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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2003
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-7694
COINMACH CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 53-0188589
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(State of incorporation) (I.R.S. Employer Identification No.)
303 SUNNYSIDE BLVD., SUITE 70, PLAINVIEW, NEW YORK 11803
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 349-8555
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No |X|
As of June 24, 2003, the registrant had outstanding 100 shares of
common stock, par value $.01 per share.
No market value can be determined for the Company's common stock. See
Item 5 of this Form 10-K Report.
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PART I
ITEM 1. BUSINESS
Unless otherwise expressly indicated herein, the descriptions of the
Company contained herein are as of March 31, 2003.
DESCRIPTION OF THE BUSINESS
GENERAL
Coinmach Corporation, a Delaware corporation (the "Company") is the
leading supplier of outsourced laundry equipment 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 laundry machines, and
operating retail laundromats. For the fiscal year ended March 31, 2003, the
Company's route business represented approximately 90% of its total revenues and
approximately 95% of its total EBITDA. The existing customer base for the
Company's route business is comprised of landlords, property management
companies, owners of rental apartment buildings, condominiums and cooperatives,
university and institutional housing and other multi-family housing properties.
The Company typically sets pricing for the use of laundry machines on location,
and the owner or property manager maintains the premises and provides utilities
such as gas, electricity and water. The Company's size and scale offer
significant advantages over its competitors in terms of marketing, operating
efficiencies and the quality of service the Company provides its customers.
The Company has selectively acquired certain related businesses in
order to expand and diversify the types of services it provides. Through
Appliance Warehouse of America, Inc. ("AWA"), a recently formed subsidiary of
the Company jointly-owned by the Company and Coinmach Holdings, LLC, a Delaware
limited liability company and the Company's ultimate parent ("Holdings"), the
Company leases laundry machines and other household appliances to property
owners, managers of multi-family housing properties, and to a lesser extent,
individuals and corporate relocation entities.
Super Laundry Equipment Corp. ("Super Laundry"), a wholly-owned
subsidiary of the Company, constructs, designs and retrofits retail laundromats
and distributes laundromat equipment. In addition, Super Laundry, commencing in
September 2002 and through its wholly-owned subsidiary, American Laundry
Franchising Corp. ("ALFC"), builds and develops laundromat facilities for sale
as franchise locations. For each franchise laundromat facility, ALFC enters into
a purchase agreement and a license agreement with the buyer whereby the buyer
may use certain systems created by ALFC to operate such facility. ALFC receives
revenue primarily from the sale price of the laundromat facility and, to a
lesser extent, from an initial franchise fee and certain other fees based on the
sales from such facility. The Company believes that these non-core businesses
provide a platform for expansion and diversification of the Company's services.
The Company is a wholly-owned subsidiary of Coinmach Laundry
Corporation, a Delaware corporation ("Coinmach Laundry"), which in turn is a
wholly-owned subsidiary of Holdings. Unless otherwise specified herein,
references to the Company shall mean Coinmach Corporation and its subsidiaries.
See "--Description of Business - Complementary Operations."
The Company maintains its headquarters in Plainview, New York, a
corporate office in Charlotte, North Carolina and regional offices throughout
the United States through which it conducts operating activities, including
sales, service and collections.
At March, 31, 2003, the Company owned and operated approximately
856,000 washers and dryers in approximately 80,000 locations throughout North
America of which (i) approximately 664,000 are located in leased laundry rooms
in approximately 70,000 locations, (ii) approximately 11,000 are located in 163
retail laundromats in Texas and Arizona, and (iii) approximately 181,000 are
installed with its rental customers through AWA.
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BUSINESS AND GROWTH STRATEGY
The Company's business strategy is to maintain its market leadership
position as the leading supplier of outsourced laundry equipment services for
multi-family housing properties in North America. The Company's growth strategy
is to increase its cash flow from operations and profitability through a
combination of internal expansion and selective acquisitions designed to achieve
economies of scale and increase its operating efficiencies. From time to time,
management may also consider other opportunities involving collections-based
core businesses to take advantage of potential synergies with the Company's
existing sales, service, collections and security infrastructure.
INTERNAL EXPANSION
Internal expansion is comprised of: (i) increasing the installed
machine base by adding new customers in existing regions and increasing the
number of locations with existing customers; (ii) converting owner-operated
facilities to Company-managed facilities; and (iii) improving the net
contribution per machine through operating efficiencies and selective price
increases.
New Customers and Locations. The Company's sales and marketing efforts
focus on adding new customers and increasing the number of locations from
existing customers within existing operating regions. The Company's primary
means of internal expansion is by marketing the Company's products and
services to building managers and property owners whose leases with other
laundry equipment services providers are near expiration. The Company's
integrated computer systems track information on the lease expirations of
its competitors. The Company believes that its leading market position and
expanding geographic presence enhance its ability to gain new customers and
additional locations from its existing customers.
Conversions. According to information provided by the Multi-housing
Laundry Association, there are approximately 1.2 million machines installed
in locations that continue to be managed by owner-operators. Building
owners or managers can forego significant cash outlays and servicing costs
by contracting with the Company to purchase, service and maintain laundry
equipment. Accordingly, the Company markets its services to building owners
and managers, encouraging them to outsource their laundry facilities. The
Company offers a full range of services from the design, construction and
installation of new laundry facilities to the refurbishment of existing
facilities. Management believes these services provide a competitive
advantage in securing new customers.
Operating Efficiencies and Price Increases. The Company focuses on
improving its net contribution per machine by increasing operating
efficiencies and implementing selective price increases. With respect to
operating efficiencies, each additional route added to its existing base
provides the Company the ability to further leverage its well-developed
operating infrastructure and positions the Company to achieve higher
returns on its established base. In terms of pricing, management actively
monitors its installed base to identify those locations in which to
implement selective price increases. Due to local competition and other
factors beyond the Company's control, however, there can be no assurance
that such efficiencies or price increases will occur.
SELECTIVE ACQUISITIONS
From January 1995 to June 1998, the Company pursued a strategy of rapid
growth through acquisitions of local, regional and multi-regional route
operators. As a result, the Company has become the leading provider of
outsourced laundry equipment services in North America. As the number of
significant acquisition opportunities has diminished over the past several
years, due in part to the Company's successful execution of its acquisition
strategy, the Company has focused its efforts on selectively acquiring smaller
routes within its fragmented industry. The Company believes that there are
numerous private, family-owned businesses that often lack the financial
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resources to compete effectively with larger independent operators such as
Coinmach to secure new or existing contracts. Consequently, such independent
operators, especially those that are undergoing generational ownership changes,
continue to represent potential acquisition opportunities. The Company evaluates
potential acquisitions based on the size of the business (in terms of revenues,
cash flow and machine base), the geographic concentration of the business,
market penetration, service history, customer relations, existing contract terms
and potential operating efficiencies and cost savings. There can be no
assurance, however, that the Company will be able to consummate any such
acquisitions on commercially reasonable terms, if at all.
DEVELOP COMPLEMENTARY LINES OF BUSINESS
While the Company intends to focus on increasing its installed machine
base, the Company believes that its leading market position and access to over
six million housing units provide the Company with additional growth and
diversification opportunities within its existing laundry business. These
opportunities include the distribution of laundry equipment to the retail
coin-operated laundromat segment (through its distribution operations of Super
Laundry) and the rental of laundry equipment to various end customers (through
its rental operations of AWA). Furthermore, the Company believes that its
existing sales, service, collections and security infrastructure could
potentially be extended into other collections-based core businesses. The
Company regularly explores strategic alliances with other companies in an effort
to develop these ancillary revenue streams. There can be no assurance, however,
that the Company will be able to take advantage of these opportunities on
commercially reasonable terms, if at all.
CONTINUE DEVELOPMENT OF INTEGRATED COMPUTER SYSTEMS
The Company's business strategy also includes the continued development
of its integrated computer systems. As the industry leader, the Company works
closely with its equipment vendors to assess ongoing technological changes and
implement those that the Company believes are beneficial to its customers and to
its operating efficiencies and financial performance. The Company's integrated
computer systems are capable of being tailored to a specific region's needs
while continuing to communicate with central management systems at its
headquarters.
INDUSTRY
The outsourced laundry equipment services industry is characterized by
stable operating cash flows generated by long-term, renewable lease contracts
with multi-family housing property owners and management companies. Based upon
industry estimates, management believes there are approximately 3.5 million
installed machines in multi-family properties throughout the United States,
approximately 2.3 million of which have been outsourced to independent operators
such as the Company and approximately 1.2 million of which continue to be
operated by the owners of such locations. The outsourced laundry equipment
services industry remains highly fragmented, with many small, private and
family-owned core businesses operating throughout all major metropolitan areas
in the United States. According to information provided by the Multi-housing
Laundry Association, the industry consists of over 280 independent operators.
Industry participants often incur significant capital costs upon the
procurement of new leases and the renewal of existing leases. Initial costs may
include replacing existing washers and dryers, refurbishing laundry rooms and
making advance location payments to secure long-term, renewable leases. After
the initial expenditures, ongoing working capital requirements are minimal. In
addition, the useful life of the Company's equipment typically extends
throughout the term of the contract under which it is installed. Furthermore,
maintenance of the facilities where the laundry machines are located is
typically performed by the property manager or landlord.
Historically, the industry has been characterized by stable demand and
has been resistant to changing market conditions and general economic cycles.
