<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 28, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-11907
COINMACH LAUNDRY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3258015
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
55 LUMBER ROAD, ROSLYN, NEW YORK 11576
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 484-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of May 26, 1997, the registrant had outstanding 10,004,278 shares of
Class A common stock, par value $.01 per share (the "Common Stock"), and
480,648 shares of non-voting Class B common stock, par value $.01 per share
(the "Non-Voting Common Stock").
At May 26, 1997, the aggregate market value of Common Stock held by non-
affiliates was approximately $83,688,840, based upon the closing price per
share of the Common Stock as reported on The Nasdaq National Market on the
close of business on May 23, 1997. For purposes of this calculation, shares of
Common Stock held by stockholders party to that certain Voting Agreement,
dated July 23, 1996, were excluded. This calculation is provided only for
purposes of this report and does not represent an admission by either the
registrant or any such person as to the status of such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the annual meeting of
stockholders held on July 9, 1997 are incorporated by reference into Part III
of the Form 10-K to which this Amendment No. 1 relates.
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<PAGE>
The undersigned registrant hereby amends Item 7 of its Form 10-K for the
fiscal year ended March 28, 1997, as filed with the Securities and Exchange
Commission on June 13, 1997, to read in its entirety as follows:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Business and Sources of Revenue
The Company is principally engaged in the business of supplying coin-
operated laundry equipment services to multi-family housing properties. Prior
to giving effect to the Reliable Acquisition, the Company owns and operates
approximately 337,000 coin-operated washers and dryers in approximately 30,000
multi-family housing properties on routes located in 30 states and the
District of Columbia and in 150 retail laundromats throughout Texas. The
Company's routes are located throughout the Northeast, Mid-Atlantic,
Southeast, South-Central and Midwest regions of the United States. The
Company, through Super Laundry, its wholly-owned subsidiary, is also a
construction and laundromat equipment distribution company.
The Company's most significant revenue source is derived from its route
business. The Company provides coin-operated laundry equipment services to
locations by leasing designated laundry rooms in buildings, typically on a
long-term, renewable basis. In return for the exclusive right to provide
laundry equipment services, most of the Company's leases provide for
commission payments to the location owners. Commission expense (also referred
to as rent expense), the Company's single largest expense item, is included in
laundry operating expenses and represents payments to location owners.
Commissions may be fixed amounts or percentages of revenues and are generally
paid monthly. Also included in laundry operating expenses are the cost of
servicing and collections in the route business, including, payroll, parts,
vehicles and other related items, the cost of sales associated with Super
Laundry and certain expenses related to the operation of retail laundromats
acquired in the Kwik Wash Acquisition.
In addition to commission payments, many of the Company's leases require the
Company to make advance rental payments to the location owners. These advance
payments are capitalized and amortized over the life of the applicable lease.
Other revenue sources for the Company include (i) leasing laundry equipment
and other household appliances and electronic items to corporate relocation
entities, individuals, property owners and managers of multi-family housing
properties; (ii) operating, maintaining and servicing retail laundromats; and
(iii) constructing complete turnkey retail laundromats, retrofitting existing
retail laundromats, distributing exclusive lines of commercial coin and non-
coin machines and parts, and selling service contracts.
Certain Other Transactions
On January 31, 1995, in connection with the acquisition of Coinmach
Industries Co., L.P. and Super Laundry Co., L.P., (the "Coinmach Acquisition")
certain asset values, primarily contract rights and fixed assets, were
recorded at their then fair market value, adjusted to reflect a pro rata
allocation of the excess of fair market value of net assets acquired, based on
an independent appraisal, over the purchase price.
On November 30, 1995, TCC merged with Solon (the "Merger") through an
exchange of stock, whereupon the surviving corporation changed its name to
Coinmach Corporation. Both Solon and TCC were under common ownership
commencing April 5, 1995. The Merger was accounted for in a manner similar to
a pooling of interests.
In connection with a series of refinancing transactions on November 30,
1995, the Company issued approximately $196.7 million of Senior Notes (as
hereinafter defined) which enabled the Company to, among other things, extend
the maturity of its debt obligations, retire the remaining debt of TCC and
provide additional working capital.
