-----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, CY0eXDu8r0RWLjsnY8L9wVOJMQu43iMx4xQ7eEuxclZ3ftibyv0GpoWvtUX3zqCr 973jPdIFVKV7Gsy9B384Qg== 0000902561-02-000546.txt : 20021104 0000902561-02-000546.hdr.sgml : 20021104 20021104170509 ACCESSION NUMBER: 0000902561-02-000546 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COINMACH CORP CENTRAL INDEX KEY: 0000091693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 530188589 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-49830 FILM NUMBER: 02808723 BUSINESS ADDRESS: STREET 1: 303 SUNNYSIDE BOULEVARD CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 5163498555 MAIL ADDRESS: STREET 1: 303 SUNNYSIDE BOULEVARD CITY: PLAINVIEW STATE: NY ZIP: 11803 FORMER COMPANY: FORMER CONFORMED NAME: SOLON AUTOMATED SERVICES INC DATE OF NAME CHANGE: 19940222 10-Q 1 form10-q_travers110402.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the period ended September 30, 2002 or { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ____________________. Commission File Number 0-7694 Coinmach Corporation (Exact name of registrant as specified in its charter) Delaware 53-0188589 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 11803 303 Sunnyside Blvd., Suite 70, Plainview, New York (zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (516) 349-8555 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ___. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No __X__. As of the close of business on November 4, 2002, Coinmach Corporation had outstanding 100 shares of common stock, par value $.01 per share (the "Common Stock"), all of which shares were held by Coinmach Laundry Corporation. COINMACH CORPORATION AND SUBSIDIARIES INDEX PART I. Financial Information Page No. - --------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2002 (Unaudited) and March 31, 2002 3 Condensed Consolidated Statements of Operations (Unaudited) - Three Months and Six Months 4 Ended September 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended September 5 30, 2000 and 2001 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 26 PART II. Other Information - ----------------- Item 1. Legal Proceedings 27 Item 2. Changes in Securities and Use of Proceeds 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 Signature Page 28 Certification by Chief Executive Officer 29 Certification by Chief Financial Officer 30 -2- COINMACH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (In thousands of dollars)
September 30, 2002 March 31, 2002 ------------------ -------------- (Unaudited) ASSETS: Cash and cash equivalents $ 30,155 $ 27,820 Receivables, net 11,272 11,883 Inventories 14,043 13,109 Prepaid expenses 6,808 7,166 Advance location payments 69,113 69,257 Land, property and equipment, net of accumulated depreciation of $149,659 and $116,361 288,980 284,413 Contract rights, net of accumulated amortization of $65,819 and $58,768 341,629 348,462 Goodwill 204,284 204,284 Other assets 21,810 22,927 --------- --------- Total assets $ 988,094 $ 989,321 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY: Accounts payable and accrued expenses $ 33,661 $ 31,775 Accrued rental payments 28,980 28,576 Accrued interest 7,369 7,540 Deferred income taxes 82,442 81,850 9% Senior Notes due 2010 450,000 450,000 Credit facility indebtedness 276,250 280,000 Other long-term debt 6,961 7,305 Due to Parent 51,123 51,852 Stockholder's equity: Common stock and capital in excess of par value 117,391 117,391 Accumulated deficit (66,083) (66,968) --------- --------- Total stockholder's equity 51,308 50,423 --------- --------- Total liabilities and stockholder's equity $ 988,094 $ 989,321 ========= ========= See accompanying notes. The March 31, 2002 balance sheet has been derived from the audited consolidated financial statements as of that date.
-3- COINMACH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (UNAUDITED) ----------- (In thousands of dollars)
Three Months Ended Six Months Ended ---------------------------- --------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- REVENUES $ 131,871 $ 131,287 $ 268,165 $ 267,110 COSTS AND EXPENSES: Operating 89,286 87,889 181,804 179,293 General and administrative 2,026 2,090 4,068 4,207 Depreciation and amortization 25,974 31,542 51,868 64,965 ------------- ------------- ------------- ------------- 117,286 121,521 237,740 248,465 ------------- ------------- ------------- ------------- OPERATING INCOME 14,585 9,766 30,425 18,645 INTEREST EXPENSE, NET 14,477 16,926 28,948 34,017 ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 108 (7,160) 1,477 (15,372) PROVISION (BENEFIT) FOR INCOME TAXES 44 (1,296) 592 (3,140) ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ 64 $ (5,864) $ 885 $ (12,232) ============= ============= ============= ============= See accompanying notes.
-4- COINMACH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (UNAUDITED) ----------- (In thousands of dollars)
Six Months Ended ---------------------------- September 30, September 30, 2002 2001 ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ 885 $(12,232) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 33,467 30,311 Amortization of advance location payments 10,948 11,882 Amortization of intangibles 7,453 22,772 Deferred income taxes 592 (3,140) Amortization of debt discount and deferred issue costs 1,220 955 Amortization of premium on 11 3/4% Senior Notes - (618) Change in operating assets and liabilities: Other assets (663) 162 Receivables, net 611 264 Inventories and prepaid expenses (576) 500 Accounts payable and accrued expenses, net 1,030 (1,998) Accrued interest (171) (1,100) ------------- ------------- Net cash provided by operating activities 54,796 47,758 ------------- ------------- INVESTING ACTIVITIES: Additions to property and equipment (36,739) (32,094) Advance location payments to location owners (9,544) (8,219) Acquisition of assets - (2,684) Proceeds from sale of property and equipment 326 439 ------------- ------------- Net cash used in investing activities (45,957) (42,558) ------------- ------------- FINANCING ACTIVITIES: Proceeds from credit facility 6,000 19,700 Repayments to credit facility (9,750) (21,339) Net repayments to parent (729) (538) Repayments of bank and other borrowings (8) (134) Principal payments on capitalized lease obligations (2,017) (1,792) ------------- ------------- Net cash used in financing activities (6,504) (4,103) ------------- ------------- Net increase in cash and cash equivalents 2,335 1,097 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,820 25,859 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,155 $ 26,956 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 27,963 $ 34,800 ============= ============= Income taxes paid $ 177 $ 335 ============= ============= NON-CASH FINANCING ACTIVITIES: Acquisition of fixed assets through capital leases $ 1,681 $ 3,402 ============= =============
