1.75%, convertible into 7,000 shares of common stock after February, 1999 (b)............................................ 350 Other (e)...................................................... 986 ------- $42,184 =======
On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation. In connection with this sale, the Company paid off all amounts owed under its revolver and term loan debt (see note 14). The accompanying financial statements do not reflect the sale or the related repayment of debt. On December 15, 1993, the Company finalized negotiations with the holders of the revolving line of credit, term loan, senior subordinated note holders, and the junior subordinated promissory note holders. Pursuant to the Plan, the holders of the subordinated note and the junior notes exchanged their notes, including accrued interest through December 15, 1993, for 87,000 shares of the restructured company's common stock. The Plan was confirmed and court approved in January 1994. (a) On March 16, 1990, the Company entered into a bank agreement that provided for a term loan of $15,000 originally payable in eight quarterly installments of $1,875 commencing April 1, 1994, and a revolving line of credit of up to $35,000 for a term of five years. On February 4, 1994, the maximum revolver facility was reduced to $29,413. In addition, commencing March 1, 1994 and continuing on F-50 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) the first day of each month thereafter, the revolving credit facility will be reduced by $175 per month through June 1994, and then $212 per month, until the termination of the facility, including the term loan, on February 28, 1995. The interest rate for bank borrowing is the prime rate plus 1.75%. As of December 31, 1994, the interest rate on these loans was 10.25%. In addition, the agreement provides for the payment of a facility fee of .125% per annum on average daily outstanding balances and an unused line fee of .50% per annum on the average daily balance of the revolving loans. The agreement contains certain restrictive covenants and requires the Company, among other things, to maintain certain financial ratios and to restrict investments, additional indebtedness and payment of dividends. The loan is secured by all of the assets of the Company. See Note 14 for description of subsequent event. (b) Pursuant to the Plan, senior management loaned the Company $350 due February 4, 2004. Interest is payable monthly, at the rate of 1.75% over prime. As of December 31, 1994, the interest rate on these loans was 10.25%. The loans are convertible, upon the earlier of five years or upon certain circumstances, into 7% of the Company's fully diluted common stock. These loans, which are subordinated to the revolving line of credit and the term loan, were funded February 4, 1994 (see note 7). Based on an independent appraisal, the estimated value of the 7% interest of the Company (issuable upon conversion of the loans) exceeded the principal amount of the loans by $1,341. Accordingly, a non-cash charge equal to such amount was recorded in 1994. The loans were repaid in connection with the subsequent event described in Note 14. (c) In 1989 and 1990, the Company sold $30,000 of its 14.5% senior subordinated notes due October 1999. Interest was payable on April 15 and October 15 of each year commencing April 15, 1990. The notes were redeemable, at the option of the Company, at amounts decreasing from 114.5% of par value at October 15, 1989 to par value at October 15, 1998. Pursuant to the Plan, the notes were cancelled and an extraordinary gain was recognized on the early extinguishment of the debt in 1994 (see note 7). (d) In 1989, the Company issued junior subordinated promissory notes to the prior owners of Coinmach. The notes, along with accrued interest, were cancelled in 1994 pursuant to the Plan (see note 7). (e) Other debt includes payments due under non-compete agreements. Maturities of long-term debt at December 31, 1994 are contractually payable as follows: 1995................................. $41,329 1996................................. 376 1997................................. 129 1998................................. 0 Thereafter........................... 350 ------- $42,184 =======
(7)RESTRUCTURING On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation (see note 14). On December 15, 1993, CIC, on a stand alone basis, completed a "pre- packaged" voluntary petition for reorganization under Chapter 11 for the United States Bankruptcy Code, which was approved by 100% of the Company's shareholders and creditors (see note 1). Neither Coinmach nor Super Laundry were parties to this agreement. The Plan provided for the Company's existing senior subordinated notes, junior subordinated promissory notes, preferred stock and common stock to be exchanged for 87,000 shares of common stock valued at $24,163. The carrying value of the senior subordinated notes, junior subordinated F-51 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) notes and related accrued interest was $30,000, $1,500, and $16,149, respectively. The preferred stock and common stock had a net carrying value of $2,609, consisting of preferred stock of $14,364, and common stock of $1, offset by the carrying value of the consideration to continuing predecessor interests in excess of book value of $11,756. The Plan was confirmed and court approved on January 21, 1994, became effective February 4, 1994, and has been reflected in the 1994 financial statements. In addition, pursuant to the Plan, the Company amended its then existing revolving and term loan agreement. As a result of the above, the Company recognized an extraordinary gain of $20,420, net of legal fees and other direct costs of $3,067, on the early extinguishment of the debt in 1994. In addition, $14,364, representing the carrying value of the preferred stock, is included in stockholders' deficiency. Pursuant to the Plan, the equity position of the shareholder to which the continuing predecessor interests were attributed surrendered such position. Consequently, the carrying value of the continuing predecessor interests has been charged to the accumulated deficit account. The restructuring has been treated as a tax free exchange of debt for equity in accordance with the provisions of the Internal Revenue Service Code. The Plan required two members of senior management to loan the Company $350. These loans have an interest rate of prime plus 1.75% and are due in 2004. The loans were funded February 4, 1994, and are reflected in the accompanying financial statements as long-term debt. Also pursuant to the Plan the Company entered into non-compete agreements with two former shareholders totaling approximately $954. (8)COMMITMENTS AND CONTINGENCIES Coinmach is obligated under long-term leases relating to revenue equipment locations. The terms of these leases principally range from three to six years, most of which provide for fixed monthly commission payments and contain renewal options. The majority of these leases contain provisions permitting the cancellation of the lease and/or adjustment of the commission by Coinmach if minimum revenue levels are not achieved. In addition, Coinmach rents office and warehouse space from SSB Corporation ("SSB"). SSB is owned by certain individuals who were also owners of the Company, prior to the Plan. The lease, expiring on May 1, 1995, provides for annual rentals of $368 and for the payment by Coinmach of all operating expenses. Super Laundry leases its facilities from a related party under an operating lease that expires on December 31, 1996 and provides for a minimum annual rental of $57 in 1993 increasing to $60 in 1994 and $63 in 1996. Under the terms of the lease, Super Laundry is required to pay operating costs. Rental expense for this lease amounted to $72 and $71 for the years ended December 31, 1994 and 1993, respectively. In addition, Super Laundry also leases a warehouse from a related party on a month-to-month basis. Rental expense for this lease amounted to $39 and $42 for the years ended December 31, 1994 and 1993, respectively. Effective January 1, 1993, Super Laundry entered into a five year lease for a sales office. This lease expires December 31, 1997 and provides for a minimum annual rental of $23 in 1993, increasing by 4% each successive year through 1997. The lease also calls for Super Laundry to pay operating costs. Rental expense including operating costs for this lease amounted to $24 and $30 for the years ended December 31, 1994 and 1993, respectively. Future minimum lease payments under noncancellable operating leases (excluding commissions for laundry equipment locations) as of December 31, 1994 are as follows: 1995.............................................................. $367 1996.............................................................. 108 1997.............................................................. 27 ---- Total future minimum lease payments............................. $502 ====