2
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RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes thereto included in Item 8
and the Selected Historical Consolidated Financial Data included in Item 6 of
this Form 10-K.
Coinmach Laundry
FISCAL YEAR ENDED MARCH 28, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 29, 1996
The discussion below should be read in conjunction with the following table,
which combines the six month transition period ended March 29, 1996 and the
period from April 5, 1995 to September 29, 1995 and the combined periods to be
referred to as the prior fiscal year (in thousands):
<TABLE>
<CAPTION>
SIX MONTH PERIOD
TRANSITION PERIOD APRIL 5, 1995 TO
YEAR ENDED ENDED MARCH 29, SEPTEMBER 29,
MARCH 28, 1997 1996 1995 COMBINED
-------------- ----------------- ---------------- --------
<S> <C> <C> <C> <C>
Revenues................ $206,852 $ 89,070 $ 89,719 $178,789
Laundry operating ex-
penses................. 139,446 60,536 62,905 123,441
General and administra-
tive expenses.......... 4,613 1,844 2,351 4,195
Depreciation and amorti-
zation................. 46,316 18,212 18,423 36,635
Stock based compensation
charge................. 2,152 -- -- --
Restructuring expenses.. -- -- 2,200 2,200
-------- -------- -------- --------
Operating income (loss). 14,325 8,478 3,840 12,318
Interest expense, net... 26,859 11,999 11,818 23,817
-------- -------- -------- --------
Loss before
extraordinary items and
income taxes........... (12,534) (3,521) (7,978) (11,499)
Income tax (benefit) ex-
pense.................. (2,307) (998) (1,862) (2,860)
-------- -------- -------- --------
Loss before extraordi-
nary items............. (10,227) (2,523) (6,116) (8,639)
Extraordinary items, net
of tax................. (296) (8,925) -- (8,925)
-------- -------- -------- --------
Net loss................ $(10,523) $(11,448) $ (6,116) $(17,564)
======== ======== ======== ========
</TABLE>
Revenues increased by approximately 16% for the 1997 Fiscal Year as compared
to the prior fiscal year. The improvement in revenues was primarily
attributable to increased route revenues resulting from internal expansion,
the Allied Acquisition, the Kwik Wash Acquisition and an increase in revenues
from Super Laundry. During the 1997 Fiscal Year, the Company's installed base
increased by approximately 7,500 machines from internal growth due primarily
to the elimination of capital constraints existing at Solon prior to the
Merger, as compared to a reduction of approximately 750 machines during the
twelve months ended March 29, 1996.
Laundry operating expenses increased by approximately 13% for the 1997
Fiscal Year, as compared to the prior fiscal year. The increase was due
primarily to the Allied Acquisition and the Kwik Wash Acquisition as well as
an increase in the cost of sales related to Super Laundry's increased sales
volume. Such increase in laundry operating expenses was offset by the
implementation of cost savings programs in the Company's field operations and
the consolidation of certain operating regions.
General and administrative expenses increased by approximately $0.4 million
or 10% for the 1997 Fiscal Year as compared to the prior fiscal year. The
increase for the period was due to expenses associated with (i) the
implementation of the Company's acquisition strategy, including legal and
financial due diligence investigations of potential targets and related costs,
(ii) the development and implementation of procedures for the management of
investor relations, and (iii) systems development, refinement and integration.
This increase includes a reduction of certain expenses resulting from the
consolidation of the Company's corporate staff into its existing facility in
Roslyn, New York on September 29, 1995.
Depreciation and amortization increased by approximately 27% for the 1997
Fiscal Year, as compared to the prior fiscal year, due primarily to the Allied
Acquisition and the Kwik Wash Acquisition, as well as an
3
<PAGE>
increase in capital expenditures for the installed base of machines resulting
from the elimination of capital constraints existing at Solon prior to the
Merger. As a result of the Company's acquisition activity since early 1995,
the Company incurred approximately $26.8 million in non-cash purchase
accounting related depreciation and amortization charges for the 1997 Fiscal
Year as compared to $23.6 million for the prior fiscal year.
