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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 0-7694
COINMACH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 53-0188589
(State of incorporation) (I.R.S. Employer Identification No.)
55 LUMBER ROAD, ROSLYN, NEW YORK 11576
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 484-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) 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
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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. [X]
As of May 29, 1998, the registrant had outstanding 100 shares of common
stock, par value $.01 per share (the "Common Stock").
No market value can be determined for the 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, 1998 and do not give effect to the
acquisition of all of the common stock of (i) Cleanco, Inc. and of its
affiliates, completed in May 1998 or (ii) Gordon & Thomas Companies, Inc.,
completed in June 1998. For a description of such acquisitions, see "Business -
General Development of Business - Recent Developments".
DESCRIPTION OF THE BUSINESS
GENERAL
Coinmach Corporation, a Delaware corporation (the "Company" or the
"Registrant"), is a leading supplier of outsourced coin-operated laundry
equipment services for multi-family housing properties in the United States. At
March 31, 1998, the Company owned and operated approximately 680,000 washers and
dryers (sometimes hereinafter referred to as "machines") in approximately 70,000
locations on routes located throughout the United States and in 150 retail
laundromats located throughout Texas. The Company, through its wholly-owned
subsidiary, Super Laundry Equipment Corp. ("Super Laundry"), is also a
laundromat equipment distribution company. The Company is a wholly-owned
subsidiary of Coinmach Laundry Corporation, a Delaware corporation ("Coinmach
Laundry"). Unless otherwise specified herein, references to the Company shall
mean Coinmach Corporation and its subsidiaries.
OVERVIEW
The outsourced laundry equipment services industry provides washer and
dryer services to individuals living in multi-family housing properties. The
Company's core business involves leasing laundry rooms from building owners and
property management companies, installing and servicing the laundry equipment
and collecting revenues generated from laundry machines. The Company 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 existing customer base for its core business is comprised of
landlords, property management companies, and owners of rental apartment
buildings, condominiums and cooperatives, university and institutional housing
and other multi-family housing properties. Management believes, based on its
knowledge of the industry, that the Company is the largest supplier of
outsourced laundry equipment services for multi-family housing properties
throughout the United States.
As a result of its strategy to acquire route operators that contribute to
the Company's core operations, the Company has also selectively acquired certain
related businesses which expand and diversify the types of services provided by
the Company. As a result of the Kwik-Wash Acquisition (as defined), the Company
operates 150 retail laundromats throughout Texas and provides laundromat
services at all such locations. In connection with the Appliance Warehouse
Acquisition and the Macke Acquisition, the Company also leases laundry equipment
and other household appliances to corporate relocation entities, individuals,
property owners and managers of multi-family housing properties. The Company
believes that these non-core businesses, although not material to the Company's
operations,
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provide a significant platform for expansion and diversification of the
Company's services. See "Business - Description of Business - Complementary
Operations".
The Company maintains its headquarters in Roslyn, 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.
BUSINESS STRATEGY
The Company's business strategy is to enhance its position as the largest
provider of outsourced laundry equipment services in the United States.
Management intends to continue to grow the Company's installed machine base both
internally and through selective acquisitions to achieve economies of scale,
increase its operating efficiencies and improve its financial performance.
Internal growth is comprised of: (i) adding new customers in existing regions
and securing contracts for additional locations from current customers; (ii)
converting owner-operated facilities to Company managed facilities; (iii)
improving the net contribution per machine through operating efficiencies and
selective price increases; and (iv) pursuing additional growth opportunities
presented by the Company's leading market position and access to approximately
six million individual housing units. The Company's acquisition strategy is to
continue to selectively acquire local, regional and multi-regional route
businesses from independent operators at attractive prices. The Company is
currently evaluating several acquisition opportunities; however, there can be no
assurance that, subsequent to ongoing negotiations and due diligence reviews,
the Company will complete any such acquisitions.
An important element of the Company's business strategy is to continue to
expand its geographic presence to gain additional regional and multi-regional
account opportunities with large multi-family housing property managers and
owners. Management believes that a significant portion of its customer base,
which manages multi-family housing and other residential properties, is
consolidating. Consequently, management believes that opportunities for
outsourcing laundry equipment services to professionally managed, multi-
regional, well-capitalized independent operators such as the Company are
increasing.
The Company's business strategy also includes the continued development of
its management information systems (the "Integrated Computer Systems"), which
management believes are the most advanced in the industry. The Integrated
Computer Systems provide real-time operational and competitive data which, in
conjunction with the Company's multi-regional service capabilities, enhance the
Company's operating efficiencies throughout its regions and enable the Company
to deliver superior customer service. The Integrated Computer Systems also
provide the Company with the flexibility to integrate acquisitions on a timely
basis, including key functions such as sales, service, collections and security.
Finally, as the industry leader, the Company works closely with its equipment
vendors to assess ongoing technological changes and implements those which the
Company believes are beneficial to its customers and to the Company's operating
efficiencies and financial performance.
In January 1995, management, with its equity sponsor, Golder, Thoma,
Cressey, Rauner Fund IV, L.P., acquired the Company and initiated a strategy of
growth through acquisitions. This strategy was designed to increase the
installed machine base in its existing operating regions and to provide the
Company with a strong market presence in new regions. Since January 1995, the
Company has enhanced its national presence by completing eight significant
acquisitions, adding annualized revenue of approximately $353 million and
increasing its installed base from approximately 55,000 machines to
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approximately 680,000 machines as of March 31, 1998. Revenues and EBITDA/1/ have
grown from approximately $72.9 million and approximately $13.6 million,
respectively, for the year ended March 31, 1995, to approximately $324.9 million
and approximately $101.4 million (before deducting non-cash stock based
compensation charges), respectively, for the year ended March 31, 1998. These
acquisitions have enabled the Company to improve its operating margins and to
expand internally by competing more aggressively for new business.
GROWTH STRATEGY
The Company's growth strategy is to increase operating cash flow and
profitability through a combination of internal expansion and acquisitions.
Internal Expansion. Internal expansion is comprised of: (i) increasing the
installed machine base by adding new customers (including the acquisition of
certain small, local route operations) and increasing the number of locations
with existing customers; (ii) converting owner-operated facilities to Company
managed facilities, (iii) improving the net contribution per machine through
operating efficiencies and selective price increases; and (iv) pursuing
additional growth opportunities presented by its leading market position and
access to approximately six million individual housing units.
New Customers and Locations. The Company's sales and marketing
---------------------------
efforts focus on two areas of expansion within its 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, primarily achieved through acquisitions, enhances its ability to
gain new customers and additional locations from its existing customers.
Conversions. Management believes that there are approximately 1.0
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million machines installed in locations which continue to be managed by
owner-operators. Building owners or managers can forgo significant cash
outlays and servicing costs by contracting with the Company to purchase,
service and maintain laundry equipment. Accordingly, the Company pursues
building owners and managers 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
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improving its net contribution per machine through achieving operating
efficiencies and 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.
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/1/ EBITDA represents earnings from continuing operations before deductions for
interest, income taxes, depreciation and amortization. EBITDA for the period
ending March 31, 1998 is before the deduction for stock based compensation
charges. EBITDA is used by management and certain investors as an indicator of a
company's historical ability to service debt. Management believes that an
increase in EBITDA is an indication of a company's improved ability to service
existing debt, to sustain potential future increases in debt and to satisfy
capital requirements. However, EBITDA is not intended to represent cash flows
for the period, nor has it been presented as an alternative to either (a)
operating income (as determined by generally accepted accounting principles) as
an indicator of operating performance or (b) cash flows from operating,
investing and financing activities (as determined by generally accepted
accounting principles) as a measure of liquidity. Given that EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA as presented
may not be comparable to other similarly titled measures of other companies.
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Other Growth Opportunities. While management intends to continue its focus
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on increasing its installed machine base, management believes that its
leading market position and its access to over six million housing units
provides the Company with additional growth and diversification
opportunities. These opportunities include laundry equipment rental as
well as other route-based facilities management services. In addition, the
Company is discussing the formation of certain strategic alliances with
vendors of products complementary to its customer base.
Management believes that its strategy of growth within its existing
operating regions will result in additional economies of scale and operating
efficiencies associated with an expanded machine base. Such growth, however,
will be dependent upon a number of factors beyond the Company's control, such as
the Company's ability to secure new contracts from owner-operators on
commercially favorable terms and competitive forces that may reduce the number
of opportunities to secure new locations or to effect price increases.
Acquisitions. The Company intends to continue to capitalize on
opportunities within the fragmented outsourced laundry equipment services
industry through selective acquisitions of additional route businesses. It has
been the Company's experience that there are numerous private, family-owned
businesses that often lack the financial resources to provide advance location
payments, install new equipment, make laundry room improvements or otherwise
compete effectively with larger independent operators such as the Company to
secure new or existing contracts. Consequently, such independent operators,
especially those which are undergoing generational ownership changes, represent
potential acquisition opportunities for the Company.
Management believes the Company is well positioned to capitalize on
acquisition opportunities due to its operating efficiencies, its access to
capital resources and senior management's extensive experience and relationships
in the industry. 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. The Company considers three types of acquisition candidates:
(i) local route operators; (ii) regional route operators; and (iii) multi-
regional route operators.