-5- COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Coinmach Corporation, a Delaware corporation (the "Company"), is the leading supplier of outsourced laundry services for multi-family housing properties in North America. The Company's core business (which the Company refers to as the "route" business) involves leasing laundry rooms from building owners and property management companies, installing and servicing laundry equipment, collecting revenues generated from washers and dryers (hereinafter referred to as "laundry machines" or "machines") and operating retail laundromats. The Company also leases laundry machines and other household appliances (through its Appliance Warehouse division) to property owners, managers of multi-family housing properties, and to a lesser extent, individuals and corporate relocation entities. At September 30, 2002, the Company owned and operated approximately 850,000 laundry machines in approximately 80,000 locations throughout North America and in 163 retail laundromats located throughout Texas and Arizona. The Company provides laundromat services at all such retail locations. Super Laundry Equipment Corp. ("Super Laundry"), a wholly-owned subsidiary of the Company, constructs, designs and retrofits retail laundromats and distributes laundromat equipment. The Company is a wholly-owned subsidiary of Coinmach Laundry Corporation, a Delaware Corporation ("CLC"). Unless otherwise specified herein, references to the Company shall mean Coinmach Corporation and its subsidiaries. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from such estimates. The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In the opinion of management of the Company, these unaudited condensed consolidated financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended March 31, 2002. Certain amounts in the financial statements have been reclassified for presentation purposes. 2. Goodwill and Contract Rights Goodwill, under purchase accounting, represents the excess of cost over fair values of net assets acquired and had been amortized on a straight-line basis over a period of 15 years. In June 2001, the Financial Accounting Standards Board ("FASB") issued two statements: Statement of Financial -6- COINMACH CORPORATION AND SUBSIDIARIES Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but instead are subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets on April 1, 2002. The Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of April 1, 2002, and determined that there was no effect on the Company's financial position or results of operations. 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 pursuant to acquisitions based on independent appraisals, have been amortized on a straight-line basis over approximately 15 years. The Company does not record contract rights relating to new locations signed in the ordinary course of business. In connection with adopting SFAS No. 142, the Company reassessed the useful economic life of contract rights and determined that such contract rights should be amortized using accelerated methods over periods ranging from 30-35 years. This change took effect for the quarter ended June 30, 2002 and is expected to result in an increase in operating income of approximately $12.3 million for the year ended March 31, 2003. Amortization expense for contract rights for each of the next five years is estimated to be as follows (in millions of dollars): Years ending March 31, ------------ 2003 $ 14.2 2004 $ 13.9 2005 $ 13.6 2006 $ 13.3 2007 $ 13.0 Had the Company adopted the non amortization provisions of SFAS No. 142 and reassessed the useful economic life of contract rights on April 1, 2001, the adjusted net loss for the six months ended September 30, 2001 would have been approximately $6.5 million. Management evaluates the realizability of goodwill and contract rights balances (if there are indicators of impairment) based upon the Company's forecasted undiscounted cash flows and operating income. Based upon present operations and strategic plans, management believes that no impairment of goodwill or contract rights has occurred. 3. Debt On January 25, 2002, the Company issued $450 million of 9% Senior Notes due 2010 (the "9% Senior Notes") and entered into a $355 million senior secured credit facility (the "Senior Credit Facility") comprised of: (i) $280 million in aggregate principal amount of term loans and (ii) a revolving credit facility with a maximum borrowing limit of $75 million. The Company used the net proceeds -7- COINMACH CORPORATION AND SUBSIDIARIES from the 9% Senior Notes, together with borrowings under the Senior Credit Facility, to (i) redeem all of its outstanding 11 3/4% Senior Notes due 2005 (the "11 3/4% Senior Notes") (including accrued interest and the related call premium), (ii) repay outstanding indebtedness under its prior senior credit facility, and (iii) pay related fees and expenses. The 11 3/4% Senior Notes were redeemed on February 25, 2002. At September 30, 2002, the Company had outstanding debt consisting of (a) $450 million of 9% Senior Notes and (b) $276.3 million of term loans with interest rates ranging from 4.63% to 5.13%. The term loans represent indebtedness pursuant to the Senior Credit Facility, which is secured by all of the Company's real and personal property and is guaranteed by the Company's domestic subsidiaries. Under the Senior Credit Facility, CLC and the Company pledged to Bankers Trust Company, as Collateral Agent, their interests in all of the issued and outstanding shares of capital stock of the Company and the Company's domestic subsidiaries. In addition to certain customary terms and provisions, including events of default and customary representations, covenants and agreements, the Senior Credit Facility contains certain restrictive covenants including, but not limited to, a maximum leverage ratio, a minimum consolidated interest coverage ratio and limitations on indebtedness, capital expenditures, advances, investments and loans, mergers and acquisitions, dividends, stock issuances and transactions with affiliates. Also, the indenture governing the 9% Senior Notes and the Senior Credit Facility limit the Company's ability to pay dividends. At September 30, 2002, the Company was in compliance with the covenants under the indenture governing the 9% Senior Notes and the Senior Credit Facility. On April 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These statements established accounting and reporting standards for derivative instruments and for hedging activities. In accordance with SFAS No. 133, all derivative instruments are recognized in the balance sheet at their fair values. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative designated as a hedge of future cash flows, the effective portion of the derivative's gain or loss is initially reported as a component of "Other Comprehensive Income" and subsequently reclassified into "Earnings" along with the related effects of the hedged item. The ineffective portion of the gain or loss is reported in "Earnings" immediately. On September 23, 2002, the Company entered into three separate interest rate swap agreements, each for $50 million, that effectively converts a portion of its floating-rate loans to a fixed rate basis, thus reducing the impact of interest-rate changes on future interest income. At September 30, 2002, approximately $150 million of the Company's loans were designated as hedged items. These interest rate swaps used to hedge the variability of forecasted cash flows attributable to interest rate risk were designated as cash flow hedges. 4. Recently Issued Accounting Pronouncement In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. -8- COINMACH CORPORATION AND SUBSIDIARIES SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 are not being reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Upon adoption, any gain or loss on extinguishments of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB Opinion No. 30 for such classification will be reclassified to conform to the provisions of SFAS No. 145. 5. Guarantor Subsidiary The Company's domestic subsidiaries (collectively, the "Guarantor Subsidiaries") have guaranteed the Company's 9% Senior Notes and Senior Credit Facility referred to in Note 3. The Company has not included separate financial statements of the Guarantor Subsidiaries because they are wholly-owned by the Company and the guarantees issued are full and unconditional. Condensed consolidating financial information for the Company and its Guarantor Subsidiaries is as follows: Condensed Consolidating Balance Sheets (in thousands of dollars)