The Company incurred restructuring costs of approximately $2.2 million
during the twelve months ended March 29, 1996 to cover severance obligations
to certain personnel, costs to relocate certain corporate functions to Roslyn,
New York, systems integration costs, and expenses related to the consolidation
of certain of its regional offices, in each case, as a result of the Solon
Acquisition and the Merger.
The extraordinary items for the 1997 Fiscal Year consisted of costs related
to the extinguishment of debt in February, 1997 and the termination of the
then existing revolving credit facility. The extraordinary items for the six
month period ending March 29, 1996 consisted of costs related to the
extinguishment of debt in connection with the Company's refinancing in
November 1995.
Prior to the Offering, Coinmach Laundry issued, in privately negotiated
transactions, 79,029 shares of its Class B common stock to certain members of
management. The Company recorded a stock-based compensation charge of
approximately $887,000 attributable to the issuance of such stock. In
addition, approximately $103,000 of receivables relating to loans to
management in connection with prior purchases of Coinmach Laundry's common
stock were forgiven and have been recorded as a stock-based compensation
charge.
Coinmach Laundry also granted options to management and certain other
individuals to purchase shares of Common Stock at a 15% discount to the
initial offering price of the Common Stock. With respect to such options
granted to its employees, Coinmach Laundry will record such discount as a
stock-based compensation charge over the applicable four year vesting period.
Coinmach Laundry also granted to two of its disinterested directors options to
purchase up to a total of 120,000 shares of Common Stock. Coinmach Laundry
will record the difference between the exercise price of such options and the
fair market value of the Common Stock on the date of grant as a stock-based
compensation charge over the applicable three year vesting period. During the
1997 Fiscal Year, Coinmach Laundry recorded a stock-based compensation charge
of approximately $1,162,000 relating to such options.
The Company's operating income margin, approximately 7% of revenues for the
1997 Fiscal Year, was equal to that for the twelve month's ended March 29,
1996.
Interest expense, net, increased by approximately 13% for the 1997 Fiscal
Year as compared to the prior year due primarily to the Company's refinancing
in November 1995 as well as entering into the Credit Agreement in January
1997. Partially offsetting this increase in interest expense was the decrease
in the effective interest rate applied against outstanding borrowings as the
result of such refinancing, as well as interest income earned on excess cash
balances generated from operations.
EBITDA/2/ was approximately $62.8 million (before deduction for stock-based
compensation charges) for the 1997 Fiscal Year as compared to approximately
$51.2 million (before deduction for restructuring costs) for the prior fiscal
year, representing an improvement of approximately 23%. EBITDA margins
improved to approximately 30% of revenues for the current year compared to
approximately 29% of revenues for the prior year.
- --------
/2/ EBITDA represents earnings from continuing operations before deductions for
interest, income taxes, depreciation and amortization. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that an increase in EBITDA is
an indication of a company's improved ability to service existing debt, to
sustain potential future increases in debt and to satisfy capital
requirements. However, EBITDA is not intended to represent cash flows for
the period, nor has it been presented as an alternative to either (a)
operating income (as determined by generally accepted accounting principles)
as an indicator of operating performance or (b) cash flows from operating,
investing and financing activities (as determined by generally accepted
accounting principles) as a measure of liquidity. Given that EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA as
presented may not be comparable to other similarly titled measures of other
companies.
4
<PAGE>
SIX MONTH TRANSITION PERIOD ENDED MARCH 29, 1996 COMPARED TO THE PERIOD
OCTOBER 1, 1994 TO APRIL 4, 1995
Prior to the merger of Solon and TCC, Solon's fiscal year was the fifty-two
or fifty-three week period ended on the Friday nearest September 30. Effective
upon the Merger, the Company changed its fiscal year end to the Friday nearest
to March 31.
The discussion below should be read in conjunction with the following table
which combines the operating results of Solon and TCC for the period October
1, 1994 to April 4, 1995 (the predecessor period) (in thousands). The
operating results of TCC are reflected in order to present comparable data.