F-52 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) Rent expense, excluding commission payments for laundry equipment locations, amounted to approximately $642 and $599 for the years ended December 31, 1994 and 1993, respectively. Super Laundry is contingently liable on receivables sold, with recourse, to finance companies. The total amount outstanding is approximated at $7,919 as of December 31, 1994. Under agreements between Super Laundry and certain finance companies, a portion of the notes receivable sales price is retained by the finance company until the receivable is collected. Amounts retained under the agreements amounted to $607 as of December 31, 1994, and are shown in the accompanying consolidated balance sheets as receivables. Coinmach has entered into leasing arrangements for automobiles and trucks and office equipment which are accounted for as capital leases. At December 31, 1994, the gross amount of such assets amounted to $1,646, and accumulated amortization amounted to $889. Future minimum lease payments as of December 31, 1994 are as follows: 1995.............................................................. $359 1996.............................................................. 133 1997.............................................................. 99 ---- Minimum lease payments............................................ 591 Less amount representing interest................................. 103 ---- Present value of net minimum lease payments....................... $488 ====
The Company is party to certain lawsuits and claims relating to its operations. It is the opinion of management, based on the advice of outside counsel, that such lawsuits and claims will be resolved without material effect to the Company's consolidated financial statements. (9)INCOME TAXES Income tax expense of $27 and $17 for the years ended December 31, 1994 and 1993, respectively, represents state and local taxes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1994 are presented below: Deferred tax assets: Net operating loss carryforwards........................... $ 21,200 Fixed and intangible assets, principally due to differences between tax and financial reporting bases................. 3,117 Allowance for doubtful accounts.............................. 189 -------- Gross deferred tax assets.................................. 24,506 Less valuation allowance..................................... (24,506) -------- Net deferred tax asset..................................... $ -0- ========
CIC files a consolidated Federal income tax return with Super Laundry and includes its equity in the earnings or loss of Coinmach. At December 31, 1994, net operating loss carryforwards of approximately $53,000 are available to offset future taxable income and expire commencing 2004 through 2009. F-53 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1994 AND 1993 (DOLLARS IN THOUSANDS) (10)MULTI-EMPLOYER PLAN Coinmach participated with other companies in making contributions to a multi-employer pension plan for the benefit of its union employees. Contributions to the Plan were $40 for the year ended December 31, 1993. Effective January 1, 1994, Coinmach no longer participates in the pension plan. (11)STOCK OPTION PLAN Pursuant to the Plan, the Company adopted two stock option plans, which provide for the grant and exercise of options to purchase up to 6,000 shares of the Company's common stock upon attainment of certain annual earnings performance goals through 1997. One of the plans is for the employees of the Company, and provides for the grant and exercise of 5,000 shares. On February 4, 1994, options representing 1,000 shares under this plan were granted to certain employees and were immediately vested but were not to be exercisable unless 1994 earnings performance goals were attained. The employee plan also provides for the grant of options to purchase an additional 1,000 shares in 1994 and each year through December 31, 1997. Such options will be vested when granted. The second stock option plan provides for the grant of options to purchase 1,000 shares to a financial advisor upon attainment of annual earnings performance goals through 1995. Under both plans, the options were to expire ten years from the dates of grant and were exercisable at $50 per share. No options have been exercised and in connection with the subsequent event described in note 14, the stock option plans were terminated and all outstanding options were cancelled. (12)PROFIT SHARING PLAN Effective April 1, 1994, the Company established a profit sharing and retirement plan (the "Coinmach Profit Sharing Plan") for substantially all of its employees. Pursuant to the Coinmach Profit Sharing Plan, eligible employees may defer up to 15% of their salaries up to a maximum level imposed by applicable federal law. Coinmach makes matching contributions in increasing amounts, based upon the number or years of service performed by eligible participants, up to a maximum of 6% of an eligible employee's salary. Matching contribution percentages range from 5% for one to two years of service up to 25% for five or more years of service and vest over a six year period. Company contributions to the plan for the year ended December 31, 1994 amounted to $64. (13)SUPPLEMENTAL CASH FLOW INFORMATION The Company paid approximately $4,012 and $3,744 for interest for the years ended December 31, 1994 and 1993, respectively. The Company entered into leasing arrangements accounted for as capital leases in the amount of approximately $207 and $406 for the years ended December 31, 1994 and 1993, respectively. (14)SUBSEQUENT EVENT On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation ("Corp."). In connection with this sale, the Company, Coinmach and Super Laundry paid off all amounts owed under their existing revolver and term loan debt (see note 6). Corp. is owned by an investor group (83%) and the management of Coinmach and Super Laundry (17%). Corp. financed the transaction with approximately $11,600 of new equity, and debt financing of up to $50,000. Under the terms of the financing, no principal payments on the debt are due until April 1996. F-54 LETTERHEAD OF KPMG PEAT MARWICK INDEPENDENT AUDITORS' REPORT The Board of Directors CIC I Acquisition Corp.: We have audited the accompanying consolidated balance sheet of CIC I Acquisition Corp. and subsidiaries (the Company) as of January 31, 1995, and the related consolidated statements of operations and accumulated deficit and cash flows for the one-month period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in note 13 of the accompanying notes to the consolidated financial statements, on January 31, 1995, the Company sold its partnership interests in its operating subsidiaries to a new corporation, The Coinmach Corporation. The accompanying consolidated financial statements reflect the financial position, results of operations and cash flows of the Company immediately prior to the sale. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CIC I Acquisition Corp. and subsidiaries as of January 31, 1995, and the results of their operations and their cash flows for the one-month period then ended, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP New York, New York April 28, 1995 F-55 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JANUARY 31, 1995 (DOLLARS IN THOUSANDS) ASSETS Cash................................................................. $ 1,162 Receivables, net of reserve of $447.................................. 3,261 Inventories.......................................................... 2,353 Prepaid commissions.................................................. 3,333 Property and equipment: Laundry equipment.................................................. 21,848 Leasehold improvements............................................. 10,604 Office equipment................................................... 1,917 Automobiles and trucks............................................. 2,934 -------- 37,303 Less accumulated depreciation........................................ 21,183 -------- Net property and equipment......................................... 16,120 Goodwill, net of accumulated amortization of $1,883.................. 6,672 Other intangibles, net of accumulated amortization of $8,802......... 2,053 Other assets......................................................... 1,115 -------- $ 36,069 ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Accounts payable..................................................... $ 2,197 Accrued expenses..................................................... 2,134 Commissions payable.................................................. 2,935 Long-term debt (including $350 of management loans).................. 41,800 Other long-term liabilities.......................................... 461 Minority interest.................................................... 133 Stockholders' deficiency: Common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 87,000 shares..................................... 1 Additional paid-in capital........................................... 39,869 Accumulated deficit.................................................. (53,461) -------- Total stockholders' deficiency................................... (13,591) -------- $ 36,069 ========