September 30, 2002 ------------------------------------------------------------ Coinmach and Non- Guarantor Guarantor Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ASSETS Cash, receivables, inventory and prepaid expenses $ 48,308 $ 13,970 $ - $ 62,278 Advance location payments 69,113 - - 69,113 Land, property and equipment, net 288,096 884 - 288,980 Intangible assets, net 543,870 2,043 - 545,913 Investment in subsidiaries 4,928 (1,430) (3,498) - Other assets 20,844 966 - 21,810 ------------ ------------ ------------ ------------ Total assets $975,159 $ 16,433 $ (3,498) $988,094 ============ ============ ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable and accrued expenses $ 64,250 $ 5,760 $ - $ 70,010 Deferred income taxes 82,530 (88) - 82,442 Debt 725,948 7,263 - 733,211 Due to parent 51,123 - - 51,123 Total stockholder's equity 51,308 3,498 (3,498) 51,308 ------------ ------------ ------------ ------------ Total liabilities and stockholder's equity $975,159 $ 16,433 $ (3,498) $988,094 ============ ============ ============ ============
-9-
COINMACH CORPORATION AND SUBSIDIARIES March 31, 2002 ------------------------------------------------------------ Coinmach and Non- Guarantor Guarantor Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ASSETS Cash, receivables, inventory and prepaid expenses $ 44,666 $ 15,312 $ - $ 59,978 Advance location payments 69,257 - - 69,257 Land, property and equipment, net 283,268 1,145 - 284,413 Intangible assets, net 550,743 2,003 - 552,746 Investment in subsidiaries 4,252 (1,300) (2,952) - Other assets 22,261 666 - 22,927 ------------ ------------ ------------ ------------ Total assets $ 974,447 $ 17,826 $ (2,952) $ 989,321 ============ ============ ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Accounts payable and accrued expenses $ 60,131 $ 7,760 $ - $ 67,891 Deferred income taxes 82,036 (186) - 81,850 Debt 730,005 7,300 - 737,305 Due to parent 51,852 - - 51,852 Total stockholder's equity 50,423 2,952 (2,952) 50,423 ------------ ------------ ------------ ------------ Total liabilities and stockholder's equity $ 974,447 $ 17,826 $ (2,952) $ 989,321 ============ ============ ============ ============
-10-
COINMACH CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Operations (in thousands of dollars) Six months ended September 30, 2002 -------------------------------------------------------------------- Coinmach and Non-Guarantor Guarantor Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------ ------------- Revenues $ 248,472 $ 19,693 $ - $ 268,165 Costs and expenses 218,123 19,617 - 237,740 ------------- ------------ ------------ ------------- Operating income 30,349 76 - 30,425 Interest expense 28,654 294 - 28,948 ------------- ------------ ------------ ------------- 1,695 (218) - 1,477 Income taxes 680 (88) - 592 ------------- ------------ ------------ ------------- 1,015 (130) - 885 Equity in loss of subsidiaries (130) - 130 - ------------- ------------ ------------ ------------- Net income (loss) $ 885 $ (130) $ 130 $ 885 ============= ============ ============ ============= Six months ended September 30, 2001 -------------------------------------------------------------------- Revenues $ 249,588 $ 17,522 $ - $ 267,110 Costs and expenses 230,568 17,897 - 248,465 ------------- ------------ ------------ ------------- Operating income (loss) 19,020 (375) - 18,645 Interest expense 33,676 341 - 34,017 ------------- ------------ ------------ ------------- (14,656) (716) - (15,372) Income taxes (2,993) (147) - (3,140) ------------- ------------ ------------ ------------- (11,663) (569) - (12,232) Equity in loss of subsidiaries (569) - 569 - ------------- ------------ ------------ ------------- Net loss $ (12,232) $ (569) $ 569 $ (12,232) ============= ============ ============ =============
-11-
COINMACH CORPORATION AND SUBSIDIARIES Three months ended September 30, 2002 -------------------------------------------------------------------- Coinmach and Non-Guarantor Guarantor Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------ ------------- Revenues $ 122,755 $ 9,116 $ - $ 131,871 Costs and expenses 108,103 9,183 - 117,286 ------------- ------------ ------------ ------------- Operating income (loss) 14,652 (67) - 14,585 Interest expense 14,326 151 - 14,477 ------------- ------------ ------------ ------------- 326 (218) - 108 Income taxes 132 (88) - 44 ------------- ------------ ------------ ------------- 194 (130) - 64 Equity in loss of subsidiaries (130) - 130 - ------------- ------------ ------------ ------------- Net income (loss) $ 64 $ (130) $ 130 $ 64 ============= ============ ============ ============= Three months ended September 30, 2001 -------------------------------------------------------------------- Revenues $ 123,189 $ 8,098 $ - $ 131,287 Costs and expenses 113,209 8,312 - 121,521 ------------- ------------ ------------ ------------- Operating income (loss) 9,980 (214) - 9,766 Interest expense 16,754 172 - 16,926 ------------- ------------ ------------ ------------- (6,774) (386) - (7,160) Income taxes (1,224) (72) - (1,296) ------------- ------------ ------------ ------------- (5,550) (314) - (5,864) Equity in loss of subsidiaries (314) - 314 - ------------- ------------ ------------ ------------- Net loss $ (5,864) $ (314) $ 314 $ (5,864) ============= ============ ============ =============
-12- COINMACH CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows (in thousands of dollars) Six months ended September 30, 2002 ------------------------------------------------------------------- Coinmach and Non-Guarantor Guarantor Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------ ------------- OPERATING ACTIVITIES Net income (loss) $ 885 $ (130) $ 130 $ 885 Noncash adjustments 53,311 369 - 53,680 Change in operating assets and liabilities 1,024 (793) - 231 ------------- ------------ ------------ ------------- Net cash provided by (used in) operating activities 55,220 (554) 130 54,796 ------------- ------------ ------------ ------------- INVESTING ACTIVITIES Investments in and advances to subsidiaries 130 - (130) - Capital expenditures (45,927) (30) - (45,957) ------------- ------------ ------------ ------------- Net cash used in investing activities (45,797) (30) (130) (45,957) ------------- ------------ ------------ ------------- FINANCING ACTIVITIES Proceeds from debt 5,940 60 - 6,000 Repayment of debt (9,652) (98) - (9,750) Other financing items (3,242) 488 - (2,754) ------------- ------------ ------------ ------------- Net cash (used in) provided by financing activities (6,954) 450 - (6,504) ------------- ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents 2,469 (134) - 2,335 Cash and cash equivalents, beginning of period 27,562 258 - 27,820 ------------- ------------ ------------ ------------- Cash and cash equivalents, end of period $ 30,031 $ 124 $ - $ 30,155 ============= ============ ============ =============
-13- COINMACH CORPORATION AND SUBSIDIARIES
Six months ended September 30, 2001 ------------------------------------------------------------------- Coinmach and Non-Guarantor Guarantor Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------ ------------ ------------- OPERATING ACTIVITIES Net loss $ (12,232) $ (569) $ 569 $ (12,232) Noncash adjustments 61,922 240 - 62,162 Change in operating assets and liabilities 694 (2,866) - (2,172) ------------- ------------ ------------ ------------- Net cash provided by (used in) operating activities 50,384 (3,195) 569 47,758 ------------- ------------ ------------ ------------- INVESTING ACTIVITIES Investments in and advances to subsidiaries 569 - (569) - Acquisition of assets (2,684) - - (2,684) Capital expenditures (39,830) (44) - (39,874) ------------- ------------ ------------ ------------- Net cash used in investing activities (41,945) (44) (569) (42,558) ------------- ------------ ------------ ------------- FINANCING ACTIVITIES Proceeds from debt 19,503 197 - 19,700 Repayment of debt (21,126) (213) - (21,339) Other financing items (5,132) 2,668 - (2,464) ------------- ------------ ------------ ------------- Net cash (used in) provided by financing activities (6,755) 2,652 - (4,103) ------------- ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents 1,684 (587) - 1,097 Cash and cash equivalents, beginning of period 25,418 441 - 25,859 ------------- ------------ ------------ ------------- Cash and cash equivalents, end of period $ 27,102 $ (146) $ - $ 26,956 ============= ============ ============ =============