<TABLE>
<CAPTION>
PERIOD FROM OCTOBER 1, 1994
SIX MONTH TO APRIL 4, 1995
TRANSITION PERIOD ---------------------------------
ENDED (PREDECESSOR)/1/,/2/
MARCH 29, 1996
(SUCCESSOR)/1/ TCC SOLON COMBINED
----------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues.................... $ 89,070 $ 35,789 $ 52,207 $ 87,996
Laundry operating expenses.. 60,536 28,253 33,165 61,418
General and administrative
expenses................... 1,844 1,345 1,539 2,884
Depreciation and amortiza-
tion....................... 18,212 6,009 10,304 16,313
-------- --------- --------- ---------
Operating income............ 8,478 182 7,199 7,381
Interest expense, net....... 11,999 2,464 8,928 11,392
Other expense............... -- 1,341 -- 1,341
-------- --------- --------- ---------
Loss before extraordinary
item and income taxes...... (3,521) (3,623) (1,729) (5,352)
Income tax (benefit) ex-
pense...................... (998) 4 50 54
-------- --------- --------- ---------
Loss before extraordinary
item....................... (2,523) (3,627) (1,779) (5,406)
Extraordinary item, net of
tax........................ (8,925) -- (848) (848)
-------- --------- --------- ---------
Net loss.................... $(11,448) $ (3,627) $ (2,627) $ (6,254)
======== ========= ========= =========
</TABLE>
- --------
/1/The term "Predecessor" refers to the period in time prior to the Solon
Acquisition. The term "Successor" refers to the period in time after the
Solon Acquisition and includes the historical results of Solon which have
been restated to include the pooling of interests of TCC. Successor is
presented on a different basis of accounting and, therefore, is not
comparable to the Predecessor.
/2/Certain reclassifications have been made to conform to the 1996
presentation.
Revenues for the six month transition period ended March 29, 1996 were
approximately 1.2% higher than combined revenues for the prior period. The
improvement in revenues consisted primarily of increased revenues from Super
Laundry of approximately $2.5 million. Such improvement was partially offset
by a decrease of approximately $1.4 million in revenues from the route
business. The average machine base for the six month transition period ended
March 29, 1996 was approximately 1.4% lower than the prior period primarily as
the result of constraints on available capital prior to the Merger. From
September 30, 1995, through March 29, 1996, the Company successfully
implemented a program to maintain its base of installed machines and eliminate
any additional erosion. The effect of the decreased number of machines was
partially offset by increased revenue per machine from price increases.
Laundry operating expenses decreased by approximately 1.4% primarily as the
result of decreased expenses of approximately $0.8 million related to
implementation of cost savings programs in the Company's field operations and
a decrease in commission expense of approximately 2.3%. These decreases were
partially offset by an increase in the cost of sales related to the increased
volume of Super Laundry.
General and administrative expenses decreased by approximately $1.0 million,
or 36.1%, primarily due to the consolidation of corporate staff by closing
Solon's Philadelphia, Pennsylvania office and combining its operations into
the Company's existing facility in Roslyn, New York on September 29, 1995.
5
<PAGE>
Depreciation and amortization increased by approximately $1.9 million or
11.6% due primarily to purchase accounting adjustments resulting from the
Solon Acquisition.
Interest expense, net, increased by approximately 5.3%. Approximately $1.8
million of such increase was due primarily to the increased debt level that
resulted from the Company's refinancing in November 1995. Offsetting this
increase is approximately $0.8 million due to the decrease in the effective
interest rate as the result of such refinancing. The increased debt resulted
in an excess cash balance, which was contemplated to be used for working
capital purposes and for future acquisition opportunities.
The extraordinary item for the six month transition period ending March 29,
1996, consisted of costs related to the extinguishment of debt in connection
with the Company's refinancing in late 1995. The extraordinary item for the
period ended April 4, 1995, consisted of costs related to the change in
control in connection with the Solon Acquisition.