The accompanying notes are an integral part of these consolidated financial statements. F-56 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE MONTH ENDED JANUARY 31, 1995 (DOLLARS IN THOUSANDS) Revenues............................................................. $ 5,879 Laundry operating expenses........................................... 4,229 General and administrative expenses.................................. 450 Depreciation and amortization of property and equipment.............. 739 Amortization of intangibles and other assets......................... 241 -------- Operating income..................................................... 220 Interest expense..................................................... 395 -------- Net loss............................................................. (175) Accumulated deficit at beginning of period........................... (53,286) -------- Accumulated deficit at end of period................................. $(53,461) ========
The accompanying notes are an integral part of these consolidated financial statements. F-57 CIC I ACQUISITION CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE MONTH ENDED JANUARY 31, 1995 (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss............................................................. $ (175) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization...................................... 980 Minority interest in loss of consolidated subsidiary............... (2) Changes in assets and liabilities: Decrease in receivables.......................................... 937 Change in prepaid commissions, net of commission payable......... (302) (Increase) in inventories........................................ (199) Decrease in other assets......................................... 2 (Decrease) in accounts payable and accrued expenses.............. (44) ------ Net cash provided by operating activities........................ 1,197 ------ Cash flows from investing activities: Purchase of laundry equipment........................................ (361) Purchase of other fixed assets....................................... (215) Additions to intangibles............................................. (35) ------ Net cash used in investing activities.............................. (611) ------ Cash flows from financing activities: Net repayments under revolving credit facility....................... (332) Payment of other debt................................................ (52) Principal payments of capital lease obligations...................... (27) ------ Net cash used in financing activities.............................. (411) ------ Net increase in cash............................................... 175 Cash at beginning of period............................................ 987 ------ Cash at end of period.................................................. $1,162 ======
The accompanying notes are an integral part of these consolidated financial statements. F-58 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1995 (DOLLARS IN THOUSANDS) (1)ORGANIZATION AND BASIS OF PRESENTATION See note 13 for subsequent event. CIC I Acquisition Corp. ("CIC" or "Company") is a holding company that owns Coinmach Industries Co. ("Coinmach") and Super Laundry Equipment Co. L.P. ("Super Laundry"). CIC was formed in 1989 expressly for the purpose of acquiring an 85% general partnership interest in Coinmach and all of the common stock of Super Laundry Equipment Corp., a predecessor company to Super Laundry. Coinmach is principally engaged in providing laundry equipment and related services to multi-family housing complexes in the New York metropolitan area. Super Laundry is principally a supplier of coin-operated laundromat equipment, and turnkey laundromat retail stores in the New York metropolitan area. On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation (see note 13). The accompanying consolidated financial statements reflect the financial position, results of operations, and cash flows of the Company immediately prior to the sale. On December 15, 1993, CIC, on a stand alone basis, completed a "pre- packaged" voluntary capital restructuring (the "Plan") which was approved by 100% of the Company's shareholders and creditors. Neither Coinmach nor Super Laundry were parties to this agreement. The Plan provided for the Company's existing senior subordinated notes, junior subordinated promissory notes, preferred stock and common stock to be exchanged for 87,000 shares of common stock valued at $24,163. The Plan, which was confirmed and court approved on January 21, 1994, and became effective February 4, 1994, was reflected in the 1994 financial statements, and was recorded in accordance with the guidelines provided by the Statement of Financial Accounting Standards Board (FASB 15 "Accounting for Troubled Debt Restructuring"). Pursuant to the Plan, the Company also amended its existing revolving and term loan agreement (see note 6(a)). As a result of the above, the Company recognized an extraordinary gain, net of legal fees and other direct costs, of $20,420 on the early extinguishment of the debt in 1994. The Company also incurred $1,341 in non-cash expenses related to the estimated fair value of the equity conversion feature of debt issued pursuant to the Plan (see note 6). In addition, the minority partners in Coinmach extinguished their ownership positions and the Company effectively owned 100% of Coinmach (see note 7). (2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CIC, Coinmach and Super Laundry. All significant intercompany balances and transactions have been eliminated in consolidation. (b)INVENTORIES Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Inventories include laundry equipment, spare parts and construction costs. (c)REVENUE RECOGNITION Super Laundry's customers generally sign sales contracts whereby Super Laundry will construct and equip a complete laundromat operation, including location identification, construction, plumbing, electrical wiring F-59 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) and all required permits. Revenue is recognized on the completed contract method. A contract is considered complete when all costs have been incurred and either the installation is operating according to specifications or has been accepted by the customer. The duration of such contracts is normally less than six months. Sales of laundromats were $451 for the one month ended January 31, 1995. (d)PROPERTY AND EQUIPMENT Laundry equipment, consisting primarily of commercial washers and dryers, and other fixed assets, are stated at cost. The cost of remanufacturing equipment is included in the cost of laundry equipment. The cost of laundry room improvements is included in leasehold improvements. The Company capitalized remanufacturing and laundry room improvement costs of approximately $273 for the month ended January 31, 1995. Depreciation of laundry equipment and fixed assets is calculated using the straight-line method over their estimated useful lives, generally five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. The Company's policy is to write-off fully depreciated assets and the accumulated depreciation and amortization. Depreciation and amortization expense was approximately $739 for the month ended January 31, 1995. The Company reviews the undiscounted cash flows of its laundry locations in assessing whether its property and equipment (primarily laundry equipment and laundry room improvements) may be impaired. The Company does not believe that the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of" will have a material impact on the Company's financial position or results of operations. (e)PREPAID COMMISSIONS The Company capitalizes contractually required advanced commissions and certain incentive payments paid in connection with the acquisition of its contractual rights to laundry room locations. Such amounts are amortized on a straight-line basis over the life of the related lease or the related contractual agreement. Amortization expense on prepaid commission amounted to approximately $12 for the month ended January 31, 1995. (f)CONTRACT RIGHTS Contract rights represent amounts expended for location contracts arising from the acquisition of laundry machines on location. These amounts are amortized on a straight-line basis over the remaining life of the corresponding contract. Such amounts were fully amortized as of January 31, 1995. (g)INTANGIBLES Intangibles, consisting principally of covenants not to compete, computer software and deferred financing costs are amortized over their estimated useful lives. Amortization expense on intangibles amounted to approximately $191 for the month ended January 31, 1995. (h)GOODWILL Goodwill is being amortized, using the straight-line method, over 40 years. Amortization expense on goodwill amounted to $38 for the month ended January 31, 1995. F-60 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) (i)INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Statement 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (3)RECEIVABLES