Local route operators. The purchase of local operators (businesses
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operating within one of the Company's existing operating regions) results
in eliminating most of the target's existing cost structure through the
absorption of its machine base into the Company's operations. The
Company's experience has been that the acquisition of local route operators
has increased operating leverage within its operating regions. Moreover,
the Company is able in many instances to acquire routes adjacent to its
existing areas of operation without incurring significant incremental
operating costs.
Regional route operators. The Company's acquisition of regional route
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operators provides opportunities to improve its cash flow by eliminating
duplicative corporate and administrative functions, reducing capital
expenditures through improved purchasing power and implementing the
Company's Integrated Computer Systems. During the past fiscal year, the
Company completed the ALI Acquisition, the Reliable Acquisition and the
National Coin Acquisition (each, as defined). All three of these
acquisitions have been substantially integrated into the Company's
operations.
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Multi-regional route operators. Management believes that the
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acquisition of large, multi-regional route operators results in a number of
operating efficiencies, including significant cost savings through the
elimination of duplicative financial and administrative functions and
related fixed costs. In addition, the increased volume of equipment
purchases usually results in reduced per unit capital expenditures. As is
the case with all acquisitions, the Company's Integrated Computer Systems
are utilized to provide further operating efficiencies and related cost
savings. The Kwik Wash Acquisition (as defined) and the Macke Acquisition
(as defined) are examples of multi-regional acquisitions which enabled the
Company to substantially increase its operating base, add several
experienced regional managers, penetrate new markets and, along with the
aforementioned regional acquisitions, become the largest industry
participant. Based on its experience in recent acquisitions, management
expects to integrate substantially all of the operations formerly conducted
by Macke (as defined) into the Company's operations during the first half
of the year ending March 31, 1999 and to achieve targeted cost savings as a
result of such integration. However, such integration and cost savings are
dependent on a number of factors beyond the Company's control, and,
accordingly, no assurance can be given that the Company will effect such
integration and targeted cost savings within such time period.
INDUSTRY
The outsourced laundry equipment services industry is characterized by
stable cash flows generated by long-term, renewable lease contracts with multi-
family housing property owners and management companies. The industry is highly
fragmented, with many small, private and family-owned route businesses
continuing to operate throughout all major metropolitan areas. According to
information provided by the Multi-housing Laundry Association, the industry
consists of over 280 independent operators. Based upon industry estimates,
management believes there are approximately 3.5 million installed machines in
multi-family properties throughout the United States, approximately 2.5 million
of which have been outsourced to independent operators such as the Company and
approximately 1.0 million of which continue to be operated by the owners of such
locations.
The industry is highly capital intensive, and customers require prompt and
reliable service. The majority of capital costs are incurred upon procurement
of new leases. Initial costs may include replacing or repairing 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, since machines operate
throughout the term of the contract under which they are installed if serviced
properly, and variable costs are paid out of revenues collected from the
machines.
Historically, the industry has been characterized by stable demand and has
proven to be resistant to changing market conditions and general economic
cycles. Management believes that the industry's consistent and predictable
revenue and cash flow from operations 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.
DESCRIPTION OF PRINCIPAL OPERATIONS
The principal aspects of the Company's operations include: (i) sales and
marketing; (ii) location leases; (iii) service; (iv) information management; (v)
remanufacturing and (vi) collection 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
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solicit and negotiate lease arrangements with building owners and managers. All
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. Management believes that its sales
staff is among the most competent and effective in the industry.
The Company's marketing strategy emphasizes service excellence offered by
its experienced, highly skilled personnel and its quality equipment that
maximizes efficiency and revenue and minimizes machine down-time. Additionally,
the Integrated Computer Systems monitor performance, repairs and maintenance, as
well as the profitability of locations on a daily basis. The Company's sales
staff targets potential new and renewal lease locations by utilizing its
Integrated Computer Systems' extensive database that provides information on the
Company's, as well as its competitors', locations. All sales activity, from
sale entries to data on service and installation, is recorded and monitored
daily on a custom-designed, computerized sales planner.
No single customer represents more than 2% of the Company's revenues or
installed machine base. In addition, the Company's ten largest customers taken
together account for less than 10% of the Company's revenue.
Location Leasing. The Company's leases provide the Company the exclusive
right to operate and service the laundry equipment, 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, which are designed to achieve certain targeted levels of
return on investments.
Management 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
intends to continue to service such customers. A majority of the Company's
leases renew automatically, and the Company has a right of first refusal on
termination on approximately 40% of its leases. 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 terms. As of March 31, 1998, the
Company's leases have an average remaining life to maturity of approximately 48
months (without giving effect to automatic renewals).
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Service
The Company's employees deliver, install, service and collect revenue from
washers and dryers in laundry facilities at its leased locations.
The Company's fleet of 554 radio-equipped service vehicles allows 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.
Management estimates that less than 1% of the Company's machines are out of
service on any given day. The ability to reduce machine down time, especially
during peak usage, serves to enhance revenue and improve the Company's
reputation with its customers.
In a business that emphasizes prompt and efficient service, management
believes that the Company's 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 operations coordinate the Company's radio-equipped service
vehicles that allow the Company to address customer needs quickly and
efficiently.
Remanufacturing
The Company's remanufacturing operations provide approximately one-third of
its anticipated annual machine installation requirements. The Company rebuilds
and reinstalls a portion of its machines at approximately one-third the cost of
acquiring new machines, providing significant 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 four regional remanufacturing facilities which
provide for consistent machine quality and efficient operations and are
strategically located to service each of its operating regions.
Collection/Security
Management believes that it provides the highest level of collection
security 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, extensive
monitoring of collections and other control mechanisms. 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.
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' lease renewal schedules.
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The 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 sales staff to forecast revenue
by location. Management is able to obtain daily, monthly, quarterly and annual
reports on location performance, coin collection, service and sales activity by
salesperson.
The Integrated Computer Systems also provide the 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.
Management also believes that the Integrated Computer Systems enhance the
Company's ability to successfully integrate acquired businesses into its
existing operations. Regional or multi-regional acquisitions have typically
been integrated within 90 to 120 days, while a local acquisition can be
integrated almost immediately.
COMPLEMENTARY OPERATIONS
In addition to supplying outsourced laundry equipment services, the Company
has expanded its breadth of operations to related, complementary lines of
businesses:
Individual Multi-Housing Units. Through the recent Macke Acquisition and
the Appliance Warehouse Acquisition (each, as defined), the Company entered the
business of renting laundry equipment and other household appliances and
electronic items to corporate relocation entities, individuals, property owners
and managers of multi-family housing properties. With access to approximately
six million individual housing units, the Company believes its new business line
represents an opportunity for growth in a new market segment which is
complementary to its core business.
Laundromat Equipment Distribution. Super Laundry is a laundromat equipment
distribution company. Super Laundry's business consists of constructing
complete turnkey laundromat retail stores, retrofitting existing laundromat
retail stores, distributing 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.
Retail Laundromat Operations. The Company operates 150 retail laundromats
located throughout Texas, which were acquired in the Kwik Wash Acquisition. The
operation of the retail laundromats involves leasing store locations in desired
geographic areas, maintaining an approximate mix of washers and dryers at each
store location and servicing the washers and dryers at such locations. The
Company is also responsible for maintaining the premises at each laundromat and
paying for utilities and related expenses.
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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
companies including the Company with significant operations in multiple regions
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, 1998, the Company employed 1,850 full time employees
(including 315 laundromat attendants in the Company's retail laundromats in
Texas). Approximately 140 hourly workers in the Northeast region are
represented by Local 966, affiliated with the International Brotherhood of
Teamsters (the "Union"). Management believes that the Company has maintained a
good relationship with the Union employees and has never experienced a work
stoppage since its inception.
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 Coinmach Corporation ("Coinmach"), its primary operating
subsidiary. In November 1995, The Coinmach Corporation ("TCC"), a Delaware
corporation, merged (the "Merger") with and into Solon Automated Services, Inc.
("Solon"). In connection with the Merger, Coinmach Laundry changed its name
from SAS Acquisitions Inc. and Solon, the surviving corporation in the Merger,
changed its name to Coinmach Corporation.
The Company's headquarters are located at 55 Lumber Road, Roslyn, New York
11576, and its telephone number is (516) 484-2300. The Company's mailing
address is the same as that of its headquarters. In September 1996, the Company
opened a corporate office in Charlotte, North Carolina.
CREDIT FACILITY AND SENIOR NOTES
During the past fiscal year, the Company's credit facility (of which
Bankers Trust Company and First Union National Bank of North Carolina are the
primary lending institutions) was amended to provide for an aggregate of $235
million of secured financing consisting of: (i) a $35 million working capital
revolving credit facility bearing interest at an annual rate of LIBOR plus
1.50%; (ii) a $125 million acquisition revolving credit facility bearing
interest at an annual rate of LIBOR plus 1.50%; and (iii) a $75 million Tranche
A term loan facility bearing interest at an annual rate of LIBOR plus 2.00%. In
March 1998, in connection with the Macke Acquisition, the Company's credit
facility was again amended to provide for approximately $200 million of
additional financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Financing Activities - Amended and Restated Credit Facility".