PERIOD APRIL 4, 1995 TO SEPTEMBER 29, 1995 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 1994
The discussion below should be read in conjunction with the following table
which combines the Predecessor period for the six months ended September 30,
1994 (in thousands):
<TABLE>
<CAPTION>
PERIOD APRIL 5, 1995
TO SIX MONTHS ENDED
SEPTEMBER 29, 1995 SEPTEMBER 30, 1994
-------------------- --------------------------
(SUCCESSOR)/1/ (PREDECESSOR)/1/,/2/
TCC SOLON COMBINED
------- ------- --------
<S> <C> <C> <C> <C>
Revenues....................... $89,719 $37,154 $51,577 $88,731
Laundry operating expenses..... 62,905 28,576 32,337 60,913
General and administrative ex-
penses........................ 2,351 1,123 1,444 2,567
Depreciation and amortization.. 18,423 7,576 10,966 18,542
Restructuring costs............ 2,200 -- -- --
------- ------- ------- -------
Operating income (loss)........ 3,840 (121) 6,830 6,709
Interest expense, net.......... 11,818 2,214 9,053 11,267
------- ------- ------- -------
Loss before income taxes....... (7,978) (2,335) (2,223) (4,558)
Income tax (benefit) expense... (1,862) 24 3,208 3,232
------- ------- ------- -------
Net Loss....................... $(6,116) $(2,359) $(5,431) $(7,790)
======= ======= ======= =======
</TABLE>
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/1/The term "Predecessor" refers to the period in time prior to the Solon
Acquisition. The term "Successor" refers to the period in time after the
Solon Acquisition and includes the historical results of Solon which have
been restated to include the pooling of interests of TCC. Successor is
presented on a different basis of accounting and therefore, is not
comparable to the Predecessor.
/2/Certain reclassifications have been made to conform to the 1995
presentation.
Revenues for the period April 5, 1995 to September 29, 1995 were
approximately 1.1% higher than combined revenues for the prior period. The
improvement in revenues consisted primarily of increased revenues from Super
Laundry of approximately $1.3 million. Such improvement was partially offset
by a decrease of approximately $0.3 million in revenues from routes, primarily
due to a 2.0% decline in the average number of laundry machines on location,
due to constraints on capital prior to the Merger. The effect of the decreased
number of machines was partially offset by increased revenue per machine of
approximately 1.6% primarily due to price increases.
Laundry operating expenses increased by approximately 3.3%, primarily due to
an increase of $1.0 million in the cost of sales related to the increase in
Super Laundry revenue. The remaining increase is primarily the result of the
method of accounting for installation costs applied in the Successor period.
This increase is the result of increased cost of sales related to the
increased volume of Super Laundry. In addition, the Company's commission
expense decreased by approximately 1.0%.
6
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General and administrative expenses decreased by approximately $0.2 million,
or 8.4% primarily due to a decrease in the corporate staff.
The Company provided for restructuring costs of approximately $2.2 million
to cover severance payments to certain of Solon's management, administrative
and regional personnel, costs to relocate Solon's financial and administrative
functions to Roslyn, New York, costs to integrate certain financial and
operating systems, and costs related to the consolidation of certain of
Solon's regional offices.
Interest expense, net, increased to approximately 4.9% primarily due to an
increase in the interest rate on TCC's revolver, which was based on the prime
lending rate.
Solon
FISCAL YEAR ENDED SEPTEMBER 29, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
The discussion should be read in conjunction with the following table which
combines the Predecessor and Successor periods for fiscal 1995 (in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 29, 1995
-------------------------------------
APRIL 5, OCTOBER 1, FISCAL YEAR
1995 TO 1994 TO ENDED
SEPTEMBER 29, APRIL 4, SEPTEMBER 30,
1995 1995 TOTAL 1994
------------- -------------- -------- ------------------
SUCCESSOR(1) PREDECESSOR(1) PREDECESSOR(1),(2)
<S> <C> <C> <C> <C>
Revenues................ $89,719 $52,207 $141,926 $104,553
Laundry operating
expenses............... 62,905 33,165 96,070 66,527
Depreciation and
amortization........... 18,423 10,304 28,727 21,347
General and
administrative
expenses............... 2,458 1,539 3,997 2,839
Gain on sale of
equipment.............. -- -- -- (109)
Restructuring costs..... 2,200 -- 2,200 --
------- ------- -------- --------
Operating income........ 3,733 7,199 10,932 13,949
Interest expense, net... 11,541 8,928 20,469 18,105
------- ------- -------- --------
Loss before income taxes
and extraordinary
item................... (7,808) (1,729) (9,537) (4,156)
------- ------- -------- --------
Provision (benefit) for
income taxes:
Currently payable....... 420 270 690 200
Deferred................ (2,282) (220) (2,502) 2,562
------- ------- -------- --------
(1,862) 50 (1,812) 2,762
------- ------- -------- --------
Loss before
extraordinary item..... (5,946) (1,779) (7,725) (6,918)
Extraordinary item, net
of income taxes of $0.. -- 848 848 --
------- ------- -------- --------
Net loss................ $(5,946) $(2,627) $ (8,573) $ (6,918)
======= ======= ======== ========
</TABLE>
- --------
(1) The term "Predecessor" refers to the period in time prior to the Solon
Acquisition. The term "Successor" refers to the period in time after the
Solon Acquisition and includes the historical results of Solon which have
been restated to include the pooling of interests of TCC. Successor is
presented on a different basis of accounting and therefore, is not
comparable to the Predecessor.