The Company believes that the industry's consistent and predictable revenue and
operating cash flows are primarily due to: (i) the long-term nature of location
leases; (ii) the stable demand for laundry services; and (iii) minimal ongoing
working capital requirements.
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DESCRIPTION OF PRINCIPAL OPERATIONS
The primary aspects of the Company's route business operations include:
(i) sales and marketing; (ii) location leasing; (iii) service; (iv) information
management; (v) remanufacturing and (vi) revenue collection and security.
SALES AND MARKETING
The Company markets its products and services through a sales staff
with an average industry experience of over ten years. The principal
responsibility of the sales staff is to solicit customers and negotiate lease
arrangements with building owners and managers. Sales personnel are paid
commissions that comprise 50% or more of their annual compensation. Selling
commissions are based on a percentage of a location's annualized earnings before
interest and taxes. Sales personnel must be proficient with the application of
sophisticated financial analyses, which calculate minimum returns on investments
to achieve the Company's targeted goals in securing location contracts and
renewals. The Company believes that its sales staff is among the most competent
and effective in the industry.
The Company's marketing strategy emphasizes excellent service offered
by its experienced, highly-skilled personnel and quality equipment that
maximizes efficiency and revenue and minimizes machine down-time. The Company's
sales staff targets potential new and renewal lease locations by utilizing the
integrated computer systems' extensive database to provide information on the
Company's, as well as its competitors', locations. Additionally, the integrated
computer systems monitor performance, repairs and maintenance, as well as the
profitability of locations on a daily basis. All sales, service and installation
data is recorded and monitored daily on a custom-designed, computerized sales
planner.
No single customer represents more than 2% of the Company's gross
revenues, and the Company's ten largest customers taken together account for
less than 10% of the Company's gross revenue.
LOCATION LEASING
The Company's leases provide it the exclusive right to operate and
service the installed laundry machines, including repairs, revenue collection
and maintenance. The Company typically sets pricing for the use of the machines
on location, and the property owner or property manager maintains the premises
and provides utilities such as gas, electricity and water.
In return for the exclusive right to provide laundry equipment
services, most of the Company's leases provide for monthly commission payments
to the location owners. Under the majority of leases, these commissions are
based on a percentage of the cash collected from the laundry machines. Many of
the Company's leases require the Company to make advance location payments to
the location owner in addition to commissions. The Company's leases typically
include provisions that allow for unrestricted price increases, a right of first
refusal (an opportunity to match competitive bids at the expiration of the lease
term) and termination rights if the Company does not receive minimum net
revenues from a lease. The Company has some flexibility in negotiating its
leases and, subject to local and regional competitive factors, may vary the
terms and conditions of a lease, including commission rates and advance location
payments. The Company evaluates each lease opportunity through its integrated
computer systems to achieve a desired level of return on investments.
The Company estimates that approximately 90% of its locations are under
long-term leases with initial terms of five to ten years. Of the remaining
locations not subject to long-term leases, the Company believes that it has
retained a majority of such customers through long-standing relationships and
expects to continue to service such customers. Most of the Company's leases
renew automatically or have a right of first refusal provision. The Company's
automatic renewal clause typically provides that, if the building owner fails to
take any action prior to the end of the original lease term or any renewal term,
the lease will automatically renew on substantially similar
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terms. As of March 31, 2003, the Company's leases had an average remaining life
to maturity of approximately 51 months (without giving effect to automatic
renewals).
SERVICE
The Company's employees deliver, install, service and collect revenue
from washers and dryers in laundry facilities at the Company's leased locations.
The Company's integrated computer systems allow for the quick dispatch
of service technicians in response to both computer-generated (for preventive
maintenance) and customer-generated service calls. On a daily basis, the Company
receives and responds to approximately 3,000 service calls. The Company
estimates that less than 1% of its machines are out of service on any given day.
The ability to reduce machine down-time, especially during peak usage, enhances
revenue and improves the Company's reputation with its customers.
In a business that emphasizes prompt and efficient service, the Company
believes that its integrated computer systems provide a significant competitive
advantage in terms of responding promptly to customer needs. Computer-generated
service calls for preventive maintenance are based on previous service history,
repeat service call analysis and monitoring of service areas. These systems
coordinate the Company's radio-equipped service vehicles and allow it to address
customer needs quickly and efficiently.
INFORMATION MANAGEMENT
The Company's integrated computer systems serve three major functions:
(i) tracing the service cycle of equipment; (ii) monitoring revenues and costs
by location, customer and salesperson; and (iii) providing information on
competitors' and the Company's lease renewal schedules.
The Company's integrated computer systems provide speed and accuracy
throughout the entire service cycle by integrating the functions of service call
entry, dispatching service personnel, parts and equipment purchasing,
installation, distribution and collection. In addition to coordinating all
aspects of the service cycle, the Company's integrated computer systems track
contract performance, which indicate potential machine problems or pilferage and
provide data to forecast future equipment servicing requirements.
Data on machine performance is used by the Company's sales staff to
forecast revenue by location. The Company is able to obtain daily, monthly,
quarterly and annual reports on location performance, coin collection, service
and sales activity by salesperson.
The Company's integrated computer systems also provide the Company's
sales staff with an extensive database essential to the Company's marketing
strategy to obtain new business through competitive bidding or owner-operator
conversion opportunities.
The Company also believes that its integrated computer systems enhance
its ability to successfully integrate acquired businesses into its existing
operations. Regional or certain multi-regional acquisitions have typically been
substantially integrated within 90 to 120 days, while a local acquisition can be
integrated almost immediately.
REMANUFACTURING
The Company rebuilds and reinstalls a portion of its machines at
approximately one-third the cost of acquiring new machines, providing cost
savings. Remanufactured machines are restored to virtually new condition with
the same estimated average life and service requirements as new machines.
Machines that can no longer be remanufactured are added to the Company's
inventory of spare parts.
The Company maintains three regional remanufacturing facilities,
strategically located to service its operating regions, which provide for
consistent machine quality and efficient operations.
6
REVENUE COLLECTION AND SECURITY
The Company believes that it provides the highest level of security for
revenue collection control in the outsourced laundry equipment services
industry. The Company utilizes numerous precautionary procedures with respect to
cash collection, including frequent alteration of collection patterns and
extensive monitoring of collections and personnel. The Company enforces
stringent employee standards and screening procedures for prospective employees.
Employees responsible for, or who have access to, the collection of funds are
tested randomly and frequently. Additionally, the Company's security department
performs trend and variance analyses of daily collections by location. Security
personnel monitor locations, conduct investigations, and implement additional
security procedures as necessary.
DESCRIPTION OF COMPLEMENTARY OPERATIONS
In addition to its route business, the Company has expanded its breadth
of operations to related, complementary lines of businesses:
RENTAL OPERATIONS
AWA, a subsidiary jointly-owned by the Company and Holdings, is
involved in the business of leasing laundry equipment and other household
appliances and electronic items to corporate relocation entities, property
owners, managers of multi-family housing properties and individuals. With access
to approximately six million individual housing units, the Company believes this
business line represents an opportunity for growth in a new market segment which
is complementary to its route business.
DISTRIBUTION OPERATIONS
Super Laundry, a wholly-owned subsidiary of the Company, is a
laundromat equipment distribution company. Super Laundry's business consists of
constructing complete turnkey retail laundromats, retrofitting existing retail
laundromats, distributing exclusive and non-exclusive lines of commercial coin
and non-coin operated machines and parts, and selling service contracts. Super
Laundry's customers generally enter into sales contracts pursuant to which Super
Laundry constructs and equips a complete laundromat operation, including
location identification, construction, plumbing, electrical wiring and all
required permits. In addition, Super Laundry, through its wholly-owned
subsidiary, ALFC, builds and develops laundromat facilities for sale as
franchise locations.
COMPETITION
The outsourced laundry equipment services industry is highly
competitive, capital intensive and requires reliable, quality service. Despite
the overall fragmentation of the industry, the Company believes there are
currently three multi-regional route operators, including the Company, with
significant operations throughout the United States. The two other major
multi-regional competitors are Web Service Company, Inc. and Mac-Gray Corp.
EMPLOYEES
As of March 31, 2003, the Company employed 2,015 employees (including
300 laundromat attendants in the Company's retail laundromats in Texas and
Arizona). In the Northeast region, 124 hourly workers are represented by Local
966, affiliated with the International Brotherhood of Teamsters (the "Union").
The Company believes that it has maintained a good relationship with the Union
employees and has never experienced a work stoppage since its inception.
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GENERAL DEVELOPMENT OF BUSINESS
Coinmach Laundry was incorporated on March 31, 1995 under the name SAS
Acquisitions Inc. in the State of Delaware and is the sole shareholder of all of
the common stock of the Company, its primary operating subsidiary. In November
1995, The Coinmach Corporation ("TCC"), a Delaware corporation and predecessor
of the Company, merged (the "Solon Merger") with and into Solon Automated
Services, Inc. ("Solon"). In connection with the Solon Merger, Coinmach Laundry
changed its name from SAS Acquisitions Inc., and Solon, the surviving
corporation in the Solon Merger, to Coinmach Corporation.