In December 1995, the Company issued 11 3/4% Senior Notes due 2005 pursuant
to the terms of an indenture between the Company and Fleet Bank of Connecticut
(formerly Shawmut Bank Connecticut, National Association) in an aggregate
principal amount of $196,655,000. On March 28, 1996, Coinmach consummated a
registered exchange offer, pursuant to which all issued and outstanding 11 3/4%
Senior Notes due 2005 were exchanged for Coinmach's Series B 11 3/4% Senior
Notes due 2005 (the "Series B Notes"). On October 8, 1997, Coinmach completed a
private placement of $100 million aggregate principal amount of its 11 3/4%
Series C Senior Notes due 2005 (the "Series C Notes") on substantially
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identical terms as its Series B Notes. On December 23, 1997, Coinmach
consummated a registered exchange offer pursuant to which all issued and
outstanding Series B Notes and Series C Notes were exchanged for Coinmach's 11
3/4% Series D Senior Notes due 2005. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Financing Activities - Senior Note Offering and Exchange Offer".
SELECTED HISTORICAL ACQUISITIONS
On January 8, 1997, Coinmach completed the acquisition of Kwik Wash
Laundries, L.P. and certain related parties (the "Kwik Wash Acquisition") for a
purchase price consisting of approximately $125 million in cash, excluding
transaction expenses, and a $15 million promissory note (the "Kwik Wash Note")
issued by Coinmach Laundry. The Kwik Wash Acquisition increased the Company's
presence in the South-Central region by adding approximately 74,000 machines to
the Company's base and enabled the Company to provide outsourced laundry
equipment services to multi-family housing properties in Texas, Louisiana,
Arkansas and Oklahoma and to operate 150 retail laundromats throughout Texas.
On March 14, 1997, Coinmach acquired substantially all of the assets of
Atlanta Washer & Dryer Leasing, Inc. (d/b/a Appliance Warehouse) for
approximately $6.3 million in cash and promissory notes (the "AW Notes") issued
by Coinmach Laundry aggregating $1.2 million (the "Appliance Warehouse
Acquisition"). The Appliance Warehouse Acquisition increased the Company's
presence in the South by adding approximately 14,000 machines to the Company's
base and expanding the Company's core operations into the related machine rental
market, creating valuable operating synergies for the Company. The holders of
the AW Notes are able to convert the AW Notes into a specified number of shares
of Common Stock at any time after March 14, 1998, subject to the terms and
conditions of the AW Notes. As of May 29, 1998, none of the AW Notes had been
converted into shares of Common Stock.
On April 23, 1997, Coinmach completed the acquisition (the "Reliable
Acquisition") of Reliable Holding Corp., Reliable Laundry Service Inc., Girard-
Hopkins Acquisition Corp., Maquilados Automaticas S.A. de C.V. and Automatica
S.A. de C.V. and certain other related parties for a cash purchase price of
approximately $44 million, excluding transaction expenses. The Reliable
Acquisition was financed through borrowings under the Company's then existing
credit facility. The Reliable Acquisition provided the Company with a strong
foothold in the California market and added approximately 49,000 machines to the
Company's machine base.
On July 17, 1997, Coinmach completed the acquisition of National Laundry
Equipment Company, Whitmer Vend-O-Mat Laundry Services, Inc. and certain other
related parties (the "National Coin Acquisition") for an aggregate purchase
price of approximately $19 million, excluding transaction expenses. The
National Coin Acquisition, which was financed through borrowings under the
Company's then existing credit facility, enabled the Company to further expand
its operations by providing laundry equipment services to multi-family housing
properties in the states of Ohio, Indiana, Kentucky, Michigan, West Virginia,
Pennsylvania, Georgia, Tennessee, Illinois and Florida, as well as by
distributing exclusive lines of commercial coin and non-coin laundry machines
and parts.
On January 15, 1998, Coinmach completed the acquisition of the route
business of Apartment Laundries, Inc., ("ALI") (the "ALI Acquisition") pursuant
to which Coinmach acquired substantially all the assets of ALI for a cash
purchase price of $16.2 million, excluding transaction expenses, and financed
through working capital and borrowings under the Company's then existing credit
facility. ALI provided outsourced laundry equipment services for multi-family
housing units in Oklahoma, Texas, Kansas and Arkansas.
-11-
On March 2, 1998, Coinmach completed the acquisition (the "Macke
Acquisition") of Macke Laundry Service, L.P. and substantially all of the assets
of certain related entities (collectively, "Macke") for a cash purchase price of
approximately $213 million, excluding transaction expenses. The Macke
Acquisition was financed with cash and borrowings under the Amended and Restated
Credit Facility (as defined) which was amended and restated in connection with
such acquisition to provide for additional borrowing capacity on substantially
similar terms as its then existing credit facility. The Macke Acquisition
enabled the Company to further expand its route operations by providing
outsourced laundry equipment services to multi-family housing properties
throughout the United States and added approximately 236,000 machines to the
Company's base. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Financing Activities - Amended and Restated Credit Facility".
RECENT DEVELOPMENTS
On May 19, 1998, Coinmach completed the acquisition (the "Cleanco
Acquisition") of Cleanco, Inc. and certain of its affiliates ("Cleanco") for a
cash purchase price of approximately $21.0 million (excluding transaction
expenses), financed with cash and borrowings under the Amended and Restated
Credit Facility. Cleanco, headquartered in Miami, Florida, was a leading
provider of coin-operated laundry equipment services in southern Florida,
generating approximately $10.0 million in revenues and $3.6 million in EBITDA,
as adjusted for certain non-recurring items, for its fiscal year ended December
31, 1997. The Cleanco Acquisition added approximately 21,000 machines to the
Company's installed base.
On June 5, 1998, Coinmach acquired all of the common stock of Gordon &
Thomas Companies, Inc. ("G&T") for a cash purchase price of approximately $58
million (excluding transaction expenses) and the assumption of certain
liabilities. This transaction was financed with cash and borrowings under the
Amended and Restated Credit Facility. G&T, headquartered in New Jersey, was a
leading provider of outsourced laundry equipment services in the New York
metropolitan area, generating approximately $40 million in revenues and $10.3
million in EBITDA, as adjusted for certain non-recurring items, for its fiscal
year ended September 30, 1997. This transaction is expected to strengthen the
Company's presence in the northeastern United States by adding approximately
36,000 machines to the Company's installed base.
ITEM 2. PROPERTIES
As of March 31, 1998, the Company leases 59 offices throughout its
operating regions serving various operational purposes, including sales and
service activities, collections and warehousing.
The Company presently maintains its headquarters in Roslyn, New York,
leasing approximately 40,000 square feet pursuant to a five year lease
terminating April 30, 2001. The Company's Roslyn facility is used for general
and administrative purposes and is the operational headquarters for the
Northeast regional branch. The Company has an option to purchase the Roslyn
facility, which it presently does not intend to exercise.
The Company also maintains a corporate office in Charlotte, North Carolina,
leasing approximately 3,000 square feet pursuant to a five year lease.
-12-
ITEM 3. LEGAL PROCEEDINGS
The Company and its predecessors have been named as defendants in a number
of legal actions arising in the ordinary course of business. Although the
amount of any liability that could arise with respect to these actions cannot be
accurately predicted, management believes that any such liabilities,
individually or in the aggregate, will not have a material adverse effect on the
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-13-
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 Common
Stock, all of which is held beneficially and of record by Coinmach Laundry.
HOLDERS
As of March 31, 1998, there was one holder of record of the Common Stock.
DIVIDENDS
The Company has not paid any dividends on the Common Stock during the past
fiscal year and does not intend to pay dividends on the Common Stock in the
foreseeable future.
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."
-14-
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios)
The following table presents summary historical consolidated financial
information of the Company. Such table includes the consolidated financial
information for the year ended March 31, 1998 ("1998 Fiscal Year"), for the year
ended March 28, 1997 ("1997 Fiscal Year"), for the six month transition period
ended March 29, 1996, the period from April 5, 1995 to September 29, 1995 and
the consolidated financial information for the period from October 1, 1994 to
April 4, 1995, and for each of the fiscal years ended the Friday closest to
September 30, 1994 and 1993. The financial data set forth below should be read
in conjunction with the Company's audited historical combined and 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.
SUCCESSOR/1/ PREDECESSOR/1/
-------------------------------------------------------------------------------------------------
SIX MONTH
TRANSITION APRIL 5, OCTOBER 1,
PERIOD 1995 1994 YEAR ENDED
YEAR ENDED ENDED TO TO -----------------------
------------------------------------ MARCH 29, SEPTEMBER APRIL 4, SEPTEMBER OCTOBER
MARCH 31, 1998 MARCH 28, 1997 1996 29, 1995 1995 30, 1994 1, 1993
----------------- ---------------- ---------- --------- -------- --------- -------
OPERATIONS DATA:
Revenues........................ $ 324,887 $ 206,852 $ 89,070 $ 89,719 $ 52,207 $104,553 $104,888
Operating general and
administrative expenses........ 223,491 143,966 62,560 65,363 34,704 69,257 69,996
Depreciation and amortization... 75,453 46,316 18,212 18,423 10,304 21,347 21,002
Operating income................ 24,682 14,802 8,298 3,733 7,199 13,949 13,890
Interest expense................ 44,668 27,417 11,830 11,541 8,928 18,105 17,453
Loss before extraordinary item.. (14,652) (10,308) (2,534) (5,946) (1,779) (6,918) (2,795)
Net loss........................ (14,652) (10,604) (11,459) (5,946) (2,627) (6,918) (2,795)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents....... $ 22,451 $ 10,110 $ 19,72 $ 9,282 -- $ 7,241 $ 6,360
Property and equipment, net..... 194,328 112,116 82,699 80,706 -- 48,727 50,593
Contract rights, net............ 366,762 180,557 59,745 63,801 -- 15,432 17,473
Total assets.................... 816,232 467,550 248,167 239,943 -- 143,589 150,402
Total debt/5/................... 598,700 329,278 202,765 176,415 -- 128,487 128,299
Stockholder's (deficit) equity.. (2,594) 11,973 (2,148) 13,783 -- (8,721) (1,636)
FINANCIAL INFORMATION AND OTHER DATA:
Cash flow from operating
activities..................... $ 58,686 $ 34,305 $ 12,100 $ 12,639 $10,216 $ 17,914 $ 16,547
Cash flow used for investing (350,875) (196,698) (14,162) (13,114) (6,537) (16,763) (18,500)
activities.....................