6. Segment Information The Company reports segment information only for its route business, its only reportable segment, and provides information for its non-reportable segments as "All other." The route business, which comprises the Company's core business, involves leasing laundry rooms from building owners and property management companies typically on a long-term, renewal basis, installing and servicing the laundry equipment, collecting revenues generated from laundry machines, and operating retail laundromats. The "All other" segment includes the aggregation of the Company's equipment distribution and rental businesses. The rental business involves the leasing of laundry machines and other household appliances to property owners, managers of multi-family housing properties and to a lesser extent, individuals and corporate relocation entities, through its Appliance Warehouse division. The distribution business involves constructing complete turnkey retail laundromats, retrofitting existing retail laundromats, -14- COINMACH CORPORATION AND SUBSIDIARIES distributing exclusive lines of coin and non-coin machines and parts and selling service contracts through the Company's wholly-owned subsidiary, Super Laundry. The Company evaluates performance and allocates resources based on EBITDA (earnings before interest, taxes, depreciation and amortization), cash flow and growth opportunity. The accounting policies of the segments are the same as those described in the Company's Annual Report on Form 10-K for the year ended March 31, 2002. The table below presents information about the Company's segments (in thousands of dollars):
Three Months ended September 30, Six Months ended September 30, --------------------------------- -------------------------------- 2002 2001 2002 2001 ------------- ------------ ------------ ------------ Revenue: Route $115,619 $117,599 $234,730 $238,827 All other: Distribution 9,116 8,098 19,693 17,522 Rental 7,136 5,590 13,742 10,761 ------------- ------------ ------------ ------------ Subtotal All other 16,252 13,688 33,435 28,283 ------------- ------------ ------------ ------------ Total $131,871 $131,287 $268,165 $267,110 ============= ============ ============ ============ EBITDA: Route $ 39,583 $ 41,439 $ 80,483 $ 83,857 All other 3,002 1,959 5,878 3,960 Reconciling items: Corporate expenses (2,026) (2,090) (4,068) (4,207) ------------- ------------ ------------ ------------ Total $ 40,559 $ 41,308 $ 82,293 $ 83,610 ============= ============ ============ ============ Income before taxes: Route $15,786 $15,714 $32,970 $30,525 All other 1,246 316 2,365 674 ------------- ------------ ------------ ------------ Subtotal 17,032 16,030 35,335 31,199 Reconciling items: Corporate expenses (2,026) (2,090) (4,068) (4,207) Amortization of goodwill and depreciation (421) (4,174) (842) (8,347) Interest expense (14,477) (16,926) (28,948) (34,017) ------------- ------------ ------------ ------------ Income (loss) before taxes $ 108 $ (7,160) $ 1,477 $(15,372) ============= ============ ============ ============
-15- COINMACH CORPORATION AND SUBSIDIARIES 7. Income Taxes The components of the Company's deferred tax liabilities and assets are as follows (in thousands):
September 30, 2002 March 31, 2002 ------------------ -------------- Deferred tax liabilities: Accelerated tax depreciation and contract rights $ 110,531 $ 110,864 Other, net 1,129 925 ------------------ -------------- 111,660 111,789 ------------------ -------------- Deferred tax assets: Net operating loss carryforwards 28,038 28,906 Covenant not to compete 1,180 1,033 ------------------ -------------- 29,218 29,939 ------------------ -------------- Net deferred tax liability $ 82,442 $ 81,850 ================== ============== The net operating loss carryforwards of approximately $69.4 million, after a reduction to reflect the limitation imposed under the provisions of the Internal Revenue Code regarding change of ownership, expire between fiscal years 2003 through 2022. The majority of the Company's net operating loss carryforwards begin to expire after five years. In addition, the net operating losses are subject to annual limitations imposed under the provisions of the Internal Revenue Code regarding changes in ownership. The provision (benefit) for income taxes consists of (in thousands): Three Months ended September 30, Six Months ended September 30, ---------------------------------- ------------------------------- 2002 2001 2002 2001 ------------- ------------ ----------- ------------ Federal $ 35 $(1,010) $ 462 $(2,448) State 9 (286) 130 (692) ------------- ------------ ----------- ------------ $ 44 $(1,296) $ 592 $(3,140) ============= ============ =========== ============ The effective income tax rate differs from the amount computed by applying the U.S. federal statutory rate to loss before taxes as a result of state taxes and permanent book/tax differences as follows (in thousands): Three Months ended September 30, Six Months ended September 30, ---------------------------------- ------------------------------- 2002 2001 2002 2001 ------------- ------------ ----------- ------------ Expected tax provision (benefit) $ 38 $(2,506) $ 517 $(5,380) State tax provision (benefit), net of federal taxes 5 (103) 84 (385) Permanent book/tax differences 1 1,313 (9) 2,625 ------------- ------------ ----------- ------------ Tax provision (benefit) $ 44 $(1,296) $ 592 $(3,140) ============= ============ =========== ============
-16- COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- Except for the historical information contained herein, certain matters discussed in this document are forward-looking statements based on the beliefs of the Company's management and are subject to certain risks and uncertainties, including the risks and uncertainties discussed below, as well as other risks set forth in the Company's Annual Report on Form 10-K for the year ended March 31, 2002. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's future performance and actual results of operations may differ materially from those expected or intended. The Company's primary financial objective is to increase its cash flow from operations. Cash flow from operations represents a source of funds available to service indebtedness and for investment in both internal growth and growth through acquisitions. The Company has experienced net losses during the past three fiscal years. Such net losses were attributable in part to significant non-cash charges associated with the Company's acquisitions and the related amortization of contract rights and goodwill accounted for under the purchase method of accounting. The Company is principally engaged in the business of supplying outsourced laundry services to multi-family housing properties. The Company's most significant revenue source is its route business, which over the last three fiscal years has accounted for approximately 90% of its revenue. Through its route operations, the Company provides outsourced laundry equipment services to locations by leasing laundry rooms from building owners and property management companies, typically on a long-term, renewable basis. In return for the