10-Q 1 form10q_travers110403.txt FORM 10-Q COINMACH CORPORATION AND SUBSIDIARIES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q { X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the period ended September 30, 2003 or { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ____________________. Commission File Number 0-7694 Coinmach Corporation (Exact name of registrant as specified in its charter) Delaware 53-0188589 ---------------------- ---------------- (State or other jurisdiction of (I. R. S.Employer incorporation or organization) Identification No.) 303 Sunnyside Blvd., Suite 70, Plainview, New York 11803 -------------------------------------------------- ---------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (516) 349-8555 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X . As of the close of business on November 4, 2003, Coinmach Corporation had outstanding 100 shares of common stock, par value $.01 per share (the "Common Stock"), all of which shares were held by Coinmach Laundry Corporation. 1 COINMACH CORPORATION AND SUBSIDIARIES INDEX PART I. Financial Information Page No. --------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2003 (Unaudited) and March 31, 2003 3 Condensed Consolidated Statements of Operations (Unaudited) - Three Months and Six Months Ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended September 30, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 32 Item 4. Controls and Procedures 33 PART II. Other Information ----------------- Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 34 Item 3. Defaults Upon Senior Securities 34 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 34 Signature Page 35 -------------- 2 COINMACH CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) September 30, 2003 March 31, 2003(1) ------------------ --------------- (Unaudited) ASSETS: Cash and cash equivalents $27,024 $27,428 Receivables, net 8,557 10,453 Inventories 16,255 14,125 Prepaid expenses 6,095 7,617 Advance location payments 74,534 70,911 Land, property and equipment, net of accumulated depreciation of $218,386 and $182,474 289,887 286,686 Contract rights, net of accumulated amortization of $80,037 and $73,027 328,317 335,327 Goodwill 203,904 203,860 Other assets 19,230 19,754 -------- -------- Total assets $973,803 $976,161 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY: Accounts payable and accrued expenses $33,214 $36,843 Accrued rental payments 30,368 29,481 Accrued interest 8,093 8,094 Interest rate swap liability 3,846 3,345 Deferred income taxes 77,968 79,621 Long-term debt 723,735 718,112 Due to Parent 50,572 50,863 Stockholder's equity: Common stock and capital in excess of par value 121,065 121,065 Accumulated other comprehensive loss, net of tax (2,278) (2,007) Accumulated deficit (72,780) (69,256) -------- -------- Total stockholder's equity 46,007 49,802 -------- -------- Total liabilities and stockholder's equity $973,803 $976,161 ======== ======== See accompanying notes. ------ 1. The March 31, 2003 balance sheet has been derived from the audited consolidated financial statements as of that date. 3 COINMACH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of dollars)

See accompanying notes. 4 COINMACH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of dollars) Six Months Ended ---------------------------- September 30, September 30, 2003 2002 ------------ ------------- OPERATING ACTIVITIES: Net (loss) income $(3,524) $ 885 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 36,038 33,467 Amortization of advance location payments 10,360 10,948 Amortization of intangibles 7,513 7,453 Gain on sale of equipment (46) (164) Deferred income taxes (1,423) 592 Amortization of deferred issue costs 1,207 1,220 Change in operating assets and liabilities: Other assets (1,184) (495) Receivables, net 1,896 611 Inventories and prepaid expenses (608) (576) Accounts payable and accrued expenses, net (4,388) 1,030 Accrued interest (1) (171) ------- ------- Net cash provided by operating activities 45,840 54,800 ------- ------- INVESTING ACTIVITIES: Additions to property and equipment (36,539) (36,908) Advance location payments to location owners (12,337) (9,544) Proceeds from sale of property and equipment 204 491 ------- ------- Net cash used in investing activities (48,672) (45,961) ------- ------- FINANCING ACTIVITIES: Proceeds from credit facility 8,200 6,000 Repayments to credit facility (4,000) (9,750) Net repayments to Parent (291) (729) Borrowings (repayments) of bank and other borrowings 599 (8) Principal payments on capitalized lease obligations (2,080) (2,017) ------- ------- Net cash provided by (used in) financing activities 2,428 (6,504) ------- ------- Net (decrease) increase in cash and cash equivalents (404) 2,335 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,428 27,820 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $27,024 $30,155 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid, net $27,529 $27,963 ======= ======= Income taxes paid $ 239 $ 177 ======= ======= NON-CASH FINANCING ACTIVITIES: Acquisition of fixed assets through capital leases $ 2,904 $ 1,681 ======= ======= 5 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Coinmach Corporation, a Delaware corporation ("Coinmach" or the "Company"), is the leading supplier of outsourced laundry services for multi-family housing properties in North America. The condensed consolidated financial statements of Coinmach include the accounts of all of its subsidiaries. The Company is a wholly-owned subsidiary of Coinmach Laundry Corporation ("CLC" or the "Parent"), which in turn is a wholly-owned subsidiary of Coinmach Holdings, LLC ("Holdings"), the ultimate parent. Holdings, a Delaware limited liability company, was formed on November 15, 2002. Unless otherwise specified herein, references to the "Company" shall mean Coinmach Corporation and its subsidiaries. The Company's core business (which the Company refers to as the "route" business) involves leasing laundry rooms from building owners and property management companies, installing and servicing laundry equipment, collecting revenues generated from laundry machines and operating and providing laundromat services at retail laundromats. Through Appliance Warehouse of America, Inc. ("AWA"), a recently formed subsidiary jointly-owned by the Company and Holdings, the Company leases laundry machines and other household appliances to property owners, managers of multi-family housing properties, and to a lesser extent, individuals and corporate relocation entities. At September 30, 2003, the Company owned and operated approximately 875,000 laundry machines in approximately 80,000 locations throughout North America and in 164 retail laundromats located throughout Texas and Arizona. Super Laundry Equipment Corp. ("Super Laundry"), a wholly-owned subsidiary of the Company, constructs, designs and retrofits laundromats and distributes laundromat equipment. In addition, Super Laundry, commencing in September 2002, through its wholly-owned subsidiary American Laundry Franchising Corp. ("ALFC"), began to build and develop laundromat facilities for sale as franchise locations. The contribution by AWA and CLC of all of their respective outstanding common stock to Holdings in exchange for substantially equivalent equity interests in Holdings in March 2003 did not result in a change in reporting entity. The accompanying financial statements include the accounts of Coinmach and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from such estimates. 