Cash flow from (used for)
financing activities........... 304,530 152,780 12,503 (1,017) (1,068) (270) (636)
EBITDA/2/....................... 101,396 62,886 26,510 24,356 17,503 35,296 34,892
EBITDA margin/3/................
Capital expenditures/4/......... 31.2% 30.4% 29.8% 27.2% 33.5% 33.8% 33.3%
Growth capital expenditures... $ 21,119 $ 12,563 -- -- -- -- --
Renewal capital expenditures.. 37,609 29,025 $ 14,219 $ 13,119 $ 6,944 $ 16,779 $ 18,556
Acquisition capital
expenditures................. 294,996 171,455 -- -- -- -- --
----------------- ---------------- ---------- --------- -------- --------- -------
Total Capital Expenditures...... $ 353,724 $ 213,043 $ 14,219 $ 13,119 $ 6,944 $ 16,779 $ 18,556
================= ================ ======== ======== ======= ======== ========
- -----------------
/1/ On November 30, 1995, Solon completed the Merger with TCC, which transaction
was accounted for in a manner similar to a pooling of interests. As a result
of the common investor group control over both entities, the term
"Successor" will refer to such common control periods; that is, the period
in time after the Solon Acquisition, and includes the historical results of
Solon which have been restated to include the pooling of interests of TCC.
The term "Predecessor" refers to the period in time prior to the Solon
Acquisition. Successor is presented on a different basis of accounting and,
therefore, is not comparable to the
-15-
Predecessor. Historical financial data for Solon (for periods prior to April
5, 1995) are contained in the financial statements and related notes thereto
presented elsewhere in this Form 10-K.
/2/ EBITDA represents earnings from continuing operations before deductions for
interest, income taxes, depreciation and amortization. EBITDA for the
periods ending March 31, 1998 and March 28, 1997 is before the deduction for
the stock based compensation charges, and EBITDA for the period ending
September 29, 1995 is before the deduction for restructuring costs. EBITDA
is used by management and certain investors as an indication of a company's
improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. However, EBITDA is
not intended to represent cash flows for the period, nor has it been
presented as an alternative to either (a) operating income (as determined by
generally accepted accounting principles) as an indicator of operating
performance or (b) cash flows from operating, investing and financing
activities (as determined by generally accepted accounting principles) as a
measure of liquidity. Given that EBITDA is not a measurement determined in
accordance with generally accepted accounting principles and is thus
susceptible to varying calculations, EBITDA as presented may not be
comparable to other similarly titled measures of other companies.
/3/ 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
generally accepted accounting principles.
/4/ 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 complimentary
businesses. For the fiscal years ended March 31, 1998 and March 28, 1997,
acquisition capital expenditures include approximately $2.3 million and
$16.2 million, respectively, of promissory notes issued by Coinmach Laundry
related to certain acquisitions. Growth capital expenditures represent the
amount of capital expended that reflects a net increase in the installed
base of machines, excluding acquisitions. Renewal capital expenditures
represent the amount of capital expended assuming no net increase in the
installed base of machines.
/5/ Total debt at March 31, 1998 does not include the premium, net, of $9,258
recorded as a result of the issuance by Coinmach of $100 million aggregate
principal amount of 11 3/4% Series C Senior Notes due 2005 in October 1997.
-16-
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 1998 Fiscal Year, the 1997 Fiscal
Year and the twelve month period ended March 29, 1996 and should be read in
conjunction with the consolidated financial statements and related notes thereto
included in Item 8 and the Selected Historical Consolidated Financial Data
included in Item 6 of this Form 10-K.
GENERAL
The Company is principally engaged in the business of supplying outsourced
laundry equipment services to multi-family housing properties. At March 31,
1998, the Company owned and operated approximately 680,000 washers and dryers in
approximately 70,000 multi-family housing properties on routes throughout the
United States and in 150 retail laundromats located throughout Texas. The
Company, through Super Laundry, its wholly-owned subsidiary, 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. During the 1998 Fiscal Year and 1997 Fiscal Year, the
Company experienced net losses. Such net losses are attributable in part to
significant non-cash charges associated with the Company's execution of its
growth strategy, namely, high levels of depreciation and amortization of
contract rights and goodwill related to the addition of new machines and
customers through acquisitions accounted for under the purchase method of
accounting.
The Company's most significant revenue source is its route business. The
Company provides outsourced laundry equipment services to locations by leasing
laundry rooms from building owners and property management companies, typically
on a long-term, renewable basis. In return for the exclusive right to provide
these services, most of the Company's contracts provide for commission payments
to the location owners. Commission expense (also referred to as rent expense),
the Company's single largest expense item, is included in laundry operating
expenses and represents payments to location owners. Commissions may be fixed
amounts or percentages of revenues and are generally paid monthly. Also
included in laundry operating expenses are the cost of servicing and collections
in the route business, including, payroll, parts, vehicles and other related
items, the costs of sales associated with Super Laundry and certain expenses
related to the operation of retail laundromats. In addition to commission
payments, many of the Company's leases require the Company to make advance
location payments to the location owners. These advance payments are
capitalized and amortized over the life of the applicable lease.
Other revenue sources for the Company include: (i) leasing laundry
equipment and other household appliances and electronic items to corporate
relocation entities, individuals, property owners and managers of multi-family
housing properties (approximately $2.9 million for the 1998 Fiscal Year); (ii)
operating, maintaining and servicing retail laundromats (approximately $21.0
million for the 1998 Fiscal Year); and (iii) constructing complete turnkey
retail laundromats, retrofitting existing retail laundromats, distributing
exclusive lines of commercial coin and non-coin machines and parts, and selling
service contracts (approximately $26.6 million for the 1998 Fiscal Year).
-17-
RESULTS OF OPERATIONS
The following table sets forth the periods indicated, selected statement of
operations data and EBITDA margin for the Company:
Six Month
Transition Period
Period from April
Year Ended Year Ended Ended 5, 1995 to
March 31, March 28, March 29, September
1998 1997 1996 29, 1995 Combined
---------- ---------- ---------- ------------ ---------
Revenues............................. 100% 100% 100% 100% 100%
Laundry operating expenses........... 66.9 67.4 68.0 70.1 69.0
General and administrative expenses.. 1.9 2.2 2.3 2.7 2.5
Depreciation and amortization........ 23.2 22.4 20.5 20.5 20.5
Operating income..................... 7.6 7.2 9.3 4.2 6.7
Interest expense, net................ 13.8 13.3 13.3 12.9 13.1
EBITDA margin........................ 31.2 30.4 29.8 27.2 28.5
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 28, 1997
Revenues increased by approximately 57% for the 1998 Fiscal Year as
compared to 1997 Fiscal Year. This improvement in revenues resulted primarily
from the Company's execution of its acquisition strategy and increased route
revenues resulting from internal expansion. Based on the historical revenues of
acquired businesses, the Company estimates that approximately $103.0 million of
its revenue increase for the 1998 Fiscal Year is primarily due to the Kwik Wash
Acquisition (January 1997), the Reliable Acquisition (April 1997), and the
National Coin Acquisition (July 1997). The ALI Acquisition (January 1998) and
the Macke Acquisition (March 1998) also contributed to the revenue increase, but
had minimal impact due to the timing of these transactions. In addition, during
the 1998 Fiscal Year, the Company's installed machine base increased by
approximately 19,500 machines from internal growth (excluding the machines added
from the Macke Acquisition, the Reliable Acquisition, the ALI Acquisition and
the National Coin Acquisition during such period) as compared to an increase of
approximately 7,500 machines during the prior year's corresponding period.
Included in internal growth are acquisitions of small, local route operators and
new customers secured by the Company's sales force.
Laundry operating expenses increased by approximately 56% for the 1998
Fiscal Year, as compared to the 1997 Fiscal Year. This increase was due
basically to an increase in laundry operating expenses, primarily commission
expense, related to the Macke Acquisition, the Kwik Wash Acquisition, the
Reliable Acquisition, the ALI Acquisition and the National Coin Acquisition.