exclusive right to provide these services, most of the Company's contracts provide for commission payments to the location owners. Commission expense (also referred to as rent expense), the Company's single largest expense item, is included in operating expenses and represents payments to location owners. Commissions may be fixed amounts or percentages of revenues and are generally paid monthly. In addition to commission payments, many of the Company's leases require it to make advance location payments to location owners, which are capitalized and amortized over the life of the applicable leases. Through the Company's route business, the Company also currently operates 163 retail laundromats throughout Texas and Arizona. The operation of retail laundromats involves leasing store locations in desirable geographic areas, maintaining an appropriate mix of washers and dryers at each store location and servicing the washers and dryers at such locations. Operating expenses include, in addition to commission payments, (i) the cost of machine maintenance and revenue collection in the route business, including payroll, parts, insurance and other related expenses, (ii) costs and expenses incurred in maintaining the Company's retail laundromats, including utilities and related expenses, (iii) the cost of sales associated with the equipment distribution business and (iv) certain expenses related to the operation of the Company's rental business. In addition to its route business, the Company operates an equipment distribution business through Super Laundry Equipment Corporation ("Super Laundry"), its wholly-owned subsidiary. Super Laundry's business consists of constructing and designing complete turnkey retail laundromats, retrofitting existing retail laundromats, distributing exclusive lines of commercial coin and non-coin operated machines and parts, and selling service contracts. -17- COINMACH CORPORATION AND SUBSIDIARIES The Company also operates an equipment rental business through its Appliance Warehouse division, which rents laundry equipment and other household appliances and electronic items to corporate relocation entities, owners and managers of multi-family housing properties as well as to individuals. Accounting Policies Involving Significant Estimates - --------------------------------------------------- The Company's financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations. Revenue and cash and cash equivalents include an estimate of cash not yet collected at the end of a reporting period which remained at laundry room locations. The Company is required to estimate the collectibility of its receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Allowance for doubtful accounts at September 30, 2002 was approximately $1.3 million. The Company currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of the Company's deferred tax assets is principally dependent upon its achievement of projected future taxable income. Management's judgments regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require possible material adjustments to these deferred tax asset balances. The Company has significant intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions, including estimated future cash flows, could significantly impact these judgments and require adjustments to recorded asset balances. Results of Operations - --------------------- The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002. -18- COINMACH CORPORATION AND SUBSIDIARIES Comparison of the three- and six-month periods ended September 30, 2002 and September 30, 2001 The following table sets forth the Company's revenues for the periods indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30, ----------------------------------------- ----------------------------------------- 2002 2001 Change 2002 2001 Change ---------- ---------- ---------- ---------- ----------- ---------- Route $ 115.6 $ 117.6 $ (2.0) $ 234.7 $ 238.8 $ (4.1) Distribution 9.1 8.1 1.0 19.7 17.5 2.2 Rental 7.2 5.6 1.6 13.8 10.8 3.0 ---------- ---------- ---------- ---------- ----------- ---------- $ 131.9 $ 131.3 $ 0.6 $ 268.2 $ 267.1 $ 1.1 ========== ========== ========== ========== =========== ==========
Revenue increased by approximately $0.6 million or less than 1% for the three-month period ended September 30, 2002, as compared to the prior year's corresponding period. Revenue increased by approximately $1.1 million or less than 1% for the six-month period ended September 30, 2002, as compared to the prior year's corresponding period. Route revenue for the three months ended September 30, 2002 decreased by approximately $2.0 million or 2% over the prior year's corresponding period. Route revenue for the six months ended September 30, 2002 decreased by approximately $4.1 million or 2% over the prior year's corresponding period. Management believes that the decrease in route revenue for the current periods as compared to the prior year's corresponding periods was primarily the result of increased vacancies related to locations in certain regions. This decrease was slightly offset by an improvement in revenue from the timing of price changes and internal growth in machine count during the prior and current year. Distribution revenue for the three months ended September 30, 2002 increased by approximately $1.0 million or 12% from the prior year's corresponding period. Distribution revenue for the six months ended September 30, 2002 increased by approximately $2.2 million or 13% from the prior year's corresponding period. Sales from the distribution business unit are sensitive to general market conditions and economic conditions and as a result have experienced fluctuations during such periods. Rental revenue for the three months ended September 30, 2002 increased by approximately $1.6 million or 28% over the prior year's corresponding period. Rental revenue for the six months ended September 30, 2002 increased by approximately $3.0 million or 28% over the prior year's corresponding period. This increase was primarily the result of internal growth of the machine base in existing areas of operations and expansion into new territories within the United States. Operating expenses increased by approximately $1.4 million or 2% for the three-month period ended September 30, 2002, as compared to the prior year's corresponding period. Operating expenses increased by approximately $2.5 million or 1% for the six-month period ended September 30, 2002, as compared to the prior year's corresponding period. This increase in operating expenses was due primarily to (i) an increase in cost of sales resulting from increased sales in -19- COINMACH CORPORATION AND SUBSIDIARIES the distribution business and (ii) costs associated with expansion into new markets in the rental business. As a percentage of revenues, operating expenses were approximately 68% for both the three and six-month periods ended September 30, 2002, as compared to approximately 67% for both the three and six-month periods ended September 30, 2001. General and administrative expenses decreased slightly for each of the three and six-month periods ended September 30, 2002, as compared to the prior year's corresponding periods. As a percentage of revenues, general and administrative expenses were approximately 1.5% for both the three and six-month periods ended September 30, 2002, as compared to approximately 1.6% for both the three and six-month periods ended September 30, 2001. Depreciation and amortization expense decreased by approximately 18% for the three-month period ended September 30, 2002, as compared to the prior year's corresponding period. Depreciation and amortization decreased by approximately 20% for the six-month period ended September 30, 2002 as compared to the prior year's corresponding period. The