6 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 1. Basis of Presentation (continued) The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In the opinion of management of the Company, these unaudited condensed consolidated financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended March 31, 2003. Certain amounts in the financial statements have been reclassified for presentation purposes. 2. Goodwill and Contract Rights Goodwill roll forward for the six months ended September 30, 2003 consists of the following (in thousands): Excess costs of investments over net assets acquired - beginning of period $203,860 Acquisitions 44 -------- Excess costs of investments over net assets acquired - end of period $203,904 ======== The Company completed its most recent goodwill impairment test as of December 31, 2002. The test involved the assessment of the fair market value of the Company's segments. No impairment of goodwill was indicated at that time. Under Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, the Company is required to perform goodwill impairment tests on at least an annual basis or more frequently if circumstances dictate. The annual impairment test for the 2004 fiscal year will be completed by the Company's fiscal year end. There can be no assurances that future goodwill impairment tests will not result in a charge to income. Contract rights represent the value of location contracts arising from the acquisition of laundry machines on location. These amounts arose primarily from purchase price allocations pursuant to acquisitions based on independent valuations. The Company does not record contract rights relating to new locations signed in the ordinary course of business. Such contract rights are amortized using accelerated methods over periods ranging from 30-35 years. 7 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 2. Goodwill and Contract Rights (continued) Amortization expense for contract rights for each of the next five years is estimated to be as follows (in millions of dollars): Years ending March 31, ---------------------- 2004 (remaining balance) $7.0 2005 13.7 2006 13.4 2007 13.1 2008 12.8 Management evaluates the realizability of contract rights balances (if there are indicators of impairment) based upon the Company's forecasted undiscounted cash flows and operating income. Based upon present operations and strategic plans, management believes that no impairment of contract rights has occurred. 3. Long-Term Debt Long-term debt consists of the following (in thousands): September 30, March 31, 2003 2003 ------------- --------- 9% Senior Notes due 2010 $450,000 $450,000 Credit facility indebtedness 265,450 261,250 Obligations under capital leases 7,652 6,828 Other 633 34 -------- -------- $723,735 $718,112 ======== ======== On January 25, 2002, the Company issued $450 million of 9% Senior Notes due 2010 (the "9% Senior Notes") and entered into a $355 million senior secured credit facility (the "Senior Credit Facility") comprised of: (i) $280 million in aggregate principal amount of term loans and (ii) a revolving credit facility with a maximum borrowing limit of $75 million. The revolving credit portion of the Senior Credit Facility includes up to $10 million of letter of credit financings and short term borrowings under a swing line facility of up to $7.5 million. The Senior Credit Facility is secured by substantially all of the Company's assets and is guaranteed by the Company's domestic subsidiaries. In addition, CLC and the Company pledged to Bankers Trust Company, as Collateral Agent, their interests in all of the issued and outstanding shares of capital stock of the Company and the Company's domestic subsidiaries. 8 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 3. Long-Term Debt (continued) At September 30, 2003, the Company had outstanding debt consisting of (a) $450 million of 9% Senior Notes and (b) $261.3 million of term loans with interest rates ranging from 3.87% to 4.12%. The term loans under the Senior Credit Facility, in aggregate principal amounts outstanding of $18.3 million and $243.0 million as of September 30, 2003, are scheduled to be fully repaid by January 25, 2008 and July 25, 2009, respectively. As of September 30, 2003, the Company had approximately $4.2 million outstanding under its revolving credit facility, bearing interest at a rate of 3.87%, which is scheduled to expire on January 25, 2008. In addition to certain customary terms and provisions, including events of default and customary representations, covenants and agreements, the Senior Credit Facility contains certain restrictive covenants including, but not limited to, a maximum leverage ratio, a minimum consolidated interest coverage ratio and limitations on indebtedness, capital expenditures, advances, investments and loans, mergers and acquisitions, dividends, stock issuances and transactions with affiliates. Also, the indenture governing the 9% Senior Notes and the Senior Credit Facility limit the Company's ability to pay dividends. At September 30, 2003, the Company was in compliance with the covenants under the indenture governing the 9% Senior Notes and the Senior Credit Facility. On September 23, 2002, the Company entered into three separate interest rate swap agreements totaling $150 million in aggregate notional amount that effectively convert a portion of its floating-rate term loans pursuant to the Senior Credit Facility to a fixed rate basis thereby reducing the impact of interest rate changes on future interest expense. The three swap agreements consist of: (i) a $50 million notional amount interest rate swap transaction with JP Morgan effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional amount interest rate swap transaction with Credit Lyonnais effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50 million notional amount interest rate swap transaction with Deutsche Bank AG effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and expiring on February 1, 2006. These interest rate swaps used to hedge the variability of forecasted cash flows attributable to interest rate risk were designated as cash flow hedges. The Company recognized an accumulated other comprehensive loss in the stockholder's equity section included in the condensed consolidated balance sheet at September 30, 2003 of approximately $2.3 million, net of tax, relating to the interest rate swaps that qualify as cash flow hedges. 