General and administrative expenses increased by approximately $1.6 million
or 36% for the 1998 Fiscal Year as compared to the 1997 Fiscal Year. The
increase for the period was due to various expenses associated with (i) costs
and expenses relating to the Company's acquisition strategy, including systems
development and refinement relating to the integration of prior acquisitions,
and (ii) additional expenses, such as accounting, management information systems
and other administrative functions related to the Company's growth. However, as
a percentage of revenues, general and administrative expenses were 1.9% for the
1998 Fiscal Year as compared to 2.2% for the 1997 Fiscal Year.
Depreciation and amortization increased by approximately 63% for the 1998
Fiscal Year, as compared to the 1997 Fiscal Year, due primarily to contract
rights and goodwill associated with the Macke Acquisition, the Kwik Wash
Acquisition, the Reliable Acquisition, the ALI Acquisition and the National Coin
Acquisition, as well as an increase in capital expenditures in respect of the
Company's installed base of machines.
-18-
The extraordinary items for the 1997 Fiscal Year consisted of costs related
to the extinguishment of debt in February 1997 and the termination of the then
existing revolving credit facility.
In July 1996, Coinmach Laundry issued, in privately negotiated
transactions, 79,029 shares of its Class B common stock to certain members of
management of Coinmach. The Company recorded a stock-based compensation charge
of approximately $887,000 attributable to the issuance of such stock during the
1997 Fiscal Year. In addition, for the 1998 Fiscal Year and the 1997 Fiscal
Year, approximately $85,000 of receivables relating to loans to management in
connection with prior purchases of Coinmach Laundry's common stock were forgiven
and have been recorded as a stock-based compensation charge.
During 1996, Coinmach Laundry granted to certain members of management of
Coinmach and certain other individuals non-qualified options (the "1996
Options") to purchase Coinmach Laundry's common stock at a 15% discount to the
initial offering price of such common stock. With respect to the 1996 Options
granted to its employees, the Company records such discount as a stock-based
compensation charge over the applicable four year vesting period.
In September 1997, Coinmach Laundry granted non-qualified options (the
"1997 Options") to purchase an aggregate of 200,000 shares of Coinmach Laundry's
common stock to certain members of management of Coinmach at an exercise price
of $11.90. The Company records the difference between the exercise price of the
1997 Options and the fair market value of such common stock on the date of grant
as a stock-based compensation charge over the applicable four year vesting
period. For the 1998 Fiscal Year and 1997 Fiscal Year, the Company recorded a
stock-based compensation charge of approximately $1,176,000 and $798,000,
respectively, relating to the 1997 Options and the 1996 Options.
Interest expense, net, increased by approximately 63% for the 1998 Fiscal
Year, as compared to the prior year, due primarily to increased borrowing levels
under the Amended and Restated Credit Facility in connection with certain
acquisitions, as well as the increased interest due to the Bond Offering by the
Company of $100 million aggregate principal amount of the Series C Notes on
October 8, 1997. (See financing activities).
EBITDA/2/ before deduction for stock-based compensation charges was
approximately $101.4 million for the 1998 Fiscal Year as compared to
approximately $62.9 million for the 1997 Fiscal Year, representing an
improvement of approximately 61%. EBITDA margins improved to approximately
31.2% of revenues for the current year compared to approximately 30.4% of
revenues for the prior year.
FISCAL YEAR ENDED MARCH 28, 1997 COMPARED TO THE TWELVE MONTH PERIOD ENDED MARCH
29, 1996
The discussion below should be read in conjunction with the following
table, which combines the six month transition period ended March 29, 1996 and
the period from April 5, 1995 to September 29, 1995 and the combined periods to
be referred to as the prior fiscal year (in thousands):
- --------------------
/2/ EBITDA represents earnings from continuing operations before deductions for
interest, income taxes, depreciation and amortization. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that an increase in EBITDA is an
indication of a company's improved ability to service existing debt, to sustain
potential future increases in debt and to satisfy capital requirements.
However, EBITDA is not intended to represent cash flows for the period, nor has
it been presented as an alternative to either (a) operating income (as
determined by generally accepted accounting principles) as an indicator of
operating performance or (b) cash flows from operating, investing and financing
activities (as determined by generally accepted accounting principles) as a
measure of liquidity. Given that EBITDA is not a measurement determined in
accordance with generally accepted accounting principles and is thus susceptible
to varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
-19-
SIX MONTH
TRANSITION PERIOD
YEAR ENDED PERIOD ENDED APRIL 5, 1995 TO
MARCH 28, 1997 MARCH 29, 1996 SEPTEMBER 29, 1995 COMBINED
-------------- -------------- ------------------ --------
Revenues.......................................... $206,852 $ 89,070 $89,719 $178,789
Laundry operating expenses........................ 139,446 60,536 62,905 123,441
General and administrative expenses............... 4,520 2,024 2,458 4,482
Depreciation and amortization..................... 46,316 18,212 18,423 36,635
Stock based compensation charge................... 1,768 -- -- --
Restructuring expenses............................ -- -- 2,200 2,200
-------------- -------------- ------------------ --------
Operating income (loss)........................... 14,802 8,298 3,733 12,031
Interest expense, net............................. 27,417 11,830 11,541 23,371
-------------- -------------- ------------------ --------
Loss before extraordinary items and income taxes.. (12,615) (3,532) (7,808) (11,340)
Income tax (benefit) expense...................... (2,307) (998) (1,862) (2,860)
-------------- -------------- ------------------ --------
Loss before extraordinary items................... (10,308) (2,534) (5,946) (8,480)
Extraordinary items, net of tax................... (296) (8,925) -- (8,925)
-------------- -------------- ------------------ --------
Net loss.......................................... $(10,604) $(11,459) $(5,946) $(17,405)
============== ============== ================== ========
Revenues increased by approximately 16% for the 1997 Fiscal Year as
compared to the prior fiscal year. The improvement in revenues was primarily
attributable to increased route revenues resulting from internal expansion, the
acquisition of a regional route operator located in St. Louis, Missouri on April
1, 1996 (the "Allied Acquisition"), the Kwik Wash Acquisition and an increase in
revenues from Super Laundry. The Company estimates that approximately $24.0
million of its revenue increase for the 1997 Fiscal Year is the combined result
of the Kwik Wash Acquisition and the Allied Acquisition based on the historical
revenue of such acquired businesses. In addition, during the 1997 Fiscal Year,
the Company's installed base increased by approximately 7,500 machines from
internal growth (excluding the machines added from the Kwik Wash Acquisition and
the Allied Acquisition during such period) due primarily to the elimination of
capital constraints existing at Solon prior to the Merger, as compared to a
reduction of approximately 750 machines during the twelve months ended March 29,
1996.
Laundry operating expenses increased by approximately 13% for the 1997
Fiscal Year, as compared to the prior fiscal year. The increase was due
primarily to the Allied Acquisition and the Kwik Wash Acquisition as well as an
increase in the cost of sales related to Super Laundry's increased sales volume.
Such increase in laundry operating expenses was offset by the implementation of
cost savings programs in the Company's field operations and the consolidation of
certain operating regions.
General and administrative expenses increased slightly for the 1997 Fiscal
Year as compared to the prior fiscal year. The increase for the period was due
to expenses associated with (i) the implementation of the Company's acquisition
strategy, including legal and financial due diligence investigations of
potential targets and related costs, (ii) the development and implementation of
procedures for the management of investor relations, and (iii) systems
development, refinement and integration. This increase includes a reduction of
certain expenses resulting from the consolidation of the Company's corporate
staff into its existing facility in Roslyn, New York on September 29, 1995.
Depreciation and amortization increased by approximately 27% for the 1997
Fiscal Year, as compared to the prior fiscal year, due primarily to the Allied
Acquisition and the Kwik Wash Acquisition, as well as an increase in capital
expenditures for the installed base of machines resulting from the elimination
of capital constraints existing at Solon prior to the Merger. As a result of
the Company's acquisition activity since early 1995, the Company incurred
approximately $26.8 million in non-cash
-20-
purchase accounting related depreciation and amortization charges for the 1997
Fiscal Year as compared to $23.6 million for the prior fiscal year.
The Company incurred restructuring costs of approximately $2.2 million
during the twelve months ended March 29, 1996 to cover severance obligations to
certain personnel, costs to relocate certain corporate functions to Roslyn, New
York, systems integration costs, and expenses related to the consolidation of
certain of its regional offices, in each case, as a result of the Solon
Acquisition and the Merger.
The extraordinary items for the 1997 Fiscal Year consisted of costs related
to the extinguishment of debt in February, 1997 and the termination of the then
existing revolving credit facility. The extraordinary items for the six month
period ending March 29, 1996 consisted of costs related to the extinguishment of
debt in connection with the Company's refinancing in November 1995.
Prior to the Offering, Coinmach Laundry issued, in privately negotiated
transactions, 79,029 shares of its Class B common stock to certain members of
management. The Company recorded a stock-based compensation charge of
approximately $887,000 attributable to the issuance of such stock. In addition,
approximately $83,000 of receivables relating to loans to management in
connection with prior purchases of Coinmach Laundry's common stock were forgiven
and have been recorded as a stock-based compensation charge.
During the 1997 Fiscal Year, Coinmach Laundry recorded a stock-based
compensation charge of approximately $798,000 relating to such options.