decrease in depreciation and amortization expense was primarily due to the elimination of amortization expense on goodwill of approximately $7.6 million and the reduction of amortization expense on contract rights of approximately $7.2 million as a result of the application of Statements of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. This decrease was offset slightly by depreciation expense relating to capital expenditures required by historical increases in the Company's installed base of machines. As a result of the issuance of SFAS No. 142, Goodwill and Other Intangible Assets, in June 2001, effective for fiscal years beginning after December 15, 2001, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but instead are subject to annual impairment tests in accordance with such Statements. Other intangible assets will continue to be amortized over their useful lives. The Company has applied the new rules on accounting for goodwill and other intangible assets as of April 1, 2002. In connection with SFAS No. 142, the Company also reassessed the useful lives of contract rights and has determined that such contract rights should be amortized using accelerated methods over periods ranging from 30 to 35 years. This change took effect beginning with the quarter ended June 30, 2002 and is expected to result in an increase in operating income of approximately $12.3 million for the year ended March 31, 2003. Operating income margins were approximately 11.1% for the three-month period ended September 30, 2002, as compared to approximately 7.4% for the prior year's corresponding period. Operating income margins were approximately 11.3% for the six-month period ended September 30, 2002, as compared to approximately 7.0% for the prior year's corresponding period. The increase in operating income margin was primarily due to the decrease in amortization expenses in the current periods. Interest expense, net, decreased by approximately 14% for the three-month period ended September 30, 2002, as compared to the prior year's corresponding period. Interest expense, net, decreased by approximately 15% for the six-month period ended September 30, 2002, as compared to the prior year's corresponding period. On January 25, 2002, the Company issued $450 million of its 9% Senior Notes due 2010 (the "9% Senior Notes") and entered into a $355 million senior -20- COINMACH CORPORATION AND SUBSIDIARIES secured credit facility (the "Senior Credit Facility"). The decrease in interest expense was primarily due to decreased borrowing levels under the Senior Credit Facility as well as a decrease in interest rates payable under such facility resulting from a market decline in interest rates. This decrease was partially offset by an increase in interest expense as the result of (i) increased indebtedness outstanding under the 9% Senior Notes of $450 million as compared to approximately $296.7 million principal amount of 11 3/4% Senior Notes due 2005, and (ii) an increase in amortization of deferred financing costs relating to the issuance of the 9% Senior Notes and entering into the Senior Credit Facility. The provision for income taxes for the six-month period ended September 30, 2002 was approximately $0.6 million as compared to a benefit for income taxes of approximately $3.1 million for the prior year's corresponding period. The change for the six-month period is due to the corresponding decrease in pretax loss from approximately $15.4 million for the six-month period ended September 30, 2001 to a pretax income of approximately $1.5 million for the six-month period ended September 30, 2002. The effective tax rate for the six-month period ended September 30, 2002 was 40% as compared to 20% for the prior year's corresponding period. This increase in the effective tax rate was due to the elimination of certain non-deductible expenses, primarily goodwill amortization, as a result of the adoption of SFAS 142. EBITDA represents earnings from continuing operations before deductions for interest, income taxes, depreciation and amortization and is used by certain investors as an indication of a company's 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 accounting principles generally accepted in the United States ("GAAP")) as an indicator of operating performance or (b) cash flows from operating, investing and financing activities (as determined by GAAP) as a measure of liquidity. Given that EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. The following table sets forth the Company's EBITDA for the periods indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30, ----------------------------------------- ----------------------------------------- 2002 2001 Change 2002 2001 Change ---------- ---------- ---------- ---------- ----------- ---------- Route $ 39.6 $ 41.4 $ (1.8) $ 80.5 $ 83.8 $ (3.3) Distribution 0.3 - 0.3 0.6 0.1 0.5 Rental 2.7 2.0 0.7 5.3 3.9 1.4 G&A (2.0) (2.1) 0.1 (4.1) (4.2) 0.1 ---------- ---------- ---------- ---------- ----------- ---------- $ 40.6 $ 41.3 $ (0.7) $ 82.3 $ 83.6 $ (1.3) ========== ========== ========== ========== =========== ==========
EBITDA was approximately $40.6 million for the three months ended September 30, 2002, as compared to approximately $41.3 million for the three months ended September 30, 2001. EBITDA margins declined to approximately 30.8% for the three months ended September 30, 2002, as compared to approximately 31.5% for the prior year's corresponding period. This decrease was primarily the result of -21- COINMACH CORPORATION AND SUBSIDIARIES increased operating expenses in the distribution and rental businesses and decreased revenues in the route business, as discussed above. EBITDA was approximately $82.3 million for the six months ended September 30, 2002, as compared to approximately $83.6 million for the for the prior year's corresponding period. EBITDA margins declined to approximately 30.7% for the six months ended September 30, 2002, as compared to approximately 31.3% for the prior year's corresponding period. This decrease was primarily the result of increased operating expenses in the distribution and rental businesses and decreased revenues in the route business, as discussed above. Liquidity and Capital Resources - ------------------------------- The Company continues to have substantial indebtedness and debt service requirements. At September 30, 2002, the Company had outstanding debt of approximately $733.2 million, which included $450 million of the 9% Senior Notes and $276.3 million of borrowings under the Senior Credit Facility. The Company's stockholder's equity was approximately $51.3 million as of September 30, 2002. The Company's liquidity requirements arise from capital expenditures, interest expense and, to a lesser extent, principal payments on its indebtedness and working capital requirements. The Company has met these requirements in each fiscal year since 1995 primarily from cash flow generated from operations. The Company's primary source of liquidity as of September 30, 2002 consisted of cash and cash equivalents of $30.2 million and available borrowings under its Senior Credit Facility of approximately $74.3 million. On January 25, 2002, the Company issued the 9% Senior Notes and entered into the Senior Credit Facility, which was comprised of: (i) $280 million in aggregate principal amount of term loans and (ii) a revolving credit facility with a maximum borrowing limit of $75 million. The Senior Credit Facility also provides for up to $10 million of letter of credit financings and short term borrowings under a swing line facility of up to $7.5 million. The Senior Credit Facility is secured by substantially all of the Company's assets. The Company used the net proceeds from the 9% Senior Notes, together with borrowings under the Senior