1995 ------ Accounts receivable............................................... $1,033 Notes receivable.................................................. 2,153 Finance reserves.................................................. 522 ------ 3,708 Allowances for doubtful accounts.................................. (447) ------ $3,261 ======
At January 31, 1995, notes receivable bear interest at a weighted average interest rate of approximately 10% and mature through 1998. The notes are collateralized by the underlying equipment. The Company periodically sells notes receivable arising from the sale of laundromats to third party finance companies. Finance reserves arise when the Company sells notes and a portion of the proceeds are retained by the finance company. As the notes are collected, the finance companies remit a portion of the collections to the Company. Many of the notes receivable are sold with recourse to the Company (see note 8). Control of the notes sold with recourse is surrendered by the Company on the date of transfer. The Company generally sells its receivables with recourse at cost, recognizing no gain or loss. (4)TRANSACTIONS WITH AFFILIATES The Company sold certain trade notes receivable to Cointrol Credit Co., L.P. ("Credit"), a company created in 1991 and owned by certain officers and directors of the Company and outside investors. All such notes are sold to yield a fair market rate of return as determined by rates available from unrelated finance companies for similar notes. The aggregate outstanding balance of all notes sold to Credit as of January 31, 1995 was $590. These notes are with recourse to the Company and mature through 1998. In April 1995, the Company entered into an agreement with Credit to repurchase the remaining receivables outstanding. F-61 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) (5)INTANGIBLES
ESTIMATED 1995 USEFUL LIVES ------- ------------ Covenants not to compete............................. $ 4,281 5 years Computer software.................................... 4,050 5 years Deferred financing costs............................. 1,552 Life of debt Other................................................ 972 5 years ------- 10,855 Accumulated amortization............................. 8,802 ------- $ 2,053 =======
(6)LONG-TERM DEBT Long-term debt consists of the following:
1995 ------- Revolving line of credit, due February 28, 1995 interest at prime plus 1.75%(a).................................................... $25,516 Term loan, due February 28, 1995(a)............................... 15,000 Management loans, due February, 2004, interest at prime plus 1.75%, convertible into 7,000 shares of common stock after February, 1999(b)................................................ 350 Other(c).......................................................... 934 ------- $41,800 =======
On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation. In connection with this sale, the Company paid off all amounts owed under its revolver and term loan debt (see note 13). The accompanying financial statements do not reflect the sale or the related repayment of debt. On December 15, 1993, the Company finalized negotiations with the holders of the revolving line of credit, term loan, senior subordinated note holders, and the junior subordinated promissory note holders. Pursuant to the Plan, the holders of senior subordinated notes in the amount of $30,000 and junior subordinated promissory notes in the amount of $1,979 exchanged their notes, including accrued interest of approximately $16,150 through December 15, 1993, for 87,000 shares of the restructured company's common stock. (a) On March 16, 1990, the Company entered into a bank agreement that provided for a term loan of $15,000 originally payable in eight quarterly installments of $1,875 commencing April 1, 1994, and a revolving line of credit of up to $35,000 for a term of five years. On February 4, 1994, the maximum revolver facility was reduced to $29,413. In addition, commencing March 1, 1994 and continuing on the first day of each month thereafter, the revolving credit facility will be reduced by $175 per month through June 1994, and then $212 per month, until the termination of the facility, including the term loan, on February 28, 1995. F-62 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) The interest rate for bank borrowings is the prime rate plus 1.75%. As of January 31, 1995, the interest rate on these loans was 10.25%. In addition, the agreement provides for the payment of a facility fee of .125% per annum on average daily outstanding balances and an unused line fee of .50% per annum on the average daily balance of the revolving loans. The agreement contains certain restrictive covenants and requires the Company, among other things, to maintain certain financial ratios and to restrict investments, additional indebtedness and payment of dividends. The loan is secured by all of the assets of the Company. See note 13 for a description of the subsequent event. (b) Pursuant to the Plan, senior management loaned the Company $350 due February 4, 2004. Interest is payable monthly, at the rate of 1.75% over prime. As of January 31, 1995, the interest rate on these loans was 10.25%. The loans are convertible, upon the earlier of five years or upon certain circumstances, into 7% of the Company's fully diluted common stock. These loans, which are subordinated to the revolving line of credit and the term loan, were funded February 4, 1994 (see note 7). The loans were repaid in connection with the subsequent event described in note 13. (c) Other debt includes payments due under non-compete agreements. Maturities of long-term debt at January 31, 1995 are contractually payable as follows:
YEARS ENDING JANUARY 31, ------------------------ 1996......................................... $40,945 1997......................................... 376 1998......................................... 129 2005......................................... 350 ------- $41,800 =======
(7)RESTRUCTURING On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation (see note 13). On December 15, 1993, CIC, on a stand alone basis, completed a "pre- packaged" voluntary capital restructuring which was approved by 100% of the Company's shareholders and creditors (see note 1). Neither Coinmach nor Super Laundry were parties to this agreement. The Plan provided for the Company's existing senior subordinated notes, junior subordinated promissory notes, preferred stock and common stock to be exchanged for 87,000 shares of common stock valued at $24,163. The carrying value of the senior subordinated notes, junior subordinated notes and related accrued interest was $30,000, $1,500, and $16,149, respectively. The preferred stock and common stock had a net carrying value of $2,609, consisting of preferred stock of $14,364, and common stock of $1, offset by the carrying value of the consideration to continuing predecessor interests in excess of book value of $11,756. The Plan, which was confirmed and court approved on January 21, 1994 and became effective February 4, 1994, was reflected in the 1994 financial statements. In addition, pursuant to the Plan, the Company amended its existing revolving and term loan agreement. As a result of the above, the Company recognized an extraordinary gain of $20,420, net of legal fees and other direct costs of $3,067, on the early extinguishment of the debt. In addition, $14,364, representing the carrying value of the preferred stock, is included in common stockholders' deficiency. Pursuant to the Plan, the equity position of the shareholder to which the continuing predecessor F-63 