9 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 4. Appliance Warehouse Transfer On November 29, 2002 (the "Transfer Date"), the Company transferred all of the assets of the Appliance Warehouse division of the Company to AWA. In March 2003, through a series of transactions, all of the outstanding common stock of AWA and all of the outstanding capital stock of CLC was contributed to Holdings in exchange for substantially equivalent equity interests (in the form of common and preferred membership units) in Holdings. As a result of these transactions, (i) Holdings became the sole holder of all of the outstanding AWA Common Stock, (ii) the Company became the sole holder of all of the outstanding AWA Preferred Stock, (iii) CLC became a wholly-owned subsidiary of Holdings, (iv) the former stockholders of CLC became unitholders of Holdings and (v) AWA, subject to certain specified qualifications, became a guarantor under, and subject to the covenants contained in, the indenture governing the 9% Senior Notes and the Senior Credit Facility. 5. Guarantor Subsidiary The Company's domestic subsidiaries (collectively, the "Guarantor Subsidiaries") have guaranteed the Company's 9% Senior Notes and Senior Credit Facility referred to in Note 3. The Company has not included separate financial statements of the Guarantor Subsidiaries because the Company owns all of the outstanding voting shares of such Guarantor Subsidiaries, and the guarantees issued by such Guarantor Subsidiaries are full and unconditional. The condensed consolidating balance sheet as of September 30, 2003 and March 31, 2003, the condensed consolidating statements of operations for the three and six months ended September 30, 2003 and the condensed consolidating statement of cash flows for the six months ended September 30, 2003 include AWA as a Guarantor Subsidiary, however, any prior corresponding periods do not include AWA as a Guarantor Subsidiary. 10 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. Guarantor Subsidiary (continued) Condensed consolidating financial information for the Company and its Guarantor Subsidiaries is as follows: Condensed Consolidating Balance Sheets (in thousands of dollars)

11 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. Guarantor Subsidiary (continued) Condensed Consolidating Balance Sheets (in thousands of dollars) (continued)

12 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. Guarantor Subsidiary (continued) Condensed Consolidating Statements of Operations (in thousands of dollars)

13 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. Guarantor Subsidiary (continued) Condensed Consolidating Statements of Operations (in thousands of dollars)

14 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. Guarantor Subsidiary (continued) Condensed Consolidating Statements of Cash Flows (in thousands of dollars)

15 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 5. Guarantor Subsidiary (continued) Condensed Consolidating Statements of Cash Flows (in thousands of dollars) (continued)

16 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 6. Segment Information The Company reports segment information for the route segment, its only reportable segment. Information for the Company's other business operations are reported as "All other". The route segment, which comprises the Company's core business, involves leasing laundry rooms from building owners and property management companies typically on a long-term, renewal basis, installing and servicing the laundry equipment, collecting revenues generated from laundry machines, and operating retail laundromats. The other business operations reported in "All other" include the aggregation of the rental, distribution and franchise businesses. The rental business involves the leasing of laundry machines and other household appliances to property owners, managers of multi-family housing properties and to a lesser extent, individuals and corporate relocation entities through the Company's jointly-owned subsidiary, AWA. The distribution business involves constructing complete turnkey retail laundromats, retrofitting existing retail laundromats, distributing exclusive lines of coin and non-coin machines and parts, selling service contracts and building and developing laundromat facilities for sale as franchise locations through the Company's subsidiaries, Super Laundry and ALFC. The Company evaluates performance and allocates resources based on EBITDA (earnings from continuing operations before interest, taxes, depreciation and amortization and other items, net), cash flow and growth opportunity. The accounting policies of the reportable segment and other businesses are the same as those described in the Company's Annual Report on Form 10-K for the year ended March 31, 2003. 17 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 6. Segment Information (continued) The table below presents information about the Company's segments (in thousands of dollars): Three Months ended Six Months ended September 30, September 30, -------------------- --------------------- 2003 2002 2003 2002 -------- -------- -------- --------- Revenue: -------- Route $114,761 $115,619 $232,356 $ 234,730 All other: Distribution 7,074 9,116 14,220 19,693 Rental 8,116 7,136 15,892 13,742 -------- -------- -------- --------- Subtotal All other 15,190 16,252 30,112 33,435 -------- -------- -------- --------- Total $129,951 $131,871 $262,468 $ 268,165 ======== ======== ======== ========= EBITDA: ------- Route $ 37,512 $ 39,583 $ 76,651 $ 80,483 All other 2,740 3,002 5,247 5,878 General and administrative expenses (1,868) (2,026) (4,077) (4,068) -------- -------- -------- --------- Total(1) $ 38,384 $ 40,559 $ 77,821 $ 82,293 ======== ======== ======== ========= (Loss) Income before taxes: --------------------------- Route(2) $ 13,092 $ 15,786 $ 27,826 $ 32,970 All other(2) 742 1,246 1,277 2,365 General and administrative expenses (1,868) (2,026) (4,077) (4,068) Depreciation and amortization (581) (421) (1,116) (842) Interest expense (14,392) (14,477) (28,708) (28,948) -------- -------- -------- --------- (Loss) income before taxes $ (3,007) $ 108 $ (4,798) $ 1,477 ======== ======== ======== ========= --------------------- (1) See description of "Non-GAAP Financial Measures" immediately following this table for a reconciliation of EBITDA to net (loss) income for the periods indicated above. (2) Operating income before deducting general and administrative expenses. 