Credit Facility, to (i) redeem all of its outstanding 11 3/4% Senior Notes (including accrued interest and the related call premium), (ii) repay outstanding indebtedness under its prior senior credit facility, and (iii) pay related fees and expenses. The 11 3/4% Senior Notes were redeemed on February 25, 2002. The term loans under the Senior Credit Facility, in aggregate principal amounts outstanding of $30 million and $246.3 million as of September 30, 2002, are scheduled to be fully repaid by January 25, 2008 and July 25, 2009, respectively. As of September 30, 2002, the Company had no amounts outstanding under its revolving credit facility, which is scheduled to expire on January 25, 2008. The Company's working capital requirements are, and are expected to continue to be, minimal since a significant portion of the Company's operating expenses are not paid until after cash is collected from installed machines. Under the Company's existing financing arrangements, the Company is required to make (i) quarterly amortization payments under the Senior Credit Facility -22- COINMACH CORPORATION AND SUBSIDIARIES commencing on March 31, 2003 with respect to the $30 million term loan and semi-annual amortization payments which commenced on June 30, 2002 with respect to the $250 million term loan, and (ii) semi-annual cash interest payments under the 9% Senior Notes on February 1 and August 1, which commenced on August 1, 2002. As the Company has focused on increasing its cash flow from operating activities, it has made significant capital investments, primarily consisting of capital expenditures related to acquisitions, renewal and growth. The Company anticipates that it will continue to utilize cash flows from operations to finance its capital expenditures and working capital needs, including interest payments on its outstanding indebtedness. Capital expenditures for the three-month period ended September 30, 2002 were approximately $22.7 million (excluding approximately $1.0 million relating to capital lease obligations). Capital expenditures for the six-month period ended September 30, 2002 were approximately $46.3 million (excluding approximately $2.0 million relating to capital lease obligations). The primary components of the Company's capital expenditures are (i) machine expenditures, (ii) advance location payments, and (iii) laundry room improvements. The Company's installed base of machines for the route business increased by approximately 2,500 machines for the six-month period ended September 30, 2002. The growth in the rental business machine base was approximately 19,000 for the six-month period ended September 30, 2002. The full impact on revenues and cash flow generated from capital expended on the net increase in the installed base of machines is not expected to be reflected in the Company's financial results until subsequent reporting periods, depending on certain factors, including the timing of the capital expended. While the Company estimates that it will generate sufficient cash flows from operations to finance anticipated capital expenditures, there can be no assurances that it will be able to do so. The following table sets forth the Company's capital expenditures (excluding payments for capital lease obligations and business acquisitions) for the periods indicated (in millions of dollars):
Three months ended September 30, Six months ended September 30, ----------------------------------------- ----------------------------------------- 2002 2001 Change 2002 2001 Change ---------- ---------- ---------- ---------- ----------- ---------- Route $ 19.8 $ 17.6 $ (2.2) $ 40.1 $ 35.7 $ (4.4) Distribution - - - - - - Rental 2.9 2.8 (0.1) 6.2 4.6 (1.6) ---------- ---------- ---------- ---------- ----------- ---------- $ 22.7 $ 20.4 $ (2.3) $ 46.3 $ 40.3 $ (6.0) ========== ========== ========== ========== =========== ==========
-23- COINMACH CORPORATION AND SUBSIDIARIES The Company's future contractual obligations related to long-term debt, capital leases and operating leases at September 30, 2002 were as follows (in millions of dollars):
Payments Due by Period ---------------------------------------------------------------------------------- Less than Contractual Obligations Total 1 Year 1-3 Years 4-5 Years After 5 Years - ----------------------- --------------- -------------- --------------- --------------- --------------- Long-term debt $ 726.3 $ 3.8 $ 24.4 $ 15.0 $ 683.1 Capital leases 7.0 2.8 4.2 - - Operating leases 31.6 7.5 15.7 2.8 5.6 Total --------------- -------------- --------------- --------------- --------------- $ 764.9 $ 14.1 $ 44.3 $ 17.8 $ 688.7 =============== ============== =============== =============== ===============
The Company's level of indebtedness will have several important effects on its future operations including, but not limited to, the following: (i) a significant portion of the Company's cash flow from operations will be required to pay interest on its indebtedness; (ii) the financial covenants contained in certain of the agreements governing the Company's indebtedness will require the Company to meet certain financial tests and may limit its ability to borrow additional funds or to dispose of assets; (iii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; and (iv) the Company's ability to adapt to changes in the outsourced laundry equipment services industry and to economic conditions in general could be limited. An inability of the Company to comply with covenants or other conditions contained in the indenture governing the 9% Senior Notes or in the Senior Credit Facility could result in an acceleration of all amounts outstanding thereunder. If the Company is unable to meet its debt service obligations, it could be required to take certain actions such as reducing or delaying capital expenditures, selling assets, refinancing or restructuring its indebtedness, selling additional equity capital or other actions. There is no assurance that any of such actions could be effected on commercially reasonable terms or on terms permitted under the Senior Credit Facility, or the indenture governing the 9% Senior Notes. Management expects the Company's principal uses of cash for the next several years will be interest payments on the 9% Senior Notes and under the Senior Credit Facility, capital expenditures related to acquisitions, renewal, growth and working capital requirements. Management believes that cash from operations will be sufficient to meet the Company's expected debt service requirements, planned capital expenditures, and operating needs. Certain Accounting Treatment - ---------------------------- The Company's depreciation and amortization expense, which aggregated approximately $51.9 million for the six months ended September 30, 2002, reduces the Company's net income, but not its cash flow from operations. In accordance with GAAP, a significant amount of the purchase price related to businesses acquired by the Company is allocated to "contract rights". Management evaluates the realizability of contract rights balances (if there are indicators of impairment) based upon the Company's forecasted undiscounted cash flows and operating income. Based upon present operations and strategic plans, management believes that no impairment of contract rights has occurred. -24- COINMACH CORPORATION AND SUBSIDIARIES Recently Issued Accounting Pronouncements - ----------------------------------------- In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 are not to be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB No. 30"). Upon adoption, any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB No. 30 for such classification will be reclassified to conform to the provisions of SFAS No. 145. Outlook - ------- An integral component of the Company's business