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) interests was attributed surrendered such position. Consequently, the carrying value of the continuing predecessor interests was charged to the accumulated deficit account. The restructuring has been treated as a tax free exchange of debt for equity in accordance with the provisions of the Internal Revenue Service Code. The Plan required two members of senior management to loan the Company $350. These loans have an interest rate of prime plus 1.75% and are due in 2004. The loans were funded February 4, 1994, and are reflected in the accompanying financial statements as long-term debt (see note 6). Also pursuant to the Plan the Company entered into non-compete agreements with two former shareholders totaling approximately $954. (8)COMMITMENTS AND CONTINGENCIES Coinmach is obligated under long-term leases relating to revenue equipment locations. The terms of these leases principally range from three to six years, most of which provide for fixed monthly commission payments and contain renewal options. The majority of these leases contain provisions permitting the cancellation and/or adjustment of the commission by Coinmach if minimum revenue levels are not achieved. In addition, Coinmach rents office and warehouse space from SSB Corporation ("SSB"). SSB is owned by certain individuals who were also owners of the Company, prior to the Plan. The lease, expiring on May 1, 1995, provides for annual rentals of $368 and for the payment by Coinmach of all operating expenses. Super Laundry leases its facilities from a related party under an operating lease that expires on December 31, 1996 and provides for a minimum annual rental of $60 in 1995 increasing to $63 in 1996. Under the terms of the lease, Super Laundry is required to pay operating costs. Rental expense for this lease amounted to $5 for the month ended January 31, 1995. In addition, Super Laundry also leases a warehouse from a related party on a month-to-month basis. Rental expense for this lease amounted to $3 for the month ended January 31, 1995. Effective January 1, 1993, Super Laundry entered into a five year lease for a sales office. This lease expires December 31, 1997 and provides for a minimum annual rental of $23 in 1993, increasing by 4% each successive year through 1997. The lease also calls for Super Laundry to pay operating costs. Rental expense including operating costs for this lease amounted to $9 for the month ended January 31, 1995. Future minimum lease payments under noncancellable operating leases (excluding commissions for laundry equipment locations) as of January 31, 1995 are as follows:
YEARS ENDING JANUARY 31, ------------------------ 1996........................................... $314 1997........................................... 108 1998........................................... 27 ---- Total future minimum lease payments............... $449 ====
Rent expense, excluding commission payments for laundry equipment locations, amounted to approximately $54 for the month ended January 31, 1995. F-64 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) Super Laundry is contingently liable on receivables sold, with recourse, to finance companies. The total amount outstanding is approximately $7,822 as of January 31, 1995. Under agreements between Super Laundry and certain finance companies, a portion of the notes receivable sales price is retained by the finance company until the receivable is collected. Amounts retained under the agreements amounted to $522 as of January 31, 1995, and are shown in the accompanying consolidated balance sheets as receivables. Coinmach has entered into leasing arrangements for automobiles and trucks and office equipment which are accounted for as capital leases. At January 31, 1995, the gross amounts of such assets amounted to $1,646 and accumulated amortization amounted to $901. Future minimum lease payments as of January 31, 1995 are as follows:
YEARS ENDING JANUARY 31, ------------------------ 1996........................................... $356 1997........................................... 144 1998........................................... 49 ---- Minimum lease payments............................ 549 Less amount representing interest................. 88 ---- Present value of net minimum lease payments....... $461 ====
The Company is party to certain lawsuits and claims relating to its operations. It is the opinion of management, based on the advice of outside counsel, that such lawsuits and claims will be resolved without material effect to the Company's consolidated financial statements. (9)INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at January 31, 1995 are presented below: Deferred tax assets: Net operating loss carryforwards.............................. $ 21,278 Fixed and intangible assets, principally due to differences between tax and financial reporting bases.................... 3,117 Allowance for doubtful accounts............................... 178 -------- Gross deferred tax assets................................... 24,573 Less valuation allowance...................................... (24,573) -------- Net deferred tax asset...................................... $ -0- ========
CIC files a consolidated Federal income tax return with Super Laundry and includes its equity in the earnings or loss of Coinmach. At January 31, 1995, net operating loss carryforwards of approximately $53,200 are available to offset future taxable income and expire commencing 2004 through 2009. F-65 CIC I ACQUISITION CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) JANUARY 31, 1995 (DOLLARS IN THOUSANDS) (10)STOCK OPTION PLAN Pursuant to the Plan, the Company adopted two stock option plans, which provided for the grant and exercise of options to purchase up to 6,000 shares of the Company's common stock upon attainment of certain annual earnings performance goals through 1997. One of the plans was for the employees of the Company, and provided for the grant and exercise of 5,000 shares. On February 4, 1994, options representing 1,000 of the shares under this plan were granted to certain employees and were immediately vested but were not to be exercisable unless 1994 earnings performance goals were attained. The employee plan also provided for the grant of options to purchase an additional 1,000 shares in 1994 and each year through December 31, 1997. The second stock option plan provided for the grant of options to purchase 1,000 shares to a financial advisor upon attainment of annual earnings performance goals through 1995. Under both plans, the options were to expire ten years from the dates of grant and were exercisable at $50 per share. No options have been exercised and in connection with the subsequent event described in note 13, the stock option plans were terminated and all outstanding options were cancelled. (11)PROFIT SHARING PLAN Effective April 1, 1994, The Company established a profit sharing and retirement plan (the "Coinmach Profit Sharing Plan") for substantially all of its employees. Pursuant to the Coinmach Profit Sharing Plan, eligible employees may defer up to 15% of their salaries up to a maximum level imposed by applicable federal law. Coinmach makes matching contributions in increasing amounts, based upon the number or years of service performed by eligible participants, up to a maximum of 6% of an eligible employee's salary. Matching contribution percentages range from 5% for one to two years of service up to 25% for five or more years of service and vest over a six year period. Company contributions to the plan for the month ended January 31, 1995 amounted to $6. (12)SUPPLEMENTAL CASH FLOW INFORMATION The Company paid approximately $395 for interest for the month ended January 31, 1995. (13)SUBSEQUENT EVENT On January 31, 1995, the Company sold its partnership interests in Coinmach and Super Laundry to a new corporation, The Coinmach Corporation ("Corp."). In connection with this sale, the Company, Coinmach and Super Laundry paid off all amounts owed under their existing revolver and term loan debt (see note 6). Corp. is owned by an investor group (83%) and the management of Coinmach and Super Laundry (17%). Corp. financed the transaction with approximately $11,600 of new equity, and debt financing of up to $50,000. Under the terms of the financing, no principal payments on the debt are due until April 1996. F-66 LETTERHEAD OF KPMG PEAT MARWICK INDEPENDENT AUDITORS' REPORT The Board of Directors The Coinmach Corporation: We have audited the accompanying consolidated balance sheet of The Coinmach Corporation and subsidiaries (the Company) as of March 31, 1995, and the related consolidated statements of operations and accumulated deficit and cash flows for the two-month period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Coinmach Corporation and subsidiaries as of March 31, 1995, and the results of their operations and their cash flows for the two-month period then ended, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP New York, New York July 7, 1995 F-67 THE COINMACH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1995 (DOLLARS IN THOUSANDS) ASSETS Cash.................................................................. $ 922 Receivables........................................................... 