18 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 6. Segment Information (continued) Non-GAAP Financial Measures Management shows EBITDA (earnings from continuing operations before interest, taxes, depreciation and amortization and other items, net), a non-GAAP financial measure, in its financial reports and believes that EBITDA is useful as a means to evaluate the Company's ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. In addition, because the Company has historically provided EBITDA to investors, it believes that presenting this non-GAAP financial measure provides consistency in its financial reporting. EBITDA is also used to determine the Company's compliance with key financial covenants under its financing agreements, which, among other things, impacts the amount of indebtedness the Company is permitted to incur. Management's use of EBITDA, however, is not intended to represent cash flows for the period, nor has it been presented as an alternative to either (a) operating income (as determined by GAAP) as an indicator of operating performance or (b) cash flows from operating, investing and financing activities (as determined by GAAP) as a measure of liquidity. Given that EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, EBITDA may not be comparable to other similarly titled measures of other companies. The following table reconciles the Company's EBITDA to net (loss) income for each period presented (in millions of dollars): Three Months ended Six Months ended September 30, September 30, ------------------ ------------------- 2003 2002 2003 2002 ------ ----- ------ ----- Net (loss) income $ (2.4) $ 0.1 $ (3.5) $ 0.9 (Benefit) provision for income taxes (0.6) - (1.3) 0.6 Interest expense, net 14.4 14.5 28.7 28.9 Depreciation and amortization 27.0 26.0 53.9 51.9 ------ ----- ------ ----- EBITDA $ 38.4 $40.6 $ 77.8 $82.3 ====== ===== ====== ===== 19 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 7. Income Taxes The components of the Company's deferred tax liabilities and assets are as follows (in thousands): September 30, 2003 March 31, 2003 ------------------ -------------- Deferred tax liabilities: Accelerated tax depreciation and contract rights $ 114,535 $ 113,436 Other, net 1,726 1,452 ---------- --------- 116,261 114,888 ---------- --------- Deferred tax assets: Interest rate swap 1,568 1,338 Net operating loss carryforwards 34,577 31,848 Covenant not to compete 1,148 1,081 Other 1,000 1,000 ---------- --------- 38,293 35,267 ---------- --------- Net deferred tax liability $ 77,968 $ 79,621 ========== ========= The net operating loss carryforwards of approximately $84.6 million, after a reduction to reflect the limitation imposed under the provisions of the Internal Revenue Code regarding change of ownership, expire between fiscal years 2004 through 2022. The majority of the Company's net operating loss carryforwards begin to expire after five years. In addition, the net operating losses are subject to annual limitations imposed under the provisions of the Internal Revenue Code regarding changes in ownership. The (benefit) provision for income taxes consists of (in thousands of dollars): Three Months ended Six Months ended September 30, September 30, ------------------- ------------------- 2003 2002 2003 2002 ----- ----- ------- ----- Federal $(534) $ 35 $(1,110) $ 462 State (76) 9 (164) 130 ----- ----- ------- ----- $(610) $ 44 $(1,274) $ 592 ===== ===== ======= ===== 20 COINMACH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) 7. Income Taxes (continued) The effective income tax rate differs from the amount computed by applying the U.S. federal statutory rate to loss before taxes as a result of state taxes and permanent book/tax differences as follows (in thousands of dollars): Three Months ended Six Months ended September 30, September 30, -------------------- ------------------- 2003 2002 2003 2002 ------ ----- ------- ----- Expected tax (benefit) provision $(1,012) $ 38 $(1,639) $ 517 NOL valuation allowance 433 - 433 - State tax (benefit) provision, net of federal taxes (49) 5 (106) 84 Permanent book/tax differences 18 1 38 (9) ------ ----- ------- ----- Tax (benefit) provision $ (610) $ 44 $(1,274) $ 592 ====== ===== ======= ===== The formation of AWA and related restructuring transactions created a tax gain for the Company. The gain is deferred and may only be recognized if AWA is deconsolidated in the future. AWA has recorded a $1 million deferred tax asset representing the benefit derived from the corresponding increase in the tax basis of the assets it received from the Company. 21 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ------- Except for the historical information contained herein, certain matters discussed in this document are forward-looking statements based on the beliefs of the Company's management and are subject to certain risks and uncertainties, including the risks and uncertainties discussed below, as well as other risks set forth in the Company's Annual Report on Form 10-K for the year ended March 31, 2003. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company's future performance and actual results of operations may differ materially from those expected or intended. The Company's primary financial objective is to increase its cash flow from operations. Cash flow from operations represents a source of funds available to service indebtedness and for investment in both internal growth and growth through acquisitions. The Company has experienced net losses during the past three fiscal years. Such net losses were attributable in part to significant non-cash charges associated with the Company's acquisitions and the related amortization of contract rights and goodwill accounted for under the purchase method of accounting. The Company is principally engaged in the business of supplying outsourced laundry services to multi-family housing properties. The Company's most significant revenue source is its route business, which over the last three fiscal years has accounted for approximately 90% of its revenue. Through its route operations, the Company provides outsourced laundry equipment services to locations by leasing laundry rooms from building owners and property management companies, typically on a long-term, renewable basis. In return for the exclusive right to provide these services, most of the Company's contracts provide for commission payments to the location owners. Commission expense (also referred to as rent expense), the Company's single largest expense item, is included in laundry operating expenses and represents payments to location owners. Commissions may be fixed amounts or percentages of revenues and are generally paid monthly. In addition to commission payments, many of the Company's leases require it to make advance location payments to location owners, which are capitalized and amortized over the life of the applicable leases. Through the Company's route business, the Company also currently operates and provides laundromat services at 164 retail laundromats throughout Texas and Arizona. The operation of retail laundromats involves leasing store locations in desirable geographic areas, maintaining an appropriate mix of washers and dryers at each store location and servicing the washers and dryers at such locations. Laundry operating expenses include, in addition to commission payments, (i) the cost of machine maintenance and revenue collection in the route business, including payroll, parts, insurance and other related expenses, (ii) costs and expenses incurred in maintaining the Company's retail laundromats, including utilities and related expenses, (iii) the cost of sales associated with the equipment distribution business and (iv) certain expenses related to the operation of the Company's rental business. 