On May 12, 2000, Coinmach Laundry entered into an Agreement and Plan of
Merger (the "Merger Agreement") with CLC Acquisition Corporation ("CLC
Acquisition"), a newly-formed Delaware corporation formed by Bruce V. Rauner, a
director of Coinmach Laundry and a principal of the indirect general partner of
GTCR Fund IV, Coinmach Laundry's then-largest stockholder. Pursuant to the
Merger Agreement, CLC Acquisition acquired all of Coinmach Laundry's outstanding
common stock and non-voting common stock for $14.25 per share in a two-step
going-private transaction consisting of a tender offer followed by a merger
transaction of CLC Acquisition with and into Coinmach Laundry. Effective July
13, 2000, CLC Acquisition was merged with and into Coinmach Laundry pursuant to
the terms of the Merger Agreement. Coinmach Laundry's Class A common stock was
subsequently delisted from The Nasdaq Stock Market, and Coinmach Laundry no
longer was subject to the reporting requirements of the Securities Exchange Act
of 1934 (the "Exchange Act"). The foregoing transactions are collectively
referred to herein as the "Going Private Transaction."
In order to effect the Restructuring Transactions (as defined herein),
AWA was incorporated on September 25, 2002 and Holdings was formed on November
15, 2002. On November 29, 2002, all of the assets of the Appliance Warehouse
division of the Company were transferred to AWA in exchange for certain
consideration, including all of the capital stock of AWA. On March 6, 2003,
Holdings acquired all of the non-voting common stock of AWA, par value $0.01 per
share (the "AWA Common Stock") and all of the outstanding capital stock of
Coinmach Laundry (collectively, the "CLC Capital Stock"). As a result of the
Restructuring Transactions, (i) Coinmach Laundry became a wholly-owned
subsidiary of Holdings and (ii) AWA became a jointly-owned subsidiary of the
Company and Holdings, of which the Company is the owner of all the outstanding
voting preferred stock of AWA, par value $0.01 per share (the "AWA Preferred
Stock") and Holdings is the owner of all of the outstanding AWA Common Stock.
See Item 7"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Operating and Investing
Activities."
The Company's headquarters are located at 303 Sunnyside Blvd., Suite
70, Plainview, New York 11803, and its telephone number is (516) 349-8555. The
Company's mailing address is the same as that of its headquarters. The Company
also maintains a corporate office in Charlotte, North Carolina. The Company's
website address is http://www.coinmach.com.
SENIOR NOTES AND CREDIT FACILITY
On January 25, 2002, the Company issued $450 million of 9% Senior Notes
due 2010 (the "Private 9% Senior Notes"). The Private 9% Senior Notes were
exchanged for registered notes otherwise identical in all respects to the
Private 9% Senior Notes (the "Registered 9% Senior Notes", and together with the
Private 9% Senior Notes, the "9% Senior Notes") pursuant to a registration
statement filed by the Company with the Securities and Exchange Commission,
which registration statement was declared effective on July 15, 2003. The
exchange of the Private 9% Senior Notes for the Registered 9% Senior Notes was
completed on August 14, 2003.
On January 25, 2002, the Company also entered into a new $355 million
senior secured credit facility (the "Senior Secured Credit Facility") comprised
of: (i) $280 million in aggregate principal amount of term loans and (ii) a
revolving credit facility with a maximum borrowing limit of $75 million. The
Senior Secured Credit Facility includes up to $10 million of letter of credit
financings and short term borrowings under a swing line facility of up to $7.5
million. The term loans under the Senior Secured Credit Facility, in aggregate
principal amounts outstanding of $18.3 million and $243.0 million as of March
31, 2003, are scheduled to be fully repaid by January 25, 2008 and
8
July 25, 2009, respectively. As of March 31, 2003, the Company had no amounts
outstanding under its revolving credit facility, which is scheduled to expire on
January 25, 2008.
The Company used the net proceeds from the Private 9% Senior Notes,
together with borrowings under the Senior Secured Credit Facility, to (i) redeem
all of its outstanding 11 3/4% Senior Notes (including accrued interest and the
resulting 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 with the funds that were set
aside in escrow on January 25, 2002. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Financing Activities" for more information about the 9%
Senior Notes and the Senior Secured Credit Facility.
ITEM 2. PROPERTIES
As of March 31, 2003, the Company leased 68 offices throughout its
operating regions serving various operational purposes, including sales and
service activities, revenue collection and warehousing. A significant portion of
the Company's leased properties service the Company's core route operations.
The Company presently maintains its headquarters in Plainview, New
York, leasing approximately 11,600 square feet pursuant to a ten-year lease
scheduled to terminate September 30, 2011. The Company's Plainview facility is
used for general and administrative purposes.
The Company also maintains a corporate office in Charlotte, North
Carolina, leasing approximately 3,000 square feet pursuant to a five-year lease
scheduled to terminate September 30, 2006.
ITEM 3. LEGAL PROCEEDINGS
On November 18, 1999, K. Reed Hinrichs v. Stephen R. Kerrigan, et al.,
a purported class action lawsuit, was filed in the Delaware Court of Chancery,
Newcastle County naming Coinmach Laundry, GTCR Fund IV, GTCR Golder Rauner,
L.L.C. and certain of its executive officers as defendants. Plaintiffs alleged
that the defendants' proposal to acquire between 80% and 90% of Coinmach
Laundry's common stock for $13.00 per share was inadequate and that the
defendants breached their fiduciary duty to Coinmach Laundry's public
shareholders. This matter was stayed by mutual agreement of the parties due to
the subsequent consummation of the Going Private Transaction. This class action
lawsuit was dismissed pursuant to a Notice and Order of Dismissal filed by the
plaintiff with the Delaware County Chancery Court on October 20, 2000.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 6, 2003, Coinmach Laundry, as the sole stockholder of the
Company, took certain actions by written consent in connection with the
Restructuring Transactions pursuant to which, among other things, the Company's
board of directors (the "Company Board") authorized the increase in the size of
the Company Board from three to five members in order to mirror the composition
of the CLC Board. In this regard, Coinmach Laundry replaced Mitchell Blatt and
Robert M. Doyle and elected Bruce V. Rauner, Vincent J. Hemmer, David A. Donnini
and James N. Chapman as new directors of the Company. Stephen R. Kerrigan
maintained his position as Chairman of the Company Board.
9
MBR&M DRAFT OF 6/__/03
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There currently exists no established public trading market for the
Company's common stock, all of which is held beneficially and of record by
Coinmach Laundry.
HOLDERS
As of March 31, 2003, there was one holder of record of the Company's
common stock.
DIVIDENDS
The Company has not declared or paid any cash dividends on its common
stock during the past two fiscal years and does not intend to pay dividends on
its common stock in the foreseeable future. On March 4, 2003, in order to effect
the Restructuring Transactions, the Company declared and paid a dividend on its
common stock in the form of all of the outstanding AWA Common Stock. The Company
was not required to obtain the consent of its lenders under the Senior Secured
Credit Facility or of the holders of the 9% Senior Notes to effect the
Restructuring Transactions. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Operating and Investing Activities."
Dividend payments by the Company are subject to restrictions contained
in certain of its outstanding debt and financing agreements relating to the
payment of cash dividends on its common stock. The Company may in the future
enter into loan or other agreements or issue debt securities or preferred stock
that restrict the payment of cash dividends or certain other distributions. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Liquidity and Capital Resources."
EQUITY PARTICIPATION PURCHASE PROGRAM
Pursuant to the Company's equity participation purchase program,
certain employees of the Company were eligible to acquire common stock of
Coinmach Laundry at a fixed price per share determined by the CLC Board. Such
shares were paid for by each participating employee and subject to vesting over
a specified period, typically over 4 years. Additionally, in connection with the
Going Private Transaction, certain members of senior management of the Company
were eligible to acquire preferred stock of Coinmach Laundry. Pursuant to the
Restructuring Transactions, on March 6, 2003, all the outstanding capital stock
of Coinmach Laundry, including shares of capital stock issued under the equity
participation purchase program, was contributed to Holdings in exchange for
substantially equivalent equity interests in Holdings. As of March 31, 2003,
Holdings had issued and outstanding (i) 167,147,065 common units the ("Common
Units") of which 16,244,394 are issued to certain employees of the Company under
the Company's equity participation purchase program, (ii) no Class A preferred
units (the "Class A Preferred Units"), (iii) 51,923 Class B preferred units (the
"Class B Preferred Units"), none of which are issued to employees of the
Company, and (iv) 135,295 Class C preferred units (the "Class C Preferred
Units", and collectively with the Class A Preferred Units and the Class B
Preferred Units, the "Preferred Units"), 693 of which are issued to certain
members of senior management of the Company under the Company's equity
participation purchase program.
10
ITEM 6.
SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios)
The following table presents summary historical consolidated financial
data of the Company. Such table includes the consolidated financial data for the
year ended March 31, 2003 ("2003 Fiscal Year"), the year ended March 31, 2002
("2002 Fiscal Year"), the period from July 1, 2000 to March 31, 2001
("Post-Transaction") and the period from April 1, 2000 to June 30, 2000
("Pre-Transaction"), and the years ended March 31, 2000 ("2000 Fiscal Year") and
March 31, 1999 ("1999 Fiscal Year"). The financial data set forth below should
be read in conjunction with the Company's audited historical consolidated
financial statements and the related notes thereto included in Item 8 "Financial
Statements and Supplementary Data" and with the information presented in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K.