3,163 Inventories........................................................... 2,584 Prepaid commissions................................................... 3,222 Property and equipment: Laundry equipment................................................... 20,039 Leasehold improvements.............................................. 3,418 Office equipment.................................................... 578 Automobiles and trucks.............................................. 1,154 ------- 25,189 Less accumulated depreciation....................................... 859 ------- Net property and equipment........................................ 24,330 Contract rights, net of accumulated amortization of $813.............. 19,327 Other intangibles, net of accumulated amortization of $364............ 6,692 Other assets.......................................................... 795 ------- $61,035 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable...................................................... $ 2,198 Accrued expenses...................................................... 3,230 Commissions payable................................................... 2,994 Long-term debt........................................................ 42,351 Other long-term liabilities........................................... 407 Minority interest..................................................... 126 Stockholders' equity: Class A Common, par value $.01; 77,350 shares authorized, issued and outstanding........................................................ 1 Class B Common, par value $.01; 15,500 shares authorized; 14,500 shares issued and outstanding...................................... -- Class C Common, par value $.01; 7,650 shares authorized, issued and outstanding........................................................ -- Class D Common, par value $.01; 7,650 shares authorized; no shares issued or outstanding.............................................. -- Preferred stock, par value $.01; 10,000 shares authorized; no shares issued or outstanding.............................................. -- Additional paid-in capital.......................................... 11,221 Accumulated deficit................................................. (1,155) ------- 10,067 Notes receivable from management.................................... (338) ------- Total stockholders' equity........................................ 9,729 ------- $61,035 =======
The accompanying notes are an integral part of these consolidated financial statements. F-68 THE COINMACH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE TWO MONTHS ENDED MARCH 31, 1995 (DOLLARS IN THOUSANDS) Revenues.............................................................. $11,515 Laundry operating expenses............................................ 8,951 General and administrative expenses................................... 799 Depreciation and amortization of property and equipment............... 859 Amortization of intangibles and prepaid commissions................... 1,285 ------- Operating loss........................................................ (379) Interest expense...................................................... 774 ------- Loss before income taxes.............................................. (1,153) Income taxes.......................................................... 2 ------- Net loss.............................................................. (1,155) Accumulated deficit, beginning of period.............................. -- ------- Accumulated deficit, end of period.................................... $(1,555) =======
The accompanying notes are an integral part of these consolidated financial statements. F-69 THE COINMACH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE TWO MONTHS ENDED MARCH 31, 1995 (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss............................................................ $(1,155) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization..................................... 2,144 Minority interest in loss of consolidated subsidiary.............. (7) Provision for bad debts........................................... 3 Changes in assets and liabilities: Decrease in receivables......................................... 94 Decrease in prepaid commissions net of decrease in commissions payable........................................................ (438) (Increase) in inventories....................................... (231) Decrease in other assets........................................ 209 (Decrease) in accounts payable and accrued liabilities.......... (546) ------- Net cash provided by operating activities..................... 73 ------- Cash flows from investing activities: Purchase of laundry equipment....................................... (918) Purchase of fixed assets............................................ (72) ------- Net cash used in investing activities......................... (990) ------- Cash flows from financing activities: Repayments under revolving credit facility.......................... (191) Payment of other debt............................................... (82) Principal payments of capital lease obligations..................... (54) ------- Net cash used in financing activities......................... (327) ------- Net decrease in cash.......................................... (1,244) Cash at beginning of period........................................... 2,166 ------- Cash at end of period................................................. $ 922 =======
The accompanying notes are an integral part of these consolidated financial statements. F-70 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1995 (DOLLARS IN THOUSANDS) (1)ORGANIZATION AND ACQUISITION The Coinmach Corporation ("Corp."; together with its subsidiaries, the "Company") was incorporated in January 1995. The Company was capitalized primarily through an equity investment by an investor group led by the majority shareholder (the "Majority Shareholder") and senior management and bank financing (see note 3 and note 6). Corp. is a holding company which was formed to acquire partnership interests in Coinmach Industries Co. ("Coinmach") and Super Laundry Equipment Co. L.P. ("Super Laundry"). Coinmach is principally engaged in providing laundry equipment and related services to multi-family housing complexes in the New York metropolitan area. Super Laundry is principally a supplier of coin-operated laundromat equipment and turnkey laundromat retail stores in the New York metropolitan area. On January 31, 1995, the Company acquired its partnership interests in Coinmach and Super Laundry from CIC I Acquisition Corp. ("CIC I"). The transaction resulted in the Company owning 100% interests in both Coinmach and Super Laundry. The aggregate purchase price for these interests was $8,570, paid in cash. The acquisition was accounted for using the purchase method of accounting. The fair value of assets acquired (based on an independent appraisal for certain assets) less liabilities assumed exceeded the purchase price by approximately $7,700. The excess was allocated to property, equipment and intangible assets ratably based on their respective fair values as prescribed by Accounting Principles Board Opinion No. 16, "Business Combinations." The acquisition was funded by a net equity investment (see Note 3) of approximately $10,884 and the assumption of liabilities aggregating approximately $52,627. The total purchase price of $63,511 was allocated to assets acquired, based on fair market value, as follows: Cash............................................................. $ 2,166 Receivables...................................................... 3,260 Inventories...................................................... 2,353 Prepaids and other assets........................................ 4,337 Property and equipment........................................... 24,199 Contract rights.................................................. 20,140 Covenants not to compete......................................... 915 Computer software................................................ 3,271 Deferred financing costs......................................... 2,870 ------- $63,511 =======