22 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) General (continued) ------- In addition to its route business, the Company operates an equipment distribution business through Super Laundry Equipment Corp. ("Super Laundry"), its wholly-owned subsidiary. Super Laundry's business consists of constructing and designing complete retail laundromats, retrofitting existing retail laundromats, distributing exclusive lines of commercial coin and non-coin operated machines and parts, and selling service contracts. In addition, Super Laundry, commencing in September 2002, through its wholly-owned subsidiary, American Laundry Franchising Corp. ("ALFC"), began to build and develop laundromat facilities for sale as franchise locations. For each franchise laundromat facility, ALFC entered into a purchase agreement and a license agreement with the buyer whereby the buyer may use certain systems created by ALFC to operate such facility. ALFC receives revenue primarily from the sale price of the laundromat facility and, to a lesser extent, from an initial franchise fee and certain other fees based on the sales from such facility. The Company also operates an equipment rental business through Appliance Warehouse of America, Inc. ("AWA"), a recently formed subsidiary of the Company that is jointly-owned by the Company and Coinmach Holdings, LLC, a Delaware limited liability company and the Company's ultimate parent ("Holdings"), which leases laundry equipment and other household appliances and electronic items to corporate relocation entities, owners and managers of multi-family housing properties, and to a lesser extent, individuals and corporate relocation entities. Accounting Policies Involving Significant Estimates --------------------------------------------------- The Company's financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations. Revenue and cash and cash equivalents include an estimate of cash not yet collected from laundry room locations at the end of a reporting period. The Company is required to estimate the collectibility of its receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Allowance for doubtful accounts at September 30, 2003 was approximately $1.9 million. 23 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Accounting Policies Involving Significant Estimates (continued) --------------------------------------------------- The Company currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of the Company's deferred tax assets is principally dependent upon its achievement of projected future taxable income. Management's judgments regarding future profitability may change due to future market conditions and other factors. These changes, if any, may require possible material adjustments to these deferred tax asset balances. The Company has significant intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions, including estimated future cash flows, could significantly impact these judgments and require adjustments to recorded asset balances. Results of Operations --------------------- The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003. COMPARISON OF THE THREE- AND SIX-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002 The following table sets forth the Company's revenues for the periods indicated (in millions of dollars): Three months ended September 30, Six months ended September 30, -------------------------------- ------------------------------ 2003 2002 Change 2003 2002 Change ------- ------- ------ ------- -------- ------ Route $ 114.8 $ 115.6 $ (0.8) $ 232.4 $ 234.7 $(2.3) Distribution 7.1 9.1 (2.0) 14.2 19.7 (5.5) Rental 8.1 7.2 0.9 15.9 13.8 2.1 ------- ------- ------ ------- -------- ------ $ 130.0 $ 131.9 $ (1.9) $ 262.5 $ 268.2 $(5.7) ======= ======= ====== ======= ======== ====== Revenue decreased by approximately $1.9 million or 1% for the three-month period ended September 30, 2003, as compared to the prior year's corresponding period. Revenue decreased by approximately $5.7 million or 2% for the six-month period ended September 30, 2003, as compared to the prior year's corresponding period. 24 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations (continued) --------------------- Route revenue for the three months ended September 30, 2003 decreased by approximately $0.8 million or less than 1% over the prior year's corresponding period. Route revenue for the six months ended September 30, 2003 decreased by approximately $2.3 million or 1% from the prior year's corresponding period. Management believes that the decrease in route revenue for the current periods as compared to the prior year's corresponding periods was primarily the result of increased vacancies, which management believes became apparent during the quarter ended September 30, 2002, related to locations in certain regions, principally in the Southeast and Texas, as well as, to a lesser extent, a transfer of approximately 9,000 rental machines to AWA in the prior year's corresponding periods. This decrease was slightly offset by an improvement in revenue due to the timing of price changes and internal growth in machine count during the prior and current year. Management believes that to the extent vacancy rates in these regions increase in the future, route revenue in such regions may continue to decrease. Any such decrease, however, may be mitigated by the Company's geographic diversity. Distribution revenue for the three months ended September 30, 2003 decreased by approximately $2.0 million or 22% from the prior year's corresponding period. Distribution revenue for the six months ended September 30, 2003 decreased by approximately $5.5 million or 28% from the prior year's corresponding period. Sales from the distribution business unit are sensitive to general market conditions and economic conditions and as a result have experienced downward pressure. Rental revenue for the three months ended September 30, 2003 increased by approximately $0.9 million or 13% over the prior year's corresponding period. Rental revenue for the six months ended September 30, 2003 increased by approximately $2.1 million or 15% over the prior year's corresponding period. This increase was primarily the result of internal growth of the machine base in existing areas of operations, as well as, to a lesser extent, the transfer of approximately 9,000 rental machines from the route business to AWA during the prior year's corresponding periods. Laundry operating expenses increased by approximately $0.4 million or less than 1% for the three-month period ended September 30, 2003, as compared to the prior year's corresponding period. Laundry operating expenses decreased by approximately $1.2 million or less than 1% for the six months ended September 30, 2003, as compared to the prior year's corresponding period. The increase in laundry operating expenses for the three-month period was due primarily to increased insurance premium costs related to both medical and general business insurance coverage, costs associated with expansion into new markets in the rental business and increased utility costs in the Company's retail laundromats caused by increased natural gas prices, offset 25 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations (continued) --------------------- by a reduction in cost of sales related to the decreased revenue experienced in the distribution business, as discussed above. This decrease in laundry operating expenses for the six-month period was