JULY 1, 2000 APRIL 1, 2000
TO MARCH 31, TO JUNE 30,
YEAR ENDED MARCH 31, 2001 2000 YEAR ENDED MARCH 31,
-------------------- ------------- ------------ ----------------------
POST- PRE-
2003 2002 TRANSACTION(8) TRANSACTION(9) 2000 1999
--------- --------- -------------- -------------- --------- ---------
OPERATIONS DATA:
Revenues $535,179 $538,895 $393,608 $134,042 $527,079 $505,323
Operating, general and administrative
expenses 375,108 371,830 271,298 91,805 358,733 340,671
Depreciation and amortization 104,178 129,529 102,727 31,557 123,002 113,448
Other items, net (1) (454) -- -- -- -- --
Operating income 56,347 37,536 19,583 10,680 45,344 51,204
Interest expense 58,167 73,036 52,391 16,661 67,232 65,901
Loss before extraordinary item (2,288) (34,620) (25,603) (4,652) (16,079) (11,618)
Extraordinary loss, net of income taxes (2) -- (6,745) -- -- -- --
Net loss (2,288) (41,365) (25,603) (4,652) (16,079) (11,618)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $27,428 $27,820 $25,859 -- $23,174 $26,515
Property and equipment, net 286,686 284,413 276,004 -- 237,160 223,610
Contract rights, net 335,327 348,462 373,352 -- 380,964 409,009
Advance location payments 70,911 69,257 74,233 -- 77,212 79,705
Goodwill, net 203,860 204,284 218,744 -- 104,969 113,030
Total assets 976,161 989,321 1,014,074 -- 875,625 900,660
Total debt (3) 718,112 737,305 697,969 -- 683,819 685,741
Stockholder's equity (deficit) 49,802 50,423 91,788 -- (30,143) (14,128)
FINANCIAL INFORMATION AND OTHER DATA:
Cash flow provided by operating activities $104,674 $78,411 $71,955 $17,407 $90,743 $103,041
Cash flow used in investing activities (81,330) (82,011) (66,202) (24,273) (88,404) (181,665)
Cash flow (used in) provided by
financing activities (23,736) 5,561 (4,471) 8,269 (5,680) 82,688
EBITDA (4) 160,071 167,065 122,310 42,237 168,346 164,652
EBITDA margin (5) 29.9% 31.0% 31.1% 31.5% 31.9% 32.6%
Operating margin (6) 10.5% 7.0% 5.0% 8.0% 8.6% 10.1%
Capital expenditures (7)
Capital expenditures $86,685 $79,464 $60,620 $24,273 $88,404 $84,134
Acquisition capital expenditures 1,976 3,723 5,582 -- -- 97,531
--------- --------- --------- --------- --------- ---------
Total capital expenditures $88,661 $83,187 $66,202 $24,273 $88,404 $181,665
========= ======== ========= ========= ========= =========
- ------------
(1) Other items, net, in the 2003 Fiscal Year consists of a gain of
approximately $3.3 million from the sale of an investment offset by
various expenses relating to (i) the Restructuring Transactions, (ii) the
formation of ALFC and (iii) the consolidation of certain Super Laundry
offices.
11
(2) The extraordinary loss, net of income taxes, in the 2002 Fiscal Year
consists of costs related to the early extinguishments of debt in
connection with the Company's refinancing on January 25, 2002.
(3) Total debt at March 31, 2001, March 31, 2000 and March 31, 1999 does not
include the unamortized premium on the 11 3/4% Series C Senior Notes of
$5,555, $6,789 and $8,023, respectively, recorded as a result of the
issuance by the Company of $100 million aggregate principal amount of 11
3/4% Series C Senior Notes due 2005 in October 1997. The 11 3/4% Series C
Senior Notes were redeemed on February 25, 2002 and the unamortized
premium on such date was included in the determination of the
extraordinary loss.
(4) EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization, and other
items, net. Management believes that EBITDA is useful as a means to
evaluate the Company's ability to service existing debt, to sustain
potential future increases in debt and to satisfy capital requirements.
Additionally, because the Company has historically provided EBITDA to
investors, it believes that presenting this non-GAAP financial measure
provides consistency in its financial reporting. EBITDA is also used to
determine the Company's compliance with key financial covenants under its
financing agreements, which, among other things, impacts the amount of
indebtedness the Company is permitted to incur. Management's use of
EBITDA, however, is not intended to represent cash flows for the period,
nor has it been presented as an alternative to either (a) operating income
(as determined by accounting principles generally accepted in the United
States) as an indicator of operating performance or (b) cash flows from
operating, investing and financing activities (as determined by accounting
principles generally accepted in the United States) as a measure of
liquidity. Given that EBITDA is not a measurement determined in accordance
with accounting principles generally accepted in the United States and is
thus susceptible to varying calculations, EBITDA may not be comparable to
other similarly titled measures of other companies. The following table
reconciles the Company's EBITDA to net loss for each period presented (in
thousands).
JULY 1, APRIL 1,
2000 TO 2000 TO
MARCH 31, JUNE 30,
YEAR ENDED 2001 2000 YEAR ENDED
---------------------- ----------- ----------- -------------------------
MARCH 31, MARCH 31, POST- PRE MARCH 31, MARCH 31,
2003 2002 TRANSACTION TRANSACTION 2000 1999
--------- --------- ------------ ----------- ----------- -----------
Net loss ($2,288) ($41,365) ($25,603) ($4,652) ($16,079) ($11,618)
Provision (benefit) for income taxes 468 (880) (7,205) (1,329) (5,809) (3,079)
Extraordinary loss, net of income
taxes -- 6,745 -- -- -- --
Interest expense 58,167 73,036 52,391 16,661 67,232 65,901
Other items, net (454) -- -- -- -- --
Depreciation and amortization 104,178 129,529 102,727 31,557 123,002 113,448
-------- --------- --------- --------- --------- ---------
EBITDA $160,071 $167,065 $122,310 $42,237 $168,346 $164,652
======== ========= ========= ========= ========= =========
- ------------
(5) EBITDA margin represents EBITDA as a percentage of revenues. Management
believes that EBITDA margin is a useful measure to evaluate the Company's
performance over various sales levels. EBITDA margin should not be
considered as an alternative for measurements determined in accordance
with accounting principles generally accepted in the United States.
(6) Operating margin represents operating income as a percentage of revenues.
(7) Capital expenditures represent amounts expended for property and
equipment, for advance location payments to location owners and for
acquisitions. Acquisition capital expenditures represent the amounts
expended to acquire local, regional and multi-regional route operators, as
well as complementary businesses.
12
(8) Includes the results of operations for the period July 1, 2000 to March
31, 2001, representing the results subsequent to the Going Private
Transaction.
(9) As a result of the Going Private Transaction that was accounted for using
the purchase method of accounting and, due to a practice known as "push
down" accounting, as of July 1, 2000 (the beginning of the accounting
period closest to the date on which control was effective), the Company
adjusted its consolidated assets and liabilities to their estimated fair
values, based on valuations, estimations and other studies. Therefore, the
financial statements presented for the Post-Transaction period are not
comparable to the financial statements presented for the Pre-Transaction
period. Had the Going Private Transaction taken place at April 1, 2000, on
an unaudited pro-forma basis, depreciation and amortization and net loss
would have been $3.5 million higher than reported for the Pre-Transaction
period ended June 30, 2000. This includes the results of operations for
the period April 1, 2000 to June 30, 2000, representing the results prior
to the Going Private Transaction.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis pertains to the results of
operations and financial position of the Company for the 2003 Fiscal Year, the
2002 Fiscal Year, and the period from April 1, 2000 to March 31, 2001 (the "2001
12-Month Period") and should be read in conjunction with the consolidated
financial statements and related notes thereto included in Item 8. The 2001
12-Month Period is comprised of the Pre-Transaction period combined with the
Post-Transaction period, and is not adjusted for the pro-forma effect that
additional depreciation and amortization would have on the Pre-Transaction
period had the Going Private Transaction occurred at the beginning of the 2001
12-Month Period.
GENERAL
The Company is principally engaged in the business of supplying
outsourced laundry equipment services to multi-family housing properties. The
Company's route business involves leasing laundry rooms from building owners and
property management companies, installing and servicing the laundry equipment,
collecting revenues generated from laundry machines and operating retail
laundromats. The Company, through AWA, a subsidiary jointly-owned with Holdings,
leases laundry machines and other household appliances to property owners,
managers of multi-family housing properties and to a lesser extent, individuals
and corporate relocation entities. At March 31, 2003, the Company owned and
operated approximately 856,000 washers and dryers in approximately 80,000
locations throughout North America, including in 163 retail laundromats located
throughout Texas and Arizona. The Company, through its wholly-owned subsidiary,
Super Laundry, is also a laundromat equipment distribution company.
SOURCES OF REVENUE
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 are 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's most significant revenue source is its route business,
which over the last three fiscal years has accounted for approximately 90% of
its revenue. Through its route operations, the Company provides outsourced
laundry equipment services to locations by leasing laundry rooms from building
owners and property management companies, typically on a long-term, renewable
basis. In return for the exclusive right to provide these services, most of the
Company's contracts provide for commission payments to the location owners.