(2) Certain reclassifications have been made to conform to the 1995
presentation.
Excluding revenues of TCC of $38.5 million for the Successor period,
revenues of $103.4 million for fiscal 1995 were $1.1 million or 1.1% lower
than revenues for fiscal 1994. A favorable change of approximately $1.8
million in revenues resulting from increases in revenue per machine was offset
by approximately $2.9 million in losses caused by a decline in the average
number of laundry machines on location. The decline in the average number of
laundry machines on location was primarily due to the lack of available
capital prior to the Merger. Revenue per machines rose slightly primarily
because of price increases and improved occupancy levels in the Southeast and
South-Central regions.
Excluding laundry operating expenses of TCC of $29.8 million for the
Successor period, laundry operating expenses of $66.3 million for fiscal 1995
were $0.2 million or 0.3% lower than laundry operating expenses for fiscal
1994. Commissions expense decreased by approximately $1.0 million due to lower
revenues and a
7
<PAGE>
reduction in the average commissions rate from 44.7% of revenues during fiscal
1994 to 44.1% of revenues during fiscal 1995. The decrease in the commissions
rate was primarily attributable to Solon's ongoing commission control programs
and a shift away from higher commission locations primarily in the Washington,
D.C. Metropolitan area. Laundry operating expenses other than commissions
expense rose by approximately $0.8 million in fiscal 1995 compared to fiscal
1994 primarily due to inflationary increases.
Excluding depreciation and amortization expenses of TCC of $5.5 million for
the Successor period, depreciation and amortization increased by $1.9 million
or 8.6% for fiscal 1995, compared to the prior year. The increase was due
primarily to purchase accounting adjustments resulting from the Solon
Acquisition.
Excluding general and administrative expenses of TCC of $0.9 million for the
Successor period, general and administrative expenses of $3.1 million for
fiscal 1995 were $0.3 million or 10.7% higher than such expenses for fiscal
1994. General and administrative expenses include a charge of approximately
$0.3 million for the cost of a severance agreement with the former chief
executive officer of Solon.
Solon provided for one-time restructuring costs of approximately $2.2
million to cover severance payments to certain of Solon's management,
administrative and regional personnel, costs to relocate Solon's financial and
administrative functions to Roslyn, New York, costs to integrate certain
financial and operating systems, and costs related to the consolidation of
certain of Solon's regional offices.
Excluding interest expense of TCC of $2.7 million for the Successor period,
interest expense for fiscal 1995 decreased by $0.3 million or 1.7% compared to
the prior year primarily due to an increase in interest income, and to a
lesser extent, a decrease in interest caused by a repurchase and retirement of
$1.0 million of Solon's 12 3/4% Senior Notes due 2001 in November 1994.
Solon's income tax benefit was $1.8 million in fiscal 1995 compared to a tax
provision of $2.8 million for fiscal 1994. As further discussed in the
consolidated financial statements, the tax provision for fiscal 1994 included
a $3.7 million charge to establish a valuation allowance for previously
recorded deferred tax assets. The deferred tax asset of $2.0 million recorded
in the Successor period does not reflect a valuation allowance because the
loss can be utilized against the deferred tax liabilities in the carryforward
periods. In addition to this benefit, Solon's effective income tax rate
differs from the amount computed by applying the U.S. federal statutory rate
to loss before income taxes as a result of state taxes and permanent book/tax
differences.