strategy has been the expansion of its installed machine base through a combination of internal growth and selective acquisitions. The Company's growth strategy is designed to achieve economies of scale, increase operating efficiencies and improve financial performance through the growth of its installed machine base. While the Company continues to expand its machine base, at the present time, the Company believes that the number of significant acquisition opportunities is limited due, in part, to the Company's successful execution of its consolidation strategy over the past several years. Additionally, the Company believes that present valuations of prospective acquisitions need to more accurately reflect current market conditions. As a result, while the Company may pursue opportunities to selectively acquire additional route businesses, the Company believes that its acquisition activity will be reduced for the foreseeable future, and will seek to preserve capital and reduce its level of indebtedness through its cash flow from operations. There can be no assurance, however, that the Company will be able to take advantage of any such opportunities on commercially viable terms, if at all. Inflation and Seasonality - ------------------------- In general, the Company's operating expenses and general and administrative expenses are affected by inflation and the effects of inflation may be experienced by the Company in future periods. Management believes such effects will not be material to the Company. The Company's business generally is not seasonal. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company's principal exposure to market risk relates to changes in interest rates on its borrowings. The Company's cash flow would be adversely affected by an increase in interest rates. As of September 30, 2002, the Company had approximately $126.3 million outstanding relating to its variable rate debt portfolio. -25- COINMACH CORPORATION AND SUBSIDIARIES The Company's future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. If market rates of interest on the Company's variable rate debt increased by 2.0% (or 200 basis points), the Company's annual interest expense would change by approximately $2.5 million, assuming the amount outstanding was $126.3 million, the balance as of September 30, 2002. Historically, the Company has utilized interest rate swap agreements to manage its exposure to certain market rate risks. As of September 30, 2002, the Company had $150 million in aggregate notional amount of interest rate swap agreements to manage its variable rate debt liabilities consisting of: (i) a $50 million notional amount interest rate swap transaction with JP Morgan effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional amount interest rate swap transaction with Credit Lyonnais effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50 million notional amount interest rate swap transaction with Deutsche Bank AG effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and expiring on February 1, 2006. The Company's fixed debt instruments are not generally affected by a change in the market rates of interest, and therefore, such instruments generally do not have an impact on future earnings. However, as fixed rate debt matures, future earnings and cash flows may be impacted by changes in interest rates related to debt acquired to fund repayments under maturing facilities. The Company does not use derivative financial instruments for trading purposes and is not exposed to foreign currency exchange risk. ITEM 4. Controls and Procedures. The Company's principal executive officer and principal financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days prior to the filing date of this report, have concluded that, as of such date, the Company's disclosure controls and procedures were effective to ensure that material information relating to the Company would be made known to them by others within the Company on a timely basis. In addition, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses. -26- COINMACH CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The Company is party to various legal proceedings arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that adverse determinations in any or all such proceedings would have a material adverse effect upon the Company's financial condition, results of operations or cash flows. ITEM 2. Changes in Securities and Use of Proceeds None. ITEM 3. Defaults Upon Senior Securities Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 5. Other Information Pursuant to a registration rights agreement entered into in connection with the issuance of the 9% Senior Notes, the Company filed a registration statement (the "Registration Statement") with the Securities and Exchange Commission under which the Company offered to register 9% senior notes (otherwise identical in all respects to its 9% Senior Notes) in exchange for its 9% Senior Notes (the "Exchange Offer"). In the Exchange Offer, which expired at 5:00 p.m., New York City time, on August 14, 2002, all the 9% Senior Notes were exchanged for registered notes. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.1 to the Company's Form 10-K for the transition period from September 30, 1995 to March 29, 1996, file number 0-7694) 3.2 Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Company's Form 10-K for the transition period from September 30, 1995 to March 29, 1996, file number 0-7694) 99.1 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 United States Code, Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K A Report on Form 8-K dated August 8, 2002 was filed on August 8, 2002. -27 COINMACH CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COINMACH CORPORATION Date: November 4, 2002 /s/ Robert M. Doyle --------------------------------- Robert M. Doyle Senior Vice President and Chief Financial Officer (On behalf of registrant and as Principal Financial Officer) -28- COINMACH CORPORATION AND SUBSIDIARIES CERTIFICATION I, Stephen R. Kerrigan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Coinmach Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 day prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2002 /s/ Stephen R. Kerrigan -------------------------- Stephen R. Kerrigan Chairman of the Board and Chief Executive Officer -29- COINMACH CORPORATION AND SUBSIDIARIES CERTIFICATION I, Robert M. Doyle, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Coinmach Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 day prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2002 /s/ Robert M. Doyle ----------------------------------- Robert M. Doyle Chief Financial Officer -30- EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned certifies that the Form 10-Q for the period ended September 30, 2002 fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Form 10-Q for the period ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Coinmach Corporation. /s/ Stephen R. Kerrigan /s/ Robert M. Doyle - -------------------------------------- ----------------------------------- Stephen R. Kerrigan Robert M. Doyle Chief Executive Officer Chief Financial Officer Coinmach Corporation Coinmach Corporation EX-99 3 form10-q_exh99trav110402.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned certifies that the Form 10-Q for the period ended September 30, 2002 fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Form 10-Q for the period ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Coinmach Corporation. /s/ Stephen R. Kerrigan /s/ Robert M. Doyle - -------------------------------------- ----------------------------------- Stephen R. Kerrigan Robert M. Doyle Chief Executive Officer Chief Financial Officer Coinmach Corporation Coinmach Corporation -----END PRIVACY-ENHANCED MESSAGE-----