Commission expense (also referred to as rent expense), the Company's single
largest expense item, is included in laundry operating expenses and represents
payments to location owners. Commissions may be fixed amounts or percentages of
revenues and are generally paid monthly. In addition to commission payments,
many of the Company's leases require it to make advance location payments to
location owners, which are capitalized and amortized over the life of the
applicable leases. Through the Company's route business, the Company also
currently operates 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. Laundry
operating expenses include, in addition to commission payments, (i) the cost of
machine maintenance and revenue collection in the route and retail laundromat
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 also operates an
equipment rental business through AWA which leases laundry machines and other
household appliances to property owners, managers of multi-family housing
properties, and to a lesser extent, individuals and corporate relocation
entities.
14
The Company also operates an equipment distribution business through
Super Laundry. Super Laundry's business consists of constructing and designing
complete turnkey retail laundromats, retrofitting existing retail laundromats,
distributing exclusive lines of commercial coin and non-coin operated machines
and parts, and selling service contracts. In addition, Super Laundry, through
its wholly-owned subsidiary, ALFC, builds and develops laundromat facilities for
sale as franchise locations. For each franchise laundromat facility, ALFC enters
into a purchase agreement and a license agreement with the buyer whereby the
buyer may use certain systems created by ALFC to operate such facility. ALFC
receives revenue primarily from the sale price of the laundromat facility and,
to a lesser extent, from an initial franchise fee and certain other fees based
on the sales from such facility.
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 and
coin not yet collected at the end of a reporting period which remain 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 March 31, 2003 was approximately $1.6 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 table sets forth for the periods indicated, selected
statement of operations data and EBITDA, as percentages of revenue:
YEAR ENDED YEAR ENDED JULY 1, 2000 TO APRIL 1, 2000 TO
MARCH 31, 2003 MARCH 31, 2002 MARCH 31, 2001 JUNE 30, 2000
-------------- -------------- --------------- ----------------
(POST- (PRE-
TRANSACTION) TRANSACTION)
Revenues.................................. 100.0% 100.0% 100.0% 100.0%
Laundry operating expenses................ 68.5 67.4 67.2 66.9
General and administrative expenses....... 1.6 1.6 1.7 1.6
Depreciation and amortization............. 19.5 24.0 26.1 23.5
Other items, net.......................... (0.1) -- -- --
Operating income.......................... 10.5 7.0 5.0 8.0
Interest expense, net..................... 10.9 13.6 13.3 12.4
Net loss ................................. -- (7.7) (6.5) (3.5)
EBITDA margin(1).......................... 29.9 31.0 31.1 31.5
(1) See footnote 4 of the table contained under Item 6 "Selected
Financial Data--Selected Historical Financial Data" for a reconciliation of
EBITDA to net loss for the periods indicated in the table immediately above.
15
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO THE FISCAL YEAR
ENDED MARCH 31, 2002
The following table sets forth the Company's revenues for the years
indicated:
(dollars in millions)
YEAR ENDED MARCH, 31
-------------------------------
2003 2002 CHANGE
------ ------ ------
Route........................... $471.5 $478.1 $(6.6)
Distribution.................... 35.0 38.4 (3.4)
Rental.......................... 28.7 22.4 6.3
------ ------ ------
$535.2 $538.9 $(3.7)
====== ====== ======
Revenue decreased by approximately $3.7 million or less than 1% for the
2003 Fiscal Year as compared to the 2002 Fiscal Year.
Route revenue for the 2003 Fiscal Year decreased by approximately $6.6
million or 1% as compared to the prior year. Management believes that the
decline in route revenue for the 2003 Fiscal Year as compared to the 2002 Fiscal
Year was primarily the result of increased vacancies related to locations in
certain regions as well as, to a lesser extent, a transfer of approximately
9,000 rental machines to AWA during the 2003 Fiscal Year. 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.
Management believes that to the extent vacancy rates in certain of the Company's
operating regions, principally in the Southeast and Texas, increase in the
future, route revenue in these regions may continue to decrease. Any such
decrease, however, may be mitigated by the Company's geographic diversity.
Distribution revenue for the 2003 Fiscal Year decreased by
approximately $3.4 million or 9% as compared to the 2002 Fiscal Year. Sales from
the distribution business unit are sensitive to general market and economic
conditions and as a result have experienced fluctuations during such periods.
Rental revenue for the 2003 Fiscal Year increased by approximately $6.3
million or 28% over the 2002 Fiscal Year. The increase was primarily the result
of the internal growth of the machine base in existing areas of operations and
expansion into new territories, as well as, to a lesser extent, the transfer of
approximately 9,000 rental machines from the route business to AWA during the
2003 Fiscal Year.
Laundry operating expenses increased by approximately $3.4 million or
less than 1% for the 2003 Fiscal Year, as compared to the 2002 Fiscal Year. This
increase in laundry operating expenses was due primarily to (i) costs associated
with expansion into new markets in the rental business and (ii) increased
insurance premium costs related to both medical and general business insurance
coverage. As a percentage of revenues, laundry operating expenses were
approximately 69% and 67% for the 2003 Fiscal Year and the 2002 Fiscal Year,
respectively.
General and administrative expenses decreased by approximately 2% for
the 2003 Fiscal Year, as compared to the 2002 Fiscal Year. The decrease in
general and administrative expenses was primarily due to a slight reduction in
various costs and expenses related to administrative functions. As a percentage
of revenues, general and administrative expenses were approximately 1.6% for
both the 2003 Fiscal Year and the 2002 Fiscal Year.
Depreciation and amortization expense decreased by approximately 20%
for the 2003 Fiscal Year as compared to the 2002 Fiscal Year. This decrease was
primarily due to the elimination of amortization expense on goodwill of
approximately $15.5 million and the reduction of amortization expense on
contract rights of approximately $12.3 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.
16
Other items, net, for the 2003 Fiscal Year is a gain of approximately
$0.5 million. In October 2002, Coinmach Laundry contributed its ownership
interest valued at approximately $2.7 million in Resident Data, Inc. ("RDI") to
the Company. Subsequently, the Company sold its interest in RDI pursuant to an
agreement and plan of merger between RDI and unrelated third parties, for cash
proceeds of approximately $6.6 million before estimated expenses directly
related to such sale resulting in a gain of approximately $3.3 million.
Offsetting this gain was approximately $2.8 million of various expenses related
to (i) professional fees incurred in connection with the Restructuring
Transactions, including the transfer of the Appliance Warehouse division to AWA
and the formation of Holdings, (ii) certain organizational costs related to the
formation of ALFC and (iii) certain expenses associated with the consolidation
of certain offices of the Super Laundry business, which was the result of
several actions taken by the Company to reduce operating costs in Super Laundry.
These actions included, among other things, the closing of operations in
Northern California, New Jersey and Maryland, the reassignment of various
responsibilities among its remaining management team, the write off of inventory
due to obsolescence and the write off of various receivable balances, none of
which are material individually, which the Company has chosen not to pursue.
Operating income margins were approximately 11% for the 2003 Fiscal
Year, as compared to approximately 7% for the 2002 Fiscal Year. The increase in
operating income margin for the 2003 Fiscal Year was primarily due to the
decrease in amortization expenses.
Interest expense, net, decreased by approximately 20% for the 2003
Fiscal Year, as compared to the 2002 Fiscal Year. On January 25, 2002, the
Company issued $450 million of its Private 9% Senior Notes and entered into the
$355 million Senior Secured Credit Facility. The decrease in interest expense
was primarily due to decreased borrowing levels under the Senior Secured Credit
Facility, a decrease in variable interest rates payable under such facility, as
well as a decrease in the fixed rate on interest rate swap agreements, resulting
from a market decline in interest rates. In addition, in the 2002 Fiscal Year,
interest expense included approximately $4.2 million relating to cost of
terminating the interest rate swap agreements that were entered into in
connection with its prior senior credit facility, which was partially offset by
a reduction in interest expense relating to the amortization of the premium on
the 11 3/4% Senior Notes due 2005. 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.
Net loss was approximately $2.3 million for the 2003 Fiscal Year, as
compared to approximately $41.4 million for the 2002 Fiscal Year. The decrease
in net loss was primarily the result of decreased depreciation and amortization
expense as well as decreased interest expense, as discussed above. In addition,
in the 2002 Fiscal Year the Company recognized an extraordinary loss on early
extinguishments of debt.
The following table sets forth the Company's EBITDA (before deducting
general and administrative expenses) for each of the route, distribution and
rental divisions for the years indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
----------------------------
2003 2002 CHANGE
------- ------ ------
Route................................... $158.9 $166.0 $(7.1)
Distribution............................ (1.6) 1.1 (2.7)
Rental.................................. 11.4 8.7 2.7
General and administrative expenses..... (8.6) (8.7) 0.1
EBITDA.................................. $160.1 $167.1 $(7.0)
======= ======= ======
EBITDA was approximately $160.1 million for the 2003 Fiscal Year, as
compared to approximately $167.1 million for the 2002 Fiscal Year, representing
a decrease of approximately 4%. EBITDA margins declined slightly to
approximately 29.9% for the 2003 Fiscal Year, as compared to approximately 31.0%
for the 2002 Fiscal Year. The decrease in EBITDA was primarily the result of
decreased revenues in the route and distribution businesses, as discussed above,
as well as increased insurance premium costs related to both medical and general
business insurance coverage.
17
EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization and other items, net.
Management believes that EBITDA is useful as a means to evaluate the Company's
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. Additionally, because the Company has
historically provided EBITDA to investors, it believes that presenting this
non-GAAP financial measure provides consistency in its financial reporting.