due primarily to a reduction in cost of sales related to the decreased revenue experienced in the distribution business, as discussed above, offset by increased insurance premium costs related to both medical and general business insurance coverage, costs associated with expansion into new markets in the rental business and increased utility costs in the Company's retail laundromats. As a percentage of revenues, laundry operating expenses were approximately 69% for both the three- and six-month periods ended September 30, 2003, as compared to 68% for both the three- and six-month periods ended September 30, 2002. General and administrative expenses decreased by approximately $0.2 million for the three-month period ended September 30, 2003, as compared to the prior year's corresponding period. General and administrative expenses remained unchanged for the six-month period ended September 30, 2003, as compared to the prior year's corresponding period. As a percentage of revenues, general and administrative expenses were approximately 1.5% for the three-month period ended September 30, 2003 and approximately 1.6% for the six-month period ended September 30, 2003, as compared to approximately 1.6% for both the three- and six-month periods ended September 30, 2002. Depreciation and amortization expense increased by approximately 4% for the three- and six-month periods ended September 30, 2003, as compared to the prior year's corresponding periods. The increase in depreciation and amortization expense was primarily due to depreciation expense relating to capital expenditures required by historical increases in the Company's installed base of machines. Operating income margins were approximately 8.8% for the three-month period ended September 30, 2003, as compared to approximately 11.1% for the prior year's corresponding period. Operating income margins were approximately 9.1% for the six-month period ended September 30, 2003, as compared to approximately 11.3% for the prior year's corresponding period. The decrease in operating income margin was primarily due to the decreased revenue in the distribution business as discussed above, offset by internal growth of the machine base in the rental business. Interest expense, net, decreased by less than 1% for the three- and six-month periods ended September 30, 2003, as compared to the prior year's corresponding periods. The decrease in interest expense was primarily due to decreased borrowing levels under the Company's $355 million senior secured credit facility (the "Senior Credit Facility"), a decrease in variable interest rates payable under such facility resulting from a market decline in interest rates, offset by an increase in interest expense resulting from interest rate swap agreements entered into by the Company in September 2002 that are at a slightly higher fixed rate compared to variable rates. 26 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations (continued) --------------------- The benefit for income taxes for the six-month period ended September 30, 2003 was approximately $1.3 million as compared to a provision for income taxes of approximately $0.6 million for the prior year's corresponding period. The change for the six-month period is due to the corresponding decrease in pretax loss from approximately $4.8 million for the six-month period ended September 30, 2003 as compared to a pretax income of approximately $1.5 million for the six-month period ended September 30, 2002. The effective tax rate for the six-month period ended September 30, 2003 was 27% as compared to 40% for the prior year's corresponding period. The effective tax rate for the six-month period ended September 30, 2003 reflects changes in the amount of net operating loss carryforwards that the Company will be able to utilize. Net loss was approximately $3.5 million for the six-month period ended September 30, 2003, as compared to net income of approximately $0.9 million for the prior year's corresponding period. The increase in net loss was primarily the result of decreased revenue, as discussed above. The following table sets forth EBITDA (before deducting general and administrative expenses) for each of the route, distribution and rental divisions for the years indicated (in millions of dollars): Three months ended September 30, Six months ended September 30, -------------------------------- ------------------------------ 2003 2002 Change 2003 2002 Change ----- ------ ------ ----- ------ ------ Route $37.5 $ 39.6 $ (2.1) $76.6 $ 80.5 $ (3.9) Distribution (0.3) 0.3 (0.6) (1.0) 0.6 (1.6) Rental 3.1 2.7 0.4 6.3 5.3 1.0 G&A (1.9) (2.0) 0.1 (4.1) (4.1) - ----- ------ ------ ----- ------ ------ $38.4 $ 40.6 $ (2.2) $77.8 $ 82.3 $ (4.5) ===== ====== ====== ===== ====== ====== EBITDA represents earnings from continuing operations before interest, taxes, depreciation and amortization and other items, net. Management believes that EBITDA is useful as a means to evaluate the Company's ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. Additionally, because the Company has historically provided EBITDA to investors, it believes that presenting this non-GAAP financial measure provides consistency in its financial reporting. EBITDA is also used to determine the Company's compliance with key financial covenants under its financing agreements, which, among other things, impacts the amount of indebtedness the Company is permitted to incur. Management's use of EBITDA, however, is not intended to represent cash flows for the period, nor has it been presented as an alternative to either (a) operating income (as determined by accounting principles generally accepted in the United States) as an indicator of operating 27 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations (continued) --------------------- performance or (b) cash flows from operating, investing and financing activities (as determined by accounting principles generally accepted in the United States) as a measure of liquidity. Given that EBITDA is not a measurement determined in accordance with accounting principles generally accepted in the United States and is thus susceptible to varying calculations, EBITDA may not be comparable to other similarly titled measures of other companies. See Note 6 to the Notes to Condensed Consolidated Financial Statements (Unaudited) for a reconciliation of EBITDA to net (loss) income for the periods indicated in the table immediately above. EBITDA was approximately $38.4 million for the three months ended September 30, 2003, as compared to approximately $40.6 million for the three months ended September 30, 2002. EBITDA margins declined to approximately 29.5% for the three months ended September 30, 2003, as compared to approximately 30.8% for the prior year's corresponding period. This decrease was primarily the result of decreased revenues in the route and distribution businesses, increased insurance premium costs related to both medical and general business insurance coverage, costs associated with expansion into new markets in the rental business and increased utility costs, as discussed above. EBITDA was approximately $77.8 