The Company was capitalized, acquired its interests in Coinmach and Super Laundry, and entered into the financing agreement described in note 6 on January 31, 1995. The Company's fiscal year-end is March 31. (2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. F-71 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) (b)INVENTORIES Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Inventories include laundry equipment, spare parts and construction costs. (c)REVENUE RECOGNITION Super Laundry's customers generally sign sales contracts whereby Super Laundry will construct and equip a complete laundromat operation, including location identification, construction, plumbing, electrical wiring and all required permits. Revenue is recognized on the completed contract method. A contract is considered complete when all costs have been incurred and either the installation is operating according to specifications or has been accepted by the customer. The duration of such contracts is normally less than six months. Sales of laundromats were $1,574 for the two months ended March 31, 1995. (d)PROPERTY AND EQUIPMENT Laundry equipment, consisting primarily of commercial washers and dryers, and fixed assets acquired in the purchase, are stated as described in Note 1, with subsequent additions recorded at cost. The cost of remanufacturing equipment is included in the costs of laundry equipment. The cost of laundry room improvements relating to new locations is included in leasehold improvements. The Company capitalized remanufacturing and laundry room improvement costs of approximately $259 for the two months ended March 31, 1995. Depreciation of laundry equipment and fixed assets is calculated using the straight-line method over their estimated useful lives, generally five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. The Company's policy is to write-off fully depreciated assets and the related accumulated depreciation and amortization. Depreciation and amortization expense was approximately $859 for the two months ended March 31, 1995. The Company reviews the undiscounted cash flows of its laundry locations in assessing whether its property and equipment (primarily laundry equipment and laundry room improvements) may be impaired. The Company does not believe that the adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of" will have a material impact on the Company's financial position or results of operations. (e)PREPAID COMMISSIONS The Company capitalizes contractually required advance commissions and certain incentive payments paid in connection with the acquisition of its contractual rights to laundry room locations. Such amounts are amortized on a straight-line basis over the life of the related lease or the related contractual agreement. Amortization expense on prepaid commissions amounted to approximately $108 for the two months ended March 31, 1995. (f)CONTRACT RIGHTS Contract rights represent amounts expended for location contracts arising from the acquisition of laundry machines on location. The carrying amount of contract rights acquired in connection with the purchase transaction is based on the accounting described in note 1, and are amortized over periods ranging from 3 F-72 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) to 15 years. Contract rights relating to written contracts are amortized on a straight-line basis over the remaining life of the corresponding contract, and verbal contracts are amortized over an estimated useful life based on a turnover analysis performed by an independent appraisal company. Amortization expense on contract rights was $813 for the two months ended March 31, 1995. (g)INTANGIBLES Intangibles, consisting principally of covenants not to compete, computer software and deferred financing costs are amortized over their estimated useful lives. Amortization expense on intangibles amounted to $364 for the two months ended March 31, 1995. (h)INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Statement 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (3)CAPITAL STOCK In connection with the initial capitalization of the Company, 77,350 shares of Class A, 14,500 shares of Class B and 7,650 shares of Class C Common Stock were issued in exchange for gross proceeds of approximately $11,200, $422 and $0, respectively. Such amounts aggregated approximately $11,222, net of a transaction fee of $400 paid to the Majority Shareholder. The Class A Common Stock is guaranteed a yield before any other class of common stock receives dividends. In addition, the Class A Common Stock has full liquidation preference, including its guaranteed yield, over all other classes of common stock. The liquidation preference for Class A Common Stock as of March 31, 1995, including the guaranteed yield, was approximately $11,350. Class A and Class B Common Stock have equal voting rights. The Class B Common Stock was purchased by certain members of management of the Company. Certain members of management also purchased Class A shares. A portion of the purchase price of Class B Common Stock was financed through the Company in the form of promissory notes. The notes, which bear interest at 8% and are payable in four equal annual installments commencing January 31, 1996, are presented as a reduction of stockholders' equity in the accompanying consolidated balance sheet. The underlying stock purchased was pledged as collateral against these notes. The liquidation preference for Class B Common Stock, which is subordinated to Class A Common Stock, as of March 31, 1995 was approximately $422. The Class C Common Stock, which was purchased by the lenders described in note 6 for a nominal amount and whose value was deemed to not be material at the date of purchase, is subordinated in liquidation to both Class A and Class B Common Stock. Class C Common Stock has no voting rights and is convertible F-73 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) into Class D Common Stock (which has voting rights) upon the occurrence of certain conversion events including public offerings of the Company's stock or changes in control. No such events have occurred. All of the agreements pursuant to which common stock was purchased contain restrictions on the transfer of Company stock. In addition, pursuant to management agreements with the purchasers of the Class B Common stock, the Company may exercise certain call provisions based on agreed upon formulae. Pursuant to a stockholders agreement with the Company, certain stockholders are granted co-sale rights, whereby, if the Majority Shareholder proposes to transfer (other than pursuant to a public offering or sale of the Company), any shares of common stock that results in the Majority Shareholder owning directly or indirectly less than 60% of the then outstanding common stock of the Company, any stockholder of the Company is given the opportunity to sell a ratable portion of his or her shares of common stock contemporaneously with such sale by the Majority Shareholder. The Majority Shareholder and other stockholders of the Company are also entitled to certain registration rights pursuant to the terms of a registration rights agreement entered into between such stockholders and the Company. The Company incurred fees and expenses in connection with the purchase transaction and the related financing agreement aggregating $2,870. Such fees are being amortized over the five year term of the revolving line of credit agreement and are included in other intangibles in the accompanying consolidated balance sheets. The Company has entered into a management agreement with the Majority Shareholder which provides for a fee of $100 per year. (4)RECEIVABLES Receivables consist of the following: Accounts receivable............................. $1,045 Notes receivable................................ 1,705 Finance reserves................................ 413 ------ $3,163 ======
At March 31, 1995, notes receivable bear interest at a weighted average interest rate of approximately 10% and mature through 1998. The notes are collateralized by the underlying laundry equipment. The Company periodically sells notes receivable arising from the sale of laundromats to third party finance companies. Finance reserves arise when the Company sells notes and a portion of the proceeds are retained by the finance company. As the notes are collected, the finance companies remit a portion of the collections to the Company. Many of the notes receivable are sold with recourse to the Company (see note 7). Control of the notes sold with recourse is surrendered by the Company on the date of transfer. The Company generally sells its receivables with recourse at cost, recognizing no gain or loss. F-74 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) (5)INTANGIBLES Intangibles consist of the following:
ESTIMATED USEFUL LIVES --------- Covenants not compete.............................. $ 915 Lives of Contract Computer software.................................. 3,271 3 years Deferred financing costs........................... 2,870 5 years ------ 7,056 Accumulated Amortization........................... (364) ------ $6,692 ======
(6)LONG-TERM DEBT Long-term debt consists of the following: Revolving line of credit, due January 31, 2000 interest at prime plus 1.25% (10.25% at March 31, 1995)(a)................................................ $ 1,499 Term loan A, quarterly payments of $250 commencing April 1, 1996, and increasing to $500 April 1, 1997, $1,250 April 1, 1998 and $1,500 April 1, 1999. Interest at prime plus 1.25% (10.25% at March 31, 1995)(a)................................................ 14,000 Term loan B, quarterly payments of $1,750 commencing April 1, 2000 and increasing to $2,000 April 1, 2001 with the final two payments of $1,750 on April 1, 2002 and July 1, 2002. Interest at prime plus 1.75% (10.75% at March 31, 1995)(a).......................................................... 18,500 Term loan C, due July 1, 2002. Interest at 12.5%(a)................ 7,500 Other(b)........................................................... 852 ------- $42,351 =======
(a) In connection with the purchase transaction described in note 1, the Company entered into a financing agreement (the "Financing Agreement") with a group of lenders (the "Lenders"). The Financing Agreement provides for $40,000 in term loans and $10,000 in aggregate for revolving credit and acquisition loan facilities. The revolving line of credit agreement provides for up to $5,000 in borrowings, including letters of credit up to a maximum of $1,000. There is a one-half of one percent fee per annum on the unused portion of this facility and a two percent letter of credit fee. The Financing Agreement also provides for acquisition loans of up to $5,000. The acquisition loans must be used to finance acquisitions or capital expenditures attributed to growth. Any amounts outstanding under the acquisition line as of January 31, 2000 will be repaid in equal quarterly installments through July 1, 2002. Borrowings under the acquisition line bear interest at prime plus 1.75%. The Company has no acquisition loans outstanding as of March 31, 1995. The Financing Agreement requires the Company, among other things, to maintain certain financial ratios and restricts additional investments, indebtedness and the payment of dividends. The Company is in compliance with all covenants contained in the Financing Agreement. Loans outstanding under F-75 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) this agreement are subject to prepayment upon the occurrence of certain events such as asset dispositions, public offerings and the generation of excess cash flow, as defined. The Company may be subject to prepayment penalty on any fixed rate borrowings. Coinmach and Super Laundry are the borrowers under the Financing Agreement. The facility is guaranteed by Corp. Borrowing under the Financing Agreement are secured by all of the assets of the Company. (b) Other debt includes payments due under noncompete agreements. Maturities of long-term debt at March 31, 1995 are contractually payable as follows:
YEARS ENDING MARCH 31, ---------------------- 1996........................................... $ 417 1997........................................... 1,380 1998........................................... 2,055 1999........................................... 5,000 2000........................................... 7,499 Thereafter..................................... 26,000 ------- $42,351 =======
(7)COMMITMENTS AND CONTINGENCIES Coinmach is obligated under long-term leases relating to revenue equipment locations. The terms of these leases principally range from three to six years, most of which provide for fixed monthly commission payments and contain renewal options. The majority of these leases contain provisions permitting cancellation of the lease and/or adjustment of the commission by Coinmach if minimum revenue levels are not achieved. In addition, Coinmach rents office and warehouse space. The lease, which expired on May 1, 1995, provided for annual rentals of $368 and for the payment by Coinmach of all operating expenses. The lease is currently on a month-to-month basis under the same terms. Super Laundry leases its facilities from a related party under an operating lease that expires on December 31, 1996 and provides for a minimum annual rental of $60 in 1995 increasing to $63 in 1996. Under the terms of the lease, Super Laundry is required to pay operating costs. Rental expense for this lease amounted to $17 for the two months ended March 31, 1995. In addition, Super Laundry also leases a warehouse from a related party on a month-to-month basis. Rental expense for this lease amounted to $6 for the two months ended March 31, 1995. Effective January 1, 1993, Super Laundry entered into a five year lease for a sales office. This lease expires December 31, 1997 and provides for a minimum annual rental of $23 in 1993, increasing by 4% each successive year through 1997. The lease also calls for Super Laundry to pay operating costs. Rental expense including operating costs for this lease amounted to $5 for the two months ended March 31, 1995. Future minimum lease payments under noncancellable operating leases (excluding commissions for laundry equipment locations) as of March 31, 1995 are as follows:
YEARS ENDING MARCH 31, ---------------------- 1996.............................................. $558 1997.............................................. 167 1998.............................................. 37 ---- Total future minimum lease payments............... $762 ====
F-76 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) Rent expense, excluding commission payments for laundry equipment locations, amounted to approximately $90 for the two months ended March 31, 1995. Super Laundry is contingently liable on receivables sold, with recourse, to finance companies. The total amount outstanding is approximately $7,442 as of March 31, 1995. Coinmach has entered into leasing arrangements for automobiles and trucks and office equipment which are accounted for as capital leases. Future minimum lease payments as of March 31, 1995 are as follows:
YEARS ENDING MARCH 31, ---------------------- 1996.............................................. $307 1997.............................................. 123 1998.............................................. 32 ---- Minimum lease payments............................ 462 Less amount representing interest................. 55 ---- Present value of net minimum lease payments....... $407 ====
The Company is party to certain lawsuits and claims relating to its operations. It is the opinion of management, based on the advice of outside counsel, that such lawsuits and claims will be resolved without material effect to the Company's consolidated financial statements. (8)INCOME TAXES Income tax expense of $2 for the two months ended March 31, 1995 primarily represents state and local taxes. Corp. will file a consolidated Federal Income tax return with Super Laundry and include its equity in the earnings or loss of Coinmach. It is anticipated that no Federal taxes will be due for the period ended March 31, 1995. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are presented below:
MARCH 31, 1995 --------- Deferred tax assets: Difference between book and tax basis of long-lived assets.......................... $ 460 Less valuation allowance.................... (460) ----- Net deferred tax assets.................. $ -0- =====
(9)PROFIT SHARING PLAN Effective April 1, 1994, the Company established a profit sharing and retirement plan (the "Coinmach Profit Sharing Plan") for substantially all of its employees. Pursuant to the Coinmach Profit sharing Plan, eligible employees may defer up to 15% of their salaries up to a maximum level imposed by applicable F-77 THE COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) MARCH 31, 1995 (DOLLARS IN THOUSANDS) federal law. Coinmach makes matching contributions in increasing amounts, based upon the number of years of service performed by eligible participants, up to a maximum of 6% of an eligible employee's salary. Matching contribution percentages range from 5% for one to two years of service up to 25% for five or more years of service and vest over a six year period. Company contributions to the plan for the two months ended March 31, 1995 amounted to $16. (10)SUPPLEMENTAL CASH FLOW INFORMATION The Company paid approximately $774 for interest for the two months ended March 31, 1995. F-78 -----END PRIVACY-ENHANCED MESSAGE-----