EBITDA is also used to determine the Company's compliance with key financial
covenants under its financing agreements, which, among other things, impacts the
amount of indebtedness the Company is permitted to incur. Management's use of
EBITDA, however, is not intended to represent cash flows for the period, nor has
it been presented as an alternative to either (a) operating income (as
determined by accounting principles generally accepted in the United States) as
an indicator of operating performance or (b) cash flows from operating,
investing and financing activities (as determined by accounting principles
generally accepted in the United States) as a measure of liquidity. Given that
EBITDA is not a measurement determined in accordance with accounting principles
generally accepted in the United States and is thus susceptible to varying
calculations, EBITDA may not be comparable to other similarly titled measures of
other companies. See footnote 4 of the table contained under Item 6 "Selected
Financial Data--Selected Historical Financial Data" for a reconciliation of
EBITDA to net loss for the years indicated in the table immediately above.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO 2001 12-MONTH PERIOD
The following table sets forth the Company's revenues for the years
indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
---------------------------------
2002 2001 CHANGE
------ ------ ------
Route...................... $478.1 $471.0 $ 7.1
Distribution............... 38.4 38.3 0.1
Rental..................... 22.4 18.3 4.1
------ ------ -----
$538.9 $527.6 $11.3
====== ====== =====
Revenue increased by approximately $11.3 million or 2% for the 2002
Fiscal Year as compared to the 2001 12-Month Period.
Route revenue for the 2002 Fiscal Year increased by approximately $7.1
million or 2% over the prior year. Management believes that the improvement in
route revenue for the 2002 Fiscal Year as compared to the 2001 12-Month Period
was the result of a combination of (i) increased revenue from the existing
machine base due primarily to price changes and machine installations, (ii) the
timing of price changes and internal growth in machine count during the 2002
Fiscal Year and the 2001 12-Month Period and (iii) greater same store revenues
due primarily to pricing strategies implemented to address increased competition
in retail laundromats.
Distribution revenue for the 2002 Fiscal Year increased slightly as
compared to the 2001 12-Month Period. Sales from the distribution business unit
are sensitive to general market and economic conditions and as a result have
experienced fluctuations during such periods.
Rental revenue for the 2002 Fiscal Year increased by approximately $4.1
million or 22% over the 2001 12-Month Period. The increase was primarily the
result of the internal growth of the machine base in existing areas of
operations and expansion into new territories.
Laundry operating expenses increased by approximately $8.9 million or
3% for the 2002 Fiscal Year, as compared to the 2001 12-Month Period. This
increase in laundry operating expenses was due primarily to (i) an increase in
commission expense related to increased route revenue, and (ii) costs associated
with expansion into new markets in the rental and distribution businesses. As a
percentage of revenues, laundry operating expenses were approximately 67% for
both the 2002 Fiscal Year and the 2001 12-Month Period.
18
General and administrative expenses decreased by approximately 2% for
the 2002 Fiscal Year, as compared to the 2001 12-Month Period. The decrease in
general and administrative expenses was primarily due to a slight reduction in
various costs and expenses related to administrative functions associated with
the Company's growth. As a percentage of revenues, general and administrative
expenses were approximately 1.6% and 1.7% for the 2002 Fiscal Year and the 2001
12-Month Period, respectively.
Depreciation and amortization expense decreased by approximately 4% for
the 2002 Fiscal Year as compared to the 2001 12-Month Period. This decrease was
due primarily to a write-off of contract rights values relating to certain
locations not renewed of approximately $5.9 million during the 2001 12-Month
Period.
Operating income margins were approximately 7% for the 2002 Fiscal
Year, as compared to approximately 6% for the 2001 12-Month Period. The increase
in operating income margin for the 2002 Fiscal Year was primarily due to
increased revenue in the route and rental businesses, as well as decreased
depreciation and amortization expense, which were partially offset by increased
commission expense and costs associated with the expansion into new rental and
distribution markets.
Interest expense, net, increased by approximately 6% for the 2002
Fiscal Year, as compared to the 2001 12-Month Period. The increase was primarily
due to (i) the cost of the termination of the interest rate swap agreements in
the amount of approximately $4.2 million, (ii) the combination of interest paid
on the 11 3/4% Senior Notes from January 25 to February 25, 2002 with the
interest expense on the 9% Senior Notes for the same period and (iii) an
increase in amortization of deferred financing costs relating to the issuance of
the 9% Senior Notes and the Senior Secured Credit Facility.
Net loss was approximately $41.4 million for the 2002 Fiscal Year, as
compared to approximately $30.2 million for the 2001 12-Month Period. The
increase in net loss was primarily the result of a decrease in the benefit from
taxes due to net operating loss carryforwards expiring and a decrease in net
taxable loss, as well as an extraordinary loss on early extinguishments of debt
recognized in the 2002 Fiscal Year, which also resulted in an increase in
interest expense in the 2002 Fiscal Year.
The following table sets forth the Company's EBITDA (before deducting
general and administrative expenses) for each of the route, distribution and
rental divisions for the years indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
------------------------------
2002 2001 CHANGE
------ ------ ------
Route................................. $166.0 $164.4 $1.6
Distribution.......................... 1.1 1.8 (0.7)
Rental................................ 8.7 7.2 1.5
General and administrative expenses... (8.7) (8.9) 0.2
------- ------- -----
EBITDA................................ $167.1 $164.5 $2.6
======= ======= =====
EBITDA was approximately $167.1 million for the 2002 Fiscal Year, as
compared to approximately $164.5 million for the 2001 12-Month Period,
representing an increase of approximately 2%. EBITDA margins declined slightly
to approximately 31.0% for the 2002 Fiscal Year, as compared to approximately
31.2% for the 2001 12-Month Period. The increase in EBITDA was primarily the
result of increased revenues in the route and rental businesses offset partially
by the increase in commission expense related to increased route revenue, as
well as an increase in the costs associated with the expansion into new rental
and distribution markets in the rental and distribution businesses.
19
EBITDA represents earnings from continuing operations before deductions
for interest, income taxes, depreciation and amortization and other items, net.
Management believes that EBITDA is useful as a means to evaluate the Company's
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. Additionally, because the Company has
historically provided EBITDA to investors, it believes that presenting this
non-GAAP financial measure provides consistency in its financial reporting.
EBITDA is also used to determine the Company's compliance with key financial
covenants under its financing agreements, which, among other things, impacts the
amount of indebtedness the Company is permitted to incur. Management's use of
EBITDA, however, is not intended to represent cash flows for the period, nor has
it been presented as an alternative to either (a) operating income (as
determined by accounting principles generally accepted in the United States) as
an indicator of operating performance or (b) cash flows from operating,
investing and financing activities (as determined by accounting principles
generally accepted in the United States) as a measure of liquidity. Given that
EBITDA is not a measurement determined in accordance with accounting principles
generally accepted in the United States and is thus susceptible to varying
calculations, EBITDA may not be comparable to other similarly titled measures of
other companies. See footnote 4 of the table contained under Item 6 "Selected
Financial Data--Selected Historical Financial Data" for a reconciliation of
EBITDA to net loss for the years indicated in the table immediately above.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have substantial indebtedness and debt service
requirements. At March 31, 2003, the Company had outstanding long-term debt of
approximately $718.1 million, which included $450.0 million of 9% Senior Notes
and approximately $261.3 million of borrowings under the Senior Secured Credit
Facility. The Company's stockholder's equity was approximately $49.8 million as
of March 31, 2003.
The Company's liquidity requirements arise from capital expenditures,
interest expense and, to a lesser extent, principal payments on its indebtedness
and working capital requirements. The Company has met these requirements in each
fiscal year since 1995 primarily from cash flow generated from operations. The
Company's primary source of liquidity as of March 31, 2003 consisted of cash and
cash equivalents of approximately $27.4 million and available borrowings under
its Senior Secured Credit Facility of approximately $74.5 million.
FINANCING ACTIVITIES
SENIOR NOTES
On January 25, 2002, the Company issued $450 million of Private 9%
Senior Notes and entered into the $355 million Senior Secured Credit Facility
comprised of (i) $280 million in aggregate principal amount of term loans and
(ii) a revolving credit facility, which has a maximum borrowing limit of $75
million. The Company used the net proceeds from its sale of Private 9% Senior
Notes, together with borrowings under its Senior Secured Credit Facility, to (i)
redeem all of its outstanding 11 3/4% Senior Notes (including accrued interest
and the resulting 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 with the funds that were
set aside in escrow on January 25, 2002. As of March 31, 2002 the Company
recognized an extraordinary loss, net of income tax, of approximately $6.7
million as a result of the early extinguishment of debt relating to the
redemption of the 11 3/4% Senior Notes and the refinancing of its prior senior
credit facility (see Recently Issued Accounting Pronouncements relating to
Statement of Financial Accounting Standard No. 145). The Company also used a
portion of the net proceeds and borrowings to terminate interest rate swap
agreements entered into in connection with its prior senior credit facility. The
cost of terminating the interest rate swap agreements was approximately $4.2
million and was recorded as interest expense in the 2002 Fiscal Year.