million for the six months ended September 30, 2003, as compared to approximately $82.3 million for the prior year's corresponding period. EBITDA margins declined to approximately 29.6% for the six months ended September 30, 2003, as compared to approximately 30.7% for the prior year's corresponding period. This decrease was primarily the result of decreased revenues in the route business, increased insurance premium costs related to both medical and general business insurance coverage, costs associated with expansion into new markets in the rental business and increased utility costs, as discussed above. Liquidity and Capital Resources ------------------------------- The Company continues to have substantial indebtedness and debt service requirements. At September 30, 2003, the Company had outstanding debt of approximately $723.7 million, which included $450 million of its 9% Senior Notes due 2010 (the "9% Senior Notes") and $265.5 million of borrowings under its Senior Credit Facility. The Company's stockholder's equity was approximately $46.0 million as of September 30, 2003. The Company's liquidity requirements arise from capital expenditures, interest expense and, to a lesser extent, principal payments on its indebtedness and working capital requirements. The Company has met these requirements in each fiscal year since 1995 primarily from cash flow generated from operations. The Company's primary source of liquidity as of September 30, 2003 consisted of cash and cash equivalents of $27.0 million and available borrowings under its Senior Credit Facility of approximately $69.7 million. 28 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources (continued) ------------------------------- On January 25, 2002, the Company issued the 9% Senior Notes and entered into the Senior Credit Facility, which was comprised of: (i) $280 million in aggregate principal amount of term loans and (ii) a revolving credit facility with a maximum borrowing limit of $75 million. The Senior Credit Facility also provides for up to $10 million of letter of credit financings and short-term borrowings under a swing line facility of up to $7.5 million. The Senior Credit Facility is secured by substantially all of the Company's assets. The term loans under the Senior Credit Facility, in aggregate principal amounts outstanding of approximately $18.3 million and $243.0 million as of September 30, 2003, are scheduled to be fully repaid by January 25, 2008 and July 25, 2009, respectively. As of September 30, 2003, the Company had approximately $4.2 million outstanding under its revolving credit facility, bearing interest at a rate of 3.87%, which is scheduled to expire on January 25, 2008. Letters of credit outstanding at September 30, 2003 were approximately $1.1 million. The Company's working capital requirements are, and are expected to continue to be, minimal since a significant portion of the Company's operating expenses are not paid until after cash is collected from installed machines. Under the Company's existing financing arrangements, the Company is required to make (i) quarterly amortization payments under the Senior Credit Facility commencing on March 31, 2004 with respect to the $30 million (original principal amount) term loan and semi-annual amortization payments commencing on June 30, 2004 with respect to the $250 million (original principal amount) term loan, and (ii) semi-annual cash interest payments under the 9% Senior Notes on February 1 and August 1, commencing August 1, 2002. On September 23, 2002, the Company entered into three separate interest rate swap agreements totaling $150 million in aggregate notional amount that effectively convert a portion of its floating-rate term loans pursuant to the Senior Credit Facility to a fixed rate basis, thereby reducing the impact of interest rate changes on future interest expense. The three swap agreements consist of: (i) a $50 million notional amount interest rate swap transaction with JP Morgan effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional amount interest rate swap transaction with Credit Lyonnais effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50 million notional amount interest rate swap transaction with Deutsche Bank AG effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and expiring on February 1, 2006. These interest rate swaps used to hedge the variability of forecasted cash flows attributable to interest rate risk were designated as cash flow hedges. The Company recognized an accumulated other comprehensive loss in the stockholder's equity section included in the Consolidated Balance Sheet at September 30, 2003 of approximately $2.3 million, net of tax, relating to the interest rate swaps that qualify as cash flow hedges. 29 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources (continued) ------------------------------- As the Company has focused on increasing its cash flow from operating activities, it has made significant capital investments, primarily consisting of capital expenditures related to acquisitions, renewal and growth. The Company anticipates that it will continue to utilize cash flows from operations to finance its capital expenditures and working capital needs, including interest payments on its outstanding indebtedness. Capital expenditures consists of expenditures (i) on the Company's installed machine base and (ii) for other general corporate purposes. Capital expenditures for the three-month period ended September 30, 2003 were approximately $25.2 million (excluding approximately $1.1 million relating to capital lease payments). Capital expenditures for the six-month period ended September 30, 2003 were approximately $48.9 million (excluding approximately $2.1 million relating to capital lease payments). The primary components of the Company's capital expenditures are (i) machine expenditures, (ii) advance location payments, and (iii) laundry room improvements. Additionally, capital expenditures for the six months ended September 30, 2003 included approximately $1.5 million attributable to technology upgrades. The Company's installed base of machines for the route business increased by approximately 3,900 machines for the six-month period ended September 30, 2003. The growth in the rental business machine base was approximately 14,800 for the six-month period ended September 30, 2003. The full impact on revenues and cash flow generated from capital expended on the net increase in the installed base of machines is not expected to be reflected in the Company's financial results until subsequent reporting periods, depending on certain factors, including the timing of the capital expended. While the Company estimates that it will generate sufficient cash flows from operations to finance anticipated capital expenditures, there can be no assurances that it will be able to do so. The following table sets forth the Company's capital expenditures (excluding payments for capital lease obligations and business acquisitions) for the periods indicated (in millions of dollars): Three months ended September 30, Six months ended September 