Interest expense, net, increased by approximately 17% for the 1997 Fiscal
Year as compared to the prior year due primarily to the Company's refinancing in
November 1995 as well as entering into a credit agreement with Bankers Trust
Company, First Union National Bank of North Carolina and Lehman Commercial
Paper, Inc. in January 1997. Partially offsetting this increase in interest
expense was the decrease in the effective interest rate applied against
outstanding borrowings as the result of such refinancing, as well as interest
income earned on excess cash balances generated from operations.
EBITDA/3/ was approximately $62.9 million (before deduction for stock-based
compensation charges) for the 1997 Fiscal Year as compared to approximately
$50.9 million (before deduction for restructuring costs) for the prior fiscal
year, representing an improvement of approximately 24%. EBITDA margins improved
to approximately 30% of revenues for the current year compared to approximately
28% of revenues for the prior year.
- --------------------
/3/ EBITDA represents earnings from continuing operations before deductions for
interest, income taxes, depreciation and amortization. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that an increase in EBITDA is an
indication of a company's improved ability to service existing debt, to sustain
potential future increases in debt and to satisfy capital requirements.
However, EBITDA is not intended to represent cash flows for the period, nor has
it been presented as an alternative to either (a) operating income (as
determined by generally accepted accounting principles) as an indicator of
operating performance or (b) cash flows from operating, investing and financing
activities (as determined by generally accepted accounting principles) as a
measure of liquidity. Given that EBITDA is not a measurement determined in
accordance with generally accepted accounting principles and is thus susceptible
to varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.
-21-
SIX MONTH TRANSITION PERIOD ENDED MARCH 29, 1996 COMPARED TO THE PERIOD
OCTOBER 1, 1994 TO APRIL 4, 1995
Prior to the Merger, Solon's fiscal year was the fifty-two or fifty-three
week period ended on the Friday nearest September 30. Effective upon the
Merger, the Company changed its fiscal year end to the Friday nearest to March
31.
The discussion below should be read in conjunction with the following table
which combines the operating results of Solon and TCC for the period October 1,
1994 to April 4, 1995 (the predecessor period) (in thousands). The operating
results of TCC are reflected in order to present comparable data.
SIX MONTH PERIOD FROM OCTOBER 1, 1994 TO APRIL 4, 1995
TRANSITION PERIOD ------------------------------------------------
ENDED (PREDECESSOR)/1,2/
MARCH 29, 1996
(SUCCESSOR)/1/ TCC SOLON COMBINED
----------------- ------------ ------------ ------------
Revenues......................................... $ 89,070 $35,789 $52,207 $87,996
Laundry operating expenses....................... 60,536 28,253 33,165 61,418
General and administrative expenses.............. 2,024 1,345 1,539 2,884
Depreciation and amortization.................... 18,212 6,009 10,304 16,313
----------------- ------------ ------------ ------------
Operating income................................. 8,298 182 7,199 7,381
Interest expense, net............................ 11,830 2,464 8,928 11,392
Other expense.................................... -- 1,341 -- 1,341
----------------- ------------ ------------ ------------
Loss before extraordinary item and income taxes.. (3,532) (3,623) (1,729) (5,352)
Income tax (benefit) expense..................... (998) 4 50 54
----------------- ------------ ------------ ------------
Loss before extraordinary item................... (2,534) (3,627) (1,779) (5,406)
Extraordinary item, net of tax................... (8,925) - (848) (848)
----------------- ------------ ------------ ------------
Net loss......................................... $(11,459) $(3,627) $(2,627) $(6,254)
================= ============ ============ ============
- --------------------
/1/ The term "Predecessor" refers to the period in time prior to the Solon
Acquisition. The term "Successor" refers to the period in time after the
Solon Acquisition and includes the historical results of Solon which have
been restated to include the pooling of interests of TCC. Successor is
presented on a different basis of accounting and, therefore, is not
comparable to the Predecessor.
/2/ Certain reclassifications have been made to conform to the 1996
presentation.
Revenues for the six month transition period ended March 29, 1996 were
approximately 1.2% higher than combined revenues for the prior period. The
improvement in revenues consisted primarily of increased revenues from Super
Laundry of approximately $2.5 million. Such improvement was partially offset by
a decrease of approximately $1.4 million in revenues from the route business.
The average machine base for the six month transition period ended March 29,
1996 was approximately 1.4% lower than the prior period primarily as the result
of constraints on available capital prior to the Merger. From September 30,
1995, through March 29, 1996, the Company successfully implemented a program to
maintain its base of installed machines and eliminate any additional erosion.
The effect of the decreased number of machines was partially offset by increased
revenue per machine from price increases.
-22-
Laundry operating expenses decreased by approximately 1.4% primarily as the
result of decreased expenses of approximately $0.8 million related to
implementation of cost savings programs in the Company's field operations and a
decrease in commission expense of approximately 2.3%. These decreases were
partially offset by an increase in the cost of sales related to the increased
volume of Super Laundry.
General and administrative expenses decreased by approximately $.9 million,
or 29.8%, primarily due to the consolidation of corporate staff by closing
Solon's Philadelphia, Pennsylvania office and combining its operations into the
Company's existing facility in Roslyn, New York on September 29, 1995.
Depreciation and amortization increased by approximately $1.9 million or
11.6% due primarily to purchase accounting adjustments resulting from the Solon
Acquisition.
Interest expense, net, increased by approximately 3.8%. Approximately $1.8
million of such increase was due primarily to the increased debt level that
resulted from the Company's refinancing in November 1995. Offsetting this
increase is approximately $0.8 million due to the decrease in the effective
interest rate as the result of such refinancing. The increased debt resulted in
an excess cash balance, which was contemplated to be used for working capital
purposes and for future acquisition opportunities.
The extraordinary item for the six month transition period ending March 29,
1996, consisted of costs related to the extinguishment of debt in connection
with the Company's refinancing in late 1995. The extraordinary item for the
period ended April 4, 1995, consisted of costs related to the change in control
in connection with the Solon Acquisition.
PERIOD APRIL 4, 1995 TO SEPTEMBER 29, 1995 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 1994
The discussion below should be read in conjunction with the following table
which combines the Predecessor period for the six months ended September 30,
1994 (in thousands):
PERIOD APRIL 5, 1995 SIX MONTHS ENDED
TO
SEPTEMBER 29, 1995 SEPTEMBER 30, 1994
-------------------- ----------------------------
(SUCCESSOR)/1/ (PREDECESSOR)/1,2/
TCC SOLON COMBINED
------- ------- --------
Revenues............................. $89,719 $37,154 $51,577 $88,731
Laundry operating expenses........... 62,905 28,576 32,337 60,913
General and administrative expenses.. 2,458 1,123 1,444 2,567
Depreciation and amortization........ 18,423 7,576 10,966 18,542
Restructuring costs.................. 2,200 -- -- --
-------------------- ------- ------- --------
Operating income (loss).............. 3,733 (121) 6,830 6,709
Interest expense, net................ 11,541 2,214 9,053 11,267
-------------------- ------- ------- --------
Loss before income taxes............. (7,808) (2,335) (2,223) (4,558)
Income tax (benefit) expense......... (1,862) 24 3,208 3,232
-------------------- ------- ------- --------
Net Loss............................. $(5,946) $(2,359) $(5,431) $(7,790)
==================== ======= ======= =======
-23-
- --------------------
/1/ The term "Predecessor" refers to the period in time prior to the Solon
Acquisition. The term "Successor" refers to the period in time after the
Solon Acquisition and includes the historical results of Solon which have
been restated to include the pooling of interests of TCC. Successor is
presented on a different basis of accounting and therefore, is not
comparable to the Predecessor.
/2/ Certain reclassifications have been made to conform to the 1995
presentation.
Revenues for the period April 5, 1995 to September 29, 1995 were
approximately 1.1% higher than combined revenues for the prior period. The
improvement in revenues consisted primarily of increased revenues from Super
Laundry of approximately $1.3 million. Such improvement was partially offset by
a decrease of approximately $0.3 million in revenues from routes, primarily due
to a 2.0% decline in the average number of laundry machines on location, due to
constraints on capital prior to the Merger. The effect of the decreased number
of machines was partially offset by increased revenue per machine of
approximately 1.6% primarily due to price increases.
Laundry operating expenses increased by approximately 3.3%, primarily due
to an increase of $1.0 million in the cost of sales related to the increase in
Super Laundry revenue. The remaining increase is primarily the result of the
method of accounting for installation costs applied in the Successor period.
This increase is the result of increased cost of sales related to the increased
volume of Super Laundry. In addition, the Company's commission expense
decreased by approximately 1.0%.
General and administrative expenses decreased by approximately $0.1
million, or 4.2% primarily due to a decrease in the corporate staff.
The Company provided for restructuring costs of approximately $2.2 million
to cover severance payments to certain of Solon's management, administrative and
regional personnel, costs to relocate Solon's financial and administrative
functions to Roslyn, New York, costs to integrate certain financial and
operating systems, and costs related to the consolidation of certain of Solon's
regional offices.
Interest expense, net, increased to approximately 2.4% primarily due to an
increase in the interest rate on TCC's revolver, which was based on the prime
lending rate.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income," and
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information."