The 9% Senior Notes, which are to mature on February 1, 2010, are
unsecured senior obligations of the Company and are redeemable, at the Company's
option, in whole or in part at any time or from time to time, on or after
February 1, 2006, upon not less than 30 nor more than 60 days' notice, at the
redemption prices set forth in that certain indenture, dated January 25, 2002,
by and between the Company and U.S. Bank, N.A. as Trustee (the
20
"Indenture") plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption. In addition, the Company has the option to redeem, on or
before February 1, 2005, up to 35% of the outstanding notes with money that the
Company raises in one or more equity offerings, provided that certain
requirements set forth in the Indenture are satisfied. The 9% Senior Notes are
guaranteed on an unsecured senior basis by the Company's domestic subsidiaries.
The Indenture contains a number of restrictive covenants and
agreements, including covenants with respect to the following matters: (i)
limitation on additional indebtedness; (ii) limitation on certain payments (in
the form of the declaration or payment of certain dividends or distributions on
the capital stock of the Company, the purchase, redemption or other acquisition
of any capital stock of the Company, 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 the issuance of
preferred stock by non-guarantor subsidiaries; (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 the Company.
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 9% Senior Notes may declare all unpaid
principal and accrued interest on all of the 9% Senior Notes to be immediately
due and payable.
Upon the occurrence of a Change of Control (as defined in the
Indenture), each holder of 9% Senior Notes will have the right to require that
the Company purchase all or a portion of such holder's 9% 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.
SENIOR SECURED CREDIT FACILITY
The Senior Secured Credit Facility is comprised of an aggregate of $355
million of secured financing consisting of: (i) $280 million in aggregate
principal amount of term loans and (ii) a revolving credit facility with a
maximum borrowing limit of $75 million. The Senior Secured Credit Facility
includes up to $10 million of letter of credit financings and short term
borrowings under a swing line facility of up to $7.5 million. The term loans
under the Senior Secured Credit Facility, in aggregate principal amounts
outstanding of approximately $18.3 million and $243.0 million, are scheduled to
be fully repaid by January 25, 2008 and July 25, 2009, respectively. As of March
31, 2003, there was no principal amount outstanding on the revolving portion of
the Senior Secured Credit Facility, which will expire on January 25, 2008.
Letters of credit outstanding at March 31, 2003 were approximately $0.5 million.
In December 2002, the Company made a $15 million voluntary prepayment
of amounts owed under the term loans of its Senior Secured Credit Facility. The
Company is required to make (i) adjusted quarterly amortization payments under
the Senior Secured Credit Facility commencing on March 31, 2004 with respect to
the $30 million term loan and adjusted semi-annual amortization payments
commencing on June 30, 2004 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, commencing August 1, 2002.
On September 23, 2002, the Company entered into three separate interest
rate swap agreements totaling $150 million in aggregate notional amount that
effectively converts a portion of its floating- rate term loans pursuant to the
Senior Secured Credit Facility to a fixed rate basis, thus reducing the impact
of interest-rate changes on future interest expense. The three swap agreements
consist of: (i) a $50 million notional amount interest rate swap transaction
with 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
21
effectively fixing the three-month LIBOR interest rate (as determined therein)
at 2.90% and expiring on February 1, 2006. These interest rate swaps used to
hedge the variability of forecasted cash flows attributable to interest rate
risk were designated as cash flow hedges. The Company recognized an accumulated
other comprehensive loss in the stockholder's equity section included in the
Consolidated Balance Sheet at March 31, 2003 of approximately $2.0 million, net
of tax, relating to the interest rate swaps that qualify as cash flow hedges.
The Company's indebtedness under the Senior Secured Credit Facility is
secured by all of the Company's real and personal property and is guaranteed by
the Company's domestic subsidiaries. Under the Senior Secured Credit Facility,
the Company and Coinmach Laundry 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.
The Senior Secured Credit Facility 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 the Company or its
subsidiaries or the purchase, redemption or other acquisition of any capital
stock of the Company or its subsidiaries); (iii) voluntary prepayments of
previously existing indebtedness; (iv) Investments (as defined in the Senior
Secured Credit Facility); (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 Senior Secured Credit
Facility also requires that the Company satisfy certain financial ratios,
including a maximum leverage ratio and a minimum consolidated interest coverage
ratio.
The Senior Secured Credit Facility contains certain events of default,
including the following: (i) the failure of the Company to pay any of its
obligations under the Senior Secured Credit Facility when due; (ii) certain
failures by the Company or its subsidiaries 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 or Coinmach Laundry in the
performance or observance of the agreements or covenants under the Senior
Secured Credit Facility or related agreements, beyond any applicable cure
periods; (iv) the falsity in any material respect of the Company's or its
subsidiaries' representations or warranties under the Senior Secured Credit
Facility; (v) certain judgments against the Company; and (vi) certain events of
bankruptcy or insolvency of the Company, its subsidiaries or Coinmach Laundry.
The Company is in compliance with all covenants under the indenture and
the Senior Secured Credit Facility and is not aware of any events of default, as
previously defined.
OPERATING AND INVESTING 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; (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.
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, renewals and growth. The Company
anticipates that it will continue to utilize cash flows from operations to
finance its capital expenditures and working capital needs, including interest
payments on its outstanding indebtedness. Capital expenditures consists of
expenditures (i) on the Company's installed machine base and (ii) for other
general corporate purposes.
22
Capital expenditures for the 2003 Fiscal Year were approximately $86.7
million (excluding payments of approximately $4.0 million relating to capital
lease obligations and excluding approximately $2.0 million relating to
acquisition capital expenditures). The primary components of the Company's
capital expenditures are (i) machine expenditures, (ii) advance location
payments, and (iii) laundry room improvements. The growth in the installed base
of machines for the route business was approximately 3,000 machines for the 2003
Fiscal Year. The growth in the rental business machine base was approximately
26,800 machines for the 2003 Fiscal Year. The full impact on revenues and cash
flow generated from capital expended on the net increase in the installed base
of machines are not expected to be reflected in the Company's financial results
until subsequent reporting periods, depending on certain factors, including the
timing of the capital expended. The Company anticipates that capital
expenditures, excluding acquisitions and internal growth, will be approximately
$74.0 million for the twelve months ending March 31, 2004. 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 years indicated:
(dollars in millions)
YEAR ENDED MARCH 31,
--------------------------------------------
2003 2002 CHANGE
---- ---- ------
Route.................. $77.2 $71.0 $6.2
Distribution........... 0.1 -- 0.1
Rental................. 9.4 8.5 0.9
----- ----- ----
$86.7 $79.5 $7.2
===== ===== ====
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.
Management believes that the Company's future operating activities will
generate sufficient cash flow to repay indebtedness outstanding under the 9%
Senior Notes and borrowings under the Senior Secured Credit Facility or to
permit any necessary refinancings thereof. An inability of the Company, however,
to comply with covenants or other conditions contained in the indenture
governing the 9% Senior Notes or in the credit agreement evidencing the Senior
Secured Credit Facility could result in an acceleration of all amounts
thereunder. If the Company is unable to meet its debt service obligations, it
could be required to take certain actions such as reducing or delaying capital
expenditures, selling assets, refinancing or restructuring its indebtedness,
selling additional equity capital or other actions. There is no assurance that
any of such actions could be effected on commercially reasonable terms or on
terms permitted under the Senior Secured Credit Facility or the indenture
governing the 9% Senior Notes.
On November 29, 2002, the Company transferred all of the assets of the
Appliance Warehouse division of the Company to AWA. The value of the assets
transferred as determined by an independent appraiser as of such date was $34.7
million. In exchange for the transfer of such assets, AWA issued to the Company
(i) an unsecured promissory note payable on demand in the amount of $19.6
million which accrues interest at a rate of 8% per annum, (ii) 1,000 shares of
AWA Preferred Stock, with a liquidation value of $14.6 million, and (iii) 10,000
shares of AWA Common Stock. The AWA Preferred Stock is not redeemable and is
vested with voting rights. Except as may otherwise be required by applicable
law, the AWA Common Stock does not have any voting rights. Dividends on the AWA
Preferred Stock accrue quarterly at a rate of 11% per annum and are payable in
cash, in kind in the form of additional shares of AWA Preferred Stock, or in a
combination thereof, at the option of AWA. In March 2003, through a series of
transactions (collectively, the "Restructuring Transactions"), all of the AWA
Common Stock and all of the outstanding capital stock of CLC was contributed to
Holdings in exchange for substantially equivalent equity interests (in the form
of common and preferred membership units) in Holdings. As a result of the
Restructuring Transactions, (i) Holdings became the sole holder of all of the
outstanding AWA Common Stock, (ii) the Company became the sole holder of all of
the outstanding AWA Preferred Stock, (iii) Coinmach Laundry
23
became a wholly-owned subsidiary of Holdings, (iv) the former stockholders of
Coinmach Laundry became unitholders of Holdings and (v) AWA, subject to certain
specified qualifications, became a guarantor under, and subject to the covenants
contained in, the indenture governing the 9% Senior Notes and the Senior Secured
Credit Facility. See Item 11 "Executive Compensation--Employment
Agreements--Employment Agreements of Stephen R. Kerrigan, Mitchell Blatt and
Robert M. Doyle" and Item 13 "Certain Relationships and Related Transactions".
CERTAIN ACCOUNTING TREATMENT
The Company's depreciation and amortization expense, which aggregated
approximately $104.2 million for the 2003 Fiscal Year, reduces the Company's net
income, but not its cash flow from operations. In accordance with accounting
principles generally accepted in the United States, a significant amount of the
purchase price representing the value of location contracts arising from
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.