30, -------------------------------- ------------------------------ 2003 2002 Change 2003 2002 Change ------ ------ ------ ----- ------ ------ Route $ 22.2 $ 19.8 $ 2.4 $43.4 $ 40.1 $ 3.3 Distribution 0.2 - 0.2 0.4 - 0.4 Rental 2.8 2.9 (0.1) 5.1 6.3 (1.1) ------ ------ ------ ----- ------ ------ $ 25.2 $ 22.7 $ 2.5 $48.9 $ 46.4 $ 2.6 ====== ====== ====== ===== ====== ====== 30 COINMACH CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity and Capital Resources (continued) ------------------------------- The Company's 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. Management believes that cash generated by operations and from borrowings under the Senior Credit Facility will be sufficient to meet the Company's anticipated working capital, capital expenditures and debt service requirements for the foreseeable future. An inability of the Company, however, to comply with covenants or other conditions contained in the indenture governing the 9% Senior Notes or in the Senior Credit Facility could result in an acceleration of all amounts thereunder. If the Company is unable to meet its debt service obligations, it could be required to take certain actions such as reducing or delaying capital expenditures, selling assets, refinancing or restructuring its indebtedness, selling additional equity capital or other actions. There is no assurance that any of such actions could be effected on commercially reasonable terms or on terms permitted under the Senior Credit Facility or the indenture governing the 9% Senior Notes. Certain Accounting Treatment ---------------------------- The Company's depreciation and amortization expense, which aggregated approximately $53.9 million for the six months ended September 30, 2003, reduces the Company's net income, but not its cash flow from operations. In accordance with accounting principles generally accepted in the United States, a significant amount of the purchase price related to businesses acquired by the Company is allocated to "contract rights". Management evaluates the realizability of contract rights balances (if there are indications of impairment) based upon the Company's forecasted undiscounted cash flows and operating income. Based upon present operations and strategic plans, management believes that no impairment of contract rights has occurred. Inflation and Seasonality ------------------------- In general, the Company's laundry operating expenses and general and administrative expenses are affected by inflation and the effects of inflation may be experienced by the Company in future periods. Management believes such effects will not be material to the Company. The Company's business generally is not seasonal. 31 COINMACH CORPORATION AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal exposure to market risk relates to changes in interest rates on its long-term borrowings. The Company's cash flow would be adversely affected by an increase in interest rates. As of September 30, 2003, the Company had approximately $115.5 million outstanding relating to its variable rate debt portfolio. The Company's future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. If market rates of interest on the Company's variable interest rate debt increased by 2.0% (or 200 basis points), the Company's annual interest expense on such variable interest rate debt would increase by approximately $2.3 million, assuming the total amount of variable interest rate debt outstanding was $115.5 million, the balance as of September 30, 2003. The Company enters into interest rate swap agreements from time to time to mitigate its exposure to adverse interest rate fluctuations. On September 23, 2002, the Company entered into three separate interest rate swap agreements totaling $150 million in aggregate notional amount that effectively convert a portion of its floating-rate term loans pursuant to the Senior Credit Facility to a fixed rate basis, thereby reducing the impact of interest rate changes on future interest expense. The three swap agreements consist of: (i) a $50 million notional amount interest rate swap transaction with JP Morgan effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional amount interest rate swap transaction with Credit Lyonnais effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50 million notional amount interest rate swap transaction with Deutsche Bank AG effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and expiring on February 1, 2006. These interest rate swaps used to hedge the variability of forecasted cash flows attributable to interest rate risk were designated as cash flow hedges. The Company's fixed debt instruments are not generally affected by a change in the market rates of interest, and therefore, such instruments generally do not have an impact on future earnings. However, as fixed rate debt matures, future earnings and cash flows may be impacted by changes in interest rates related to debt acquired to fund repayments under maturing facilities. The Company does not use derivative financial instruments for trading purposes and is not exposed to foreign currency exchange risk. 32 COINMACH CORPORATION AND SUBSIDIARIES ITEM 4. CONTROLS AND PROCEDURES The Company's management, together with the participation of the Company's principal executive officer and principal financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that material information relating to the Company is made known to them by others within the Company on a timely basis. However, there is no assurance that the Company's disclosure controls and procedures will operate effectively under all circumstances. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses. 33 COINMACH CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The Company is party to various legal proceedings arising in the ordinary course of business. Although the ultimate disposition of such proceedings is not presently determinable, management does not believe that adverse determinations in any or all such proceedings would have a material adverse effect upon the Company's financial condition, results of operations or cash flows. ITEM 2. Changes in Securities None. ITEM 3. Defaults Upon Senior Securities Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference from Exhibit 3.1 to the Company's Form 10-K for the transition period from September 30, 1995 to March 29, 1996, file number 0-7694) 3.2 Bylaws of the Company (incorporated by reference from Exhibit 3.2 to the Company's Form 10-K for the transition period from September 30, 1995 to March 29, 1996, file number 0-7694) 31.1 Certificate of Chief Executive Officer pursuant to 18 United States Code, Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certificate of Chief Financial Officer pursuant to 18 United States Code, Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K ------------------- None. 34 COINMACH CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COINMACH CORPORATION Date: November 4, 2003 /s/ Robert M. Doyle ------------------------------------------ Robert M. Doyle Senior Vice President and Chief Financial Officer (On behalf of registrant and as Principal Financial Officer) 35

COINMACH CORP 10-Q