These statements are effective for fiscal years commencing after December 15,
1997. The Company will be required to comply with the provisions of these
statements in its year ending March 31, 1999. The Company is currently
evaluating what operating segments of its business may trigger disclosure
requirements under SFAS 131 and believes the required disclosure will be made,
if applicable, at the end of fiscal 1999. The Company does not believe that
adoption of SFAS 130 will have a significant effect on the Company's
consolidated financial statements and related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have substantial indebtedness and debt service
requirements. At March 31, 1998, the Company had outstanding long-term debt of
approximately $598.7 million (excluding the premium, net, of approximately $9.3
million on the Series C Notes) and stockholder's deficit of approximately $2.6
million.
-24-
FINANCING ACTIVITIES
Senior Note Offering and Exchange Offer
In December 1995, the Company issued 11 3/4% Senior Notes due 2005 pursuant
to the terms of an indenture between the Company and Fleet Bank of Connecticut
(formerly Shawmut Bank Connecticut, National Association) (as amended, the
"Indenture") in an aggregate principal amount of $196,655,000. On March 28,
1996, Coinmach consummated a registered exchange offer, pursuant to which all
issued and outstanding 11 3/4% Senior Notes due 2005 were exchanged for the
Series B Notes.
On October 8, 1997, Coinmach completed a private placement (the "Bond
Offering") of $100 million aggregate principal amount of Series C Notes on
substantially identical terms as its Series B Notes. The gross proceeds from
the Bond Offering were $109.875 million, of which $100.0 million represented the
principal amount outstanding and $9.875 million represented the payment of a
premium for the Series C Notes. Coinmach used approximately $105.4 million of
the net proceeds from the Bond Offering to repay indebtedness outstanding under
its senior financing arrangement.
On December 23, 1997, Coinmach commenced an offer to exchange (the
"Exchange Offer") up to $296.7 million (excluding the premium on the Series C
Notes discussed above) of its 11 3/4% Series D Senior Notes due 2005 (the
"Series D Notes" or "Senior Notes") for any and all of its Series B Notes and
its Series C Notes. The Exchange Offer expired on February 6, 1998, and, as of
such date, the holders of 100% of the outstanding Series B Notes and Series C
Notes tendered such notes in the Exchange Offer for Series D Notes.
The Senior Notes, which mature on November 15, 2005, are unsecured senior
obligations of Coinmach and are redeemable, at the Company's option, in whole or
in part at any time or from time to time, on and after November 15, 2000, upon
not less than 30 nor more than 60 days notice, at the redemption prices set
forth in the Indenture, plus, in each case, accrued and unpaid interest thereon,
if any, to the date of redemption.
The Indenture contains a number of restrictive covenants and agreements,
including covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on certain payments (in the form of the
declaration or payment of certain dividends or distributions on the capital
stock of Coinmach Laundry or its subsidiaries, the purchase, redemption or other
acquisition of any capital stock of Coinmach Laundry, the voluntary prepayment
of subordinated indebtedness, or an Investment (as defined in the Indenture) in
any other person or entity); (iii) limitation on transactions with affiliates;
(iv) limitation on liens; (v) limitation on sales of assets; (vi) limitation on
sale and leaseback transactions; (vii) limitation on conduct of business; (viii)
limitation on dividends and other payment restrictions affecting subsidiaries;
and (ix) limitation on consolidations, mergers and sales of substantially all of
the assets of Coinmach.
The events of default under the Indenture include provisions that are
typical of senior unsecured debt financings. Upon the occurrence and
continuance of certain events of default, the trustee or the holders of not less
than 25% in aggregate principal amount of outstanding Senior Notes may declare
all unpaid principal and accrued interest on all of the Senior Notes to be
immediately due and payable.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Senior Notes will have the right to require that the Company
purchase all or a portion of such holder's Senior
-25-
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.
Amended and Restated Credit Facility
On June 2, 1997, the Company's existing credit facility with Bankers Trust
Company, First Union National Bank of North Carolina, Lehman Commercial Paper,
Inc. and certain other lending institutions providing for, among other things, a
$130 million term loan facility and a $70 million revolving credit facility, was
amended to, among other things, increase the existing term loan facility by
$60.0 million, of which $50.0 million was used to repay outstanding revolver
borrowings under such facility. Such credit facility, as amended, consisted of
a $70 million revolving credit facility and a $190 million term loan facility,
which was comprised of a Tranche A term loan in the amount of $30.0 million and
a Tranche B term loan in the amount of $160.0 million. Such amended credit
facility also provided for up to $10 million of letter of credit financings and
short term borrowings under a swing line facility of up to $5 million.
In December 1997, the Company's credit facility was amended to provide for
an aggregate of $235 million of secured financing consisting of: (i) a $35
million working capital revolving credit facility bearing interest at an annual
rate of LIBOR plus 1.50%; (ii) a $125 million acquisition revolving credit
facility bearing interest at an annual rate of LIBOR plus 1.50%; and (iii) a $75
million Tranche A term loan facility bearing interest at an annual rate of LIBOR
plus 2.00%.
In March 1998, concurrently with the Macke Acquisition, the Company once
again amended and restated its senior financing agreement (as amended and
restated, the "Amended and Restated Credit Facility"), on substantially similar
terms, providing for approximately $200 million of additional financing
consisting of a Tranche B term loan bearing interest at an annual rate of LIBOR
plus 2.25%. Under the Amended and Restated Credit Facility, the working capital
revolving credit facility and the acquisition revolving credit facility are
expected to mature on December 31, 2003, the Tranche A term loan facility is
expected to mature on December 31, 2004, and the Tranche B term loan facility is
expected to mature on June 30, 2005.
Interest on the Company's borrowings under the Amended and Restated Credit
Facility is payable quarterly in arrears with respect to Base Rate Loans and the
last day of each applicable interest period with respect to Eurodollar Loans and
at a rate per annum no greater than the sum of the Applicable Base Rate Margin
plus the Base Rate or the sum of the Applicable Eurodollar Margin plus the
Eurodollar Rate (in each case, as defined in the Amended and Restated Credit
Facility).
To manage its exposure to fluctuations in interest rates, the Company
entered into interest rate swap agreements, relating to its variable rate debt
portfolio. On February 23, 1998, the Company entered into a 33 month $75
million notional amount interest rate swap transaction with Bankers Trust
Company to fix the monthly LIBOR interest rate under the Amended and Restated
Credit Facility at 5.71%. On March 2, 1998, the Company entered into a 32
month, $100 million notional amount interest rate swap transaction with First
Union National Bank of North Carolina to fix the monthly LIBOR interest rate
under a portion of the Amended and Restated Credit Facility at 5.83%. On April
7, 1998, the Company entered into a 31 month, $75 million notional amount
interest rate swap transaction with Bankers Trust Company to fix the monthly
LIBOR interest rate under a portion of the Amended and Restated Credit Facility
at 5.75%. At March 31, 1998, the monthly variable LIBOR interest rate was
5.6875%. The Company does not use derivative financial instruments for trading
purposes.
-26-
Indebtedness under the Amended and Restated Credit Facility is secured by
all of the Company's real and personal property. The Company has guaranteed the
indebtedness under the Amended and Restated Credit Facility and pledged to
Bankers Trust Company, as Collateral agent, its interests in all of the issued
and outstanding shares of capital stock of the Company.
Subject to the terms and conditions of the Amended and Restated Credit
Facility, the Company may, at its option, convert Base Rate Loans (as defined in
the Amended and Restated Credit Facility) into Eurodollar Loans (as defined in
the Amended and Restated Credit Facility). Interest on the Company's borrowings
under the Amended and Restated Credit Facility is payable at a rate per annum no
greater than the sum of the Applicable Base Rate Margin plus the Base Rate or
the sum of the Applicable Eurodollar Margin plus the Eurodollar Rate (in each
case, as defined in the Amended and Restated Credit Facility).
The Amended and Restated 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 Coinmach Laundry
or its subsidiaries or the purchase, redemption or other acquisition of any
capital stock of Coinmach Laundry or its subsidiaries); (iii) voluntary
prepayments of previously existing indebtedness; (iv) Investments (as defined in
the Amended and Restated 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 Amended and Restated Credit Facility also requires that the Company satisfy
certain financial ratios, including a maximum leverage ratio and a minimum
consolidated interest coverage ratio.
The Amended and Restated Credit Facility contains certain events of
default, including the following: (i) the failure of the Company to pay any of
its obligations under the Amended and Restated Credit Facility when due; (ii)
certain failures by the Company to pay principal or interest on indebtedness or
certain breaches or defaults by the Company in respect of certain indebtedness,
in each case, after the expiration of any applicable grace periods; (iii)
certain defaults by the Company in the performance or observance of the
agreements or covenants under the Amended and Restated Credit Facility or
related agreements, beyond any applicable cure periods; (iv) the falsity in any
material respect of certain of the Company's representations or warranties under
the Amended and Restated Credit Facility; (v) certain judgments against the
Company; and (vi) certain events of bankruptcy or insolvency of the Company.