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
that may be experienced by the Company in future periods. Management believes
that such effects will not be material. The Company's business generally is not
seasonal.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is
effective April 1, 2003. This standard addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company has determined that the
implementation of this standard will not have a material effect on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, 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. The Company is
required to adopt this statement on April 1, 2003. As a result of adopting SFAS
No. 145, in future financial statement presentations the Company will classify
the extraordinary loss taken in January 2002 to continuing operations resulting
in total pre-tax loss of approximately $46.9 million for the year ended March
31, 2002.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard requires costs
associated with exit or disposal activities to be recognized when they are
incurred. The requirements of SFAS No. 146 apply prospectively to activities
that are initiated after December 31, 2002, and as such, the Company cannot
reasonably estimate the impact of adopting these new rules until and unless it
undertakes relevant activities in future periods.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to a
guarantor's accounting for and disclosures of certain guarantees issued. FIN 45
requires enhanced disclosures for certain guarantees. It also will require
certain guarantees that are issued or modified after December 31, 2002,
including certain third-party guarantees, to be initially recorded on the
balance sheet at fair value. For guarantees issued on or before December 31,
2002, liabilities are recorded when and if payments become probable and
estimable. The financial statement recognition provisions are effective
prospectively, and the Company cannot reasonably estimate the impact of adopting
FIN 45 until guarantees are issued or modified in future periods, at which time
their results will be initially reported in the financial statements.
24
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, relating
to consolidation of certain entities. First, FIN 46 will require identification
of the Company's participation in variable interests entities ("VIE"), which are
defined as entities with a level of invested equity that is not sufficient to
fund future activities to permit them to operate on a standalone basis, or whose
equity holders lack certain characteristics of a controlling financial interest.
Then, for entities identified as VIE, FIN 46 sets forth a model to evaluate
potential consolidation based on an assessment of which party to the VIE, if
any, bears a majority of the exposure to its expected losses, or stands to gain
from a majority of its expected returns. FIN 46 also sets forth certain
disclosures regarding interests in VIE that are deemed significant, even if
consolidation is not required. The Company has determined that the
implementation of this standard will not have a material effect on its financial
statements.
FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this Form 10-K 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.
Forward-looking statements are those that are not historical facts. When used in
SEC Filings, the words "anticipate," "project," "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 that may be beyond
the Company's control. Such risks and uncertainties, together with any risks and
uncertainties specifically identified in the text surrounding such
forward-looking statements, include, but are not limited to, the Company's
ability to satisfy its debt service requirements, the costs of integration of
acquired businesses and realization of anticipated synergies, increased
competition, availability of capital to finance capital expenditures necessary
to increase and maintain the Company's operating machine base, the rate of
growth in general and administrative expenses due to the Company's business
expansion, the Company's dependence upon lease renewals, risks of extended
periods of reduced occupancy levels, and the ability of the Company to implement
its business strategy. Other risks and uncertainties also include 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 underlying assumptions prove incorrect, the Company's future performance
and actual results of operations may vary significantly from those anticipated,
projected, believed, estimated, expected, intended or planned.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal exposure to market risk relates to changes in
interest rates on its long-term borrowings. The Company's cash flow would be
adversely affected by an increase in interest rates. As of March 31, 2003, the
Company had approximately $111.3 million outstanding relating to its variable
rate debt portfolio.
The Company's future earnings, cash flow and fair values relevant to
financial instruments are dependent upon prevalent market rates. Market risk is
the risk of loss from adverse changes in market prices and interest rates. If
market rates of interest on the Company's variable interest rate debt increased
by 2.0% (or 200 basis points), the Company's annual interest expense on such
variable interest rate debt would increase by approximately $2.2 million,
assuming the total amount of variable interest rate debt outstanding was $111.3
million, the balance as of March 31, 2003.
25
The Company enters into interest rate swap agreements from time to time
to mitigate its exposure to adverse interest rate fluctuations. On September 23,
2002, the Company entered into three separate interest rate swap agreements
totaling $150 million in aggregate notional amount that effectively converts a
portion of its floating- rate term loans pursuant to the Senior Secured Credit
Facility to a fixed rate basis, thus reducing the impact of interest-rate
changes on future interest expense. The three swap agreements consist of: (i) a
$50 million notional amount interest rate swap transaction with JP Morgan
effectively fixing the three-month LIBOR interest rate (as determined therein)
at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional amount
interest rate swap transaction with Credit Lyonnais effectively fixing the
three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on
February 1, 2006 and (iii) a $50 million notional amount interest rate swap
transaction with Deutsche Bank AG effectively fixing the three-month LIBOR
interest rate (as determined therein) at 2.90% and expiring on February 1, 2006.
These interest rate swaps used to hedge the variability of forecasted cash flows
attributable to interest rate risk were designated as cash flow hedges.
The Company's fixed debt instruments are not generally affected by a
change in the market rates of interest, and therefore, such instruments
generally do not have an impact on future earnings. However, as fixed rate debt
matures, future earnings and cash flows may be impacted by changes in interest
rates related to debt acquired to fund repayments under maturing facilities.
The Company does not use derivative financial instruments for trading
purposes and is not exposed to foreign currency exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited consolidated financial statements and the notes thereto are
contained in pages F-1 through F-33 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The directors of the Company are listed on the table below which is
followed by descriptions of all positions and offices held by such persons with
the Company, the periods during which they have served as such and certain other
information. The term of office of each director continues until the election of
directors to be held at the next annual meeting of stockholders or until his
successor has been elected. There is no family relationship between any director
and any other director or executive officer of the Company. The information set
forth below concerning such directors has been furnished by such directors.
NAME TITLE AGE
---- ----- ---
Stephen R. Kerrigan Chairman of the Board and Director 49
James N. Chapman Director 41
David A. Donnini Director 38
Vincent J. Hemmer Director 34
Bruce V. Rauner Director 47
MR. KERRIGAN. Mr. Kerrigan has been Chief Executive Officer of Coinmach
Laundry since May 1996 and of the Company since November 1995. Mr. Kerrigan was
President and Treasurer of Solon and Coinmach Laundry from April 1995 until May
1996, and Chief Executive Officer of TCC from January 1995 until November 1995.
Mr. Kerrigan has been a director and Chairman of the CLC Board since April 1995
and of the Company Board since November 1995. Mr. Kerrigan was a director of TCC
from January 1995 to November 1995 and a director of Solon from April 1995 to
November 1995. Mr. Kerrigan served as Vice President and Chief Financial Officer
of TCC's predecessor, Coinmach Industries Co., L.P. from 1987 to 1994.
MR. CHAPMAN. Mr. Chapman has been a director of the Company and a
member of the board of managers of Holdings since March 2003 and a director of
Coinmach Laundry since 1995. He previously was a director of the Company from
November 1995 to November 1996 and a director of TCC from January 1995 to
November 1995. Mr. Chapman is associated with Regiment Capital Advisors, LLC
which he joined in January 2003. Prior to Regiment, Mr. Chapman acted as a
capital markets and strategic planning consultant with private and public
companies, as well as hedge funds, across a range of industries. Prior to
establishing an independent consulting practice, Mr. Chapman worked for The
Renco Group, Inc. from December 1996 to December 2001. Mr. Chapman serves as a
member of the board of directors of Anchor Glass Container Corporation, Davel
Communications, Inc., Meridian Rail LLC and Southwest Royalties, Inc.
MR. DONNINI. Mr. Donnini has been a director of the Company and a
member of the board of managers of Holdings since March 2003 and a director of
Coinmach Laundry since July 1995. He previously was a director of the Company
from November 1995 to November 1996 and a director of TCC from January 1995 to
November 1995. Mr. Donnini has been a Principal of GTCR since 1993, where he is
responsible for originating and making new investments, monitoring portfolio
companies and recruiting and training associates. Mr. Donnini serves on the
boards of TSI Telecommunications Services, Synagro Technologies, Inc and a
number of private companies.
MR. HEMMER. Mr. Hemmer has been a director of the Company and a member
of the board of managers of Holdings since March 2003 and a director of Coinmach
Laundry since July 2000. Mr. Hemmer has been a Principal of GTCR since 2001,
where he is responsible for originating and making new investments, monitoring
portfolio companies and recruiting and training associates. From 1998 to 2001,
Mr. Hemmer was a Vice-President of GTCR. Mr. Hemmer serves on the boards of
Synagro Technologies, Inc. and a number of private companies.
27
MR. RAUNER. Mr. Rauner has been a director of the Company and a member
of the board of managers of Holdings since March 2003 and a director of Coinmach
Laundry since July 1995. He previously was a director of the Company from
November 1995 to November 1996 and a director of TCC from January 1995 to
November 1995. Mr. Rauner has been a Principal and General Partner with GTCR
since 1984, where he is responsible for originating and making new investments,
monitoring portfolio companies and recruiting and training associates. Mr.
Rauner serves on the boards of a number of private companies.
EXECUTIVE OFFICERS
The executive officers of the Company are listed on the table below
which is followed by descriptions of all positions and offices held by such
persons with the Company and the periods during which they have served as such
and other information. The term of office of each executive officer continues
until the election of executive officers to be held at the next annual meeting
of directors or until his successor has been elected. There i