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,
-27-
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 for the 1998 Fiscal Year were approximately $353.7 million
(including approximately $2.3 million promissory note in connection with the
acquisition of a small route operator and approximately $1.2 million relating to
capital lease obligations). Of such amount, the Company spent approximately
$295.0 million in acquisition and related transaction costs, primarily the Macke
Acquisition, the Reliable Acquisition, the ALI Acquisition and the National Coin
Acquisition, and approximately $21.1 million related to the net increase in the
installed base of machines of 19,500 machines. The balance of approximately
$37.6 million was used to maintain the existing machine base (which consist of
machine expenditures, advance location payments and laundry room improvements)
in current locations and the replacement of discontinued locations and for
general corporate purposes. The full impact on revenues and cash flow generated
from capital expended on acquisitions and the net increase in the installed
based are not expected to be reflected in the Company's financial results until
subsequent reporting periods, depending on the timing of the capital expended.
The Company anticipates that capital expenditures, excluding acquisitions and
internal growth, will be approximately $62.0 million for the twelve months
ending March 31, 1999. Such increase relative to fiscal 1998 is primarily
attributable to the Company's recent acquisition activities. While the Company
estimates that it will generate sufficient cash flows from operations to finance
anticipated capital expenditures, there can be no assurances that it will be
able to do so.
The Company's working capital requirements are, and are expected to
continue to be, minimal since a significant portion of the Company's operating
expenses are not paid until after cash is collected from the installed machines.
In connection with certain of the financing agreements governing the Company's
indebtedness, the Company is required to make monthly cash interest payments as
required by the Amended and Restated Credit Facility and semi-annual cash
interest payments as required by the Senior Notes.
Management believes that the Company's future operating activities will
generate sufficient cash flow to repay indebtedness outstanding under the Senior
Notes and borrowings under the Amended and Restated Credit Facility or to permit
any necessary refinancings thereof. An inability of the Company, however, to
comply with covenants or other conditions contained in the indentures governing
the Senior Notes or in the credit agreement evidencing the Amended and Restated
Credit Facility could result in an acceleration of all amounts due under such
indentures and the Amended and Restated Credit Facility. If the Company is
unable to meet its debt service obligations, it could be required to take
certain actions such as reducing or delaying capital expenditures, selling
assets, refinancing or restructuring its indebtedness, selling additional equity
capital or other actions. There is no assurance that any of such actions could
be effected on commercially reasonable terms or on terms permitted under the
Amended and Restated Credit Facility, or the indentures governing the Senior
Notes.
Certain Accounting Treatment
The Company's depreciation and amortization expenses, aggregating
approximately $75.5 million for the 1998 Fiscal Year, have the effect of
reducing net income but not operating cash flow. In accordance with generally
accepted accounting principles, a significant amount of the purchase price of
businesses acquired by the Company is allocated to "contract rights", which
costs are amortized over periods of up to 15 years.
-28-
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. During the 1998 Fiscal Year,
the Company determined that it needed to modify significant portions of its
software so that its information systems will function properly with respect to
dates in the year 2000 and beyond. The Company also has initiated discussions
with its significant suppliers, customers, and financial institutions to ensure
that those parties have appropriate plans to remediate year 2000 issues where
their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to properly remediate their computer
systems.
The Company's comprehensive year 2000 initiative is being managed by a team
of internal and external staff. The team's activities are designed to ensure
that there is no adverse effect on the Company's core business operations and
that transactions with customers, suppliers, and financial institutions are
fully supported. The Company anticipates its information systems transformation
for year 2000 compliance will be completed in the fall of 1999. While the
Company believes its planning efforts are adequate to address its year 2000
concerns, there can be no guarantee that its computer systems or the computer
systems of other companies on which the Company's systems and operations rely
will be converted on a timely basis and will not have a material effect on the
operations of the Company. The cost of the year 2000 initiative is not expected
to be material to the Company's results of operation or financial condition.
INFLATION AND SEASONALITY
In general, the Company's laundry operating expenses and general and
administrative expenses are affected by inflation, and the effects of inflation
may be experienced by the Company in future periods. Management believes that
such effects have not been nor will be material to the Company. The Company's
business generally is not seasonal.
FORWARD LOOKING STATEMENTS
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
-29-
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, including the acquisition and successful integration and operation of
acquired businesses. 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 is not required to disclose information pursuant to this item
until its fiscal year ended March 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited consolidated financial statements and the notes thereto are
contained in pages F-1 through F-29 hereto.
--
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-30-
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 the Directors has been furnished by such
Directors of the Company.
Name Title Age
- --------------------- ---------------------------------- ---
Stephen R. Kerrigan.. Chairman of the Board and Director 45
Mitchell Blatt....... Director 46
Robert M. Doyle...... Director 41
At a regular meeting of the Board held on November 1, 1996, the Board
unanimously resolved, subject to obtaining shareholder approval of Coinmach
Laundry, to reconstitute the Board so that the number of directors constituting
the Board would be three, consisting initially of Messrs. Kerrigan, Blatt and
Doyle. Effective November 4, 1996, upon obtaining the approval of Coinmach
Laundry, Messrs. James N. Chapman, David A. Donnini and Bruce V. Rauner were
removed from the Board, and Mr. Doyle was appointed to the Board. Each of
Messrs. Chapman, Donnini and Rauner are presently members of the board of
directors of Coinmach Laundry.
Effective as of July 23, 1996, that certain stockholders' agreement,
dated July 26, 1995, as amended and restated as of November 30, 1995, which
provided, among other things, for the composition of the Board and of the board
of directors of Coinmach Laundry, was terminated.
Mr. Kerrigan has been Chief Executive Officer of Coinmach Laundry
since April 1996 and of the Company since November 1995. Mr. Kerrigan was
President and Treasurer of Solon Automated Services, Inc. ("Solon") and Coinmach
Laundry from April 1995 until April 1996, and Chief Executive Officer of TCC
from January 1995 until November 1995./4/ Mr. Kerrigan has been a director and
Chairman of the Board of Coinmach Laundry since April 1995 and of the Company
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 until 1994. Mr. Kerrigan
was an executive officer of CIC I Acquisition Corp. ("CIC"), which filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in 1993 and thereafter emerged from bankruptcy in 1994.
- --------------------
/4/ On November 30, 1995, TCC merged with and into Solon (the "Merger") and
entered into a series of refinancing transactions, whereupon the surviving
corporation changed its name to "Coinmach Corporation."
-31-
Mr. Blatt has been President and Chief Operating Officer of Coinmach Laundry
since April 1996 and of the Company since November 1995. Mr. Blatt was the
President and Chief Operating Officer of TCC from January 1995 to November 1995.
Mr. Blatt has been a director of Coinmach Laundry and the Company since November
1995. Mr. Blatt joined TCC as Vice President-General Manager in 1982 and was
Vice President and Chief Operating Officer from January 1988 to February 1994.
Mr. Blatt was an executive officer of CIC, which filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in 1993.
Mr. Doyle has been Chief Financial Officer, Senior Vice President, Treasurer
and Secretary of Coinmach Laundry since April 1996 and the Company since
November 1995. Mr. Doyle has been a director of the Company since November
1995. Mr. Doyle served as Vice President, Treasurer and Secretary of TCC from
January 1995 to November 1995. Mr. Doyle joined the Company's predecessor in
1987 as Controller. In 1988, Mr. Doyle became Director of Accounting, and was
promoted in 1989 to Vice President and Controller. Mr. Doyle was an executive
officer of CIC, which filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code in 1993.
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 is no family
relationship between any Executive Officer and any other Executive Officer or
Director of the Company.
||
Name Title Age
- --------------------- ---------------------------------- ---
Stephen R. Kerrigan.. Chairman of the Board and Chief
Executive Officer 45
Mitchell Blatt....... President, Chief Operating Officer 46
Robert M. Doyle...... Chief Financial Officer, Senior Vice
President, Treasurer, Secretary 41
John E. Denson....... Senior Vice President 60
Michael E. Stanky.... Senior Vice President 46
For information regarding Messrs. Kerrigan, Blatt and Doyle, see "-- Directors"
above.
Mr. Denson has been Senior Vice President of Coinmach Laundry since April 1996
and of the Company since November 1995. Mr. Denson was Senior Vice President,
Finance of Solon from June 1987 until November 1995. Mr. Denson has served as
an officer of Solon under various titles since 1973, and served as a director
and Co-Chief Executive Officer of Solon from November 1994 to April 1995.
Mr. Stanky has been Senior Vice President of Coinmach Laundry since April 1996
and of the Company since November 1995. Mr. Stanky was a Senior Vice President
of Solon from July 1995 to November 1995. Mr. Stanky served Solon in various
capacities since 1976, and in 1985 was promoted to Area Vice President
responsible for Solon's South-Central region. Mr. Stanky served as a Co-Chief
Executive Officer of Solon from November 1994 to April 1995.
-32-
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by or paid
to the Chief Executive Officer and the next four most highly compensated
executive officers of the Company (collectively, the "Named Executive Officers")
for all services rendered in all capacities for the fiscal years ended March 29,
1996, March 28, 1997 and March 31, 1998. In connection with the Merger, Solon
and Coinmach Industries Co., L.P., predecessors of the Company, changed their
fiscal years from September 30, 1995 and December 31, 1995, respectively, to the
last Friday in March 1996. Accordingly, (i) fiscal years prior to March 28,
1997 have been restated to conform such periods to fiscal years ending the last
Friday in March, and (ii) compensation for the Named Executive Officers has been
adjusted to reflect the amount of compensation awarded to, earned by or paid in
each of the fiscal periods shown. In M