Solon incurred costs aggregating $0.8 million in connection with the Solon
Acquisition, including a total of $0.4 million in lump sum payments made to
fourteen management employees pursuant to certain contractual arrangements
relating to the acquisition. The total costs have been reflected as an
extraordinary item in the financial statements.
TCC (and CIC I Acquisition Corp. ("CIC"), its Predecessor)
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31,
1994
The discussion of three months ended March 31, 1995 is based on management's
combination of the one month ended January 31, 1995 for TCC's predecessor and
the two months ended March 31, 1995 for TCC.
Although the Coinmach Acquisition was completed during this period,
management does not believe there was a material impact on TCC's day to day
operations and thus believes the combination of the two periods is
appropriate. Despite the change in accounting basis, management believes it
can make a meaningful comparison to the prior year's comparable three month
period.
Revenues were $17.4 million for the three month period ended March 31, 1995,
a decrease of $0.9 million or 5.0% compared to the three month period ended
March 31, 1994. This decrease was primarily the result of a decrease in Super
Laundry revenues of approximately $1.2 million, which was due to the timing of
completed
8
<PAGE>
contracts. Super Laundry recognizes revenue on a completed contract basis.
During the three months ended March 31, 1995, Super Laundry completed fewer
contracts than in the corresponding period in the prior year. This shortfall
was eliminated in the subsequent quarter. Increases in route revenues of
approximately $0.3 million, primarily due to increased revenue per machine of
approximately 1%, partially offset this shortfall. The increase in revenue per
machine was primarily due to TCC's price review program whereby vend prices
are regularly monitored and price increases or decreases are instituted with
the goal of maximizing revenue per machine.
Laundry operating expenses decreased by $0.4 million or 2.7% to $13.2
million as compared to the three month period ended March 31, 1994. The
decrease in Super Laundry revenues resulted in a corresponding reduction in
laundry operating expenses of approximately $0.8 million. Offsetting this
decrease is an increase in commission expense of approximately $0.2 million,
which is based on increased route revenues. The remaining increase of $0.2
million is due to a general increase in expenses.
General and administrative expenses were generally unchanged for the two
periods.
Depreciation and amortization expense decreased in the three month period
ended March 31, 1995 by $0.5 million compared to the three month period ended
March 31, 1994. The decrease was primarily the result of purchase accounting
adjustments associated with the Coinmach Acquisition.
As a result of the above, operating loss was approximately $0.2 million for
each period.
Interest expense for the three month period ended March 31, 1995 increased
by $0.3 million or 30.9% compared to the three month period ended March 31,
1994, primarily due to an increase in the effective interest rate to
approximately 11% from approximately 8%, due to the increase in the prime
rate.
Income taxes were insignificant in both periods and resulted from state and
local taxes. TCC had no Federal income tax benefit in either period because of
the valuation allowances established against deferred tax assets generated
from net operating losses.
FISCAL YEAR ENDED DECEMBER 31, 1994 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1993
Revenues were $73.9 million in fiscal 1994, an increase of $2.0 million or
2.8% compared to fiscal 1993. The favorable change is attributable to
improvements in Super Laundry of approximately $1.5 million and improvements
in route operations of approximately $0.5 million. The increase in Super
Laundry revenue is primarily the result of access to more attractive financing
options for Super Laundry customers. The increase in route revenues is due to
a 3.8% increase in revenue per machine, partially offset by a 1% decrease in
the machine base. The increase in revenue per machine was primarily due to the
Company's price review program.
Laundry operating expenses increased by $1.9 million or 3.7% to $54.7
million as compared to fiscal 1993. The increase is attributed to costs
associated with the increase in Super Laundry revenue and increased laundry
operating expenses of the route operations.
General and administrative expenses decreased by $0.6 million or 11.3% in
fiscal 1994 compared to fiscal 1993 due to decreased salaries, benefits and
professional fees.
Depreciation and amortization expense decreased in fiscal 1994 by $0.8
million or 4.9% compared to fiscal 1993. The decrease was primarily the result
of certain assets acquired in the leveraged buyout of CIC in 1989 becoming
fully depreciated in fiscal 1994.
As a result, operating loss decreased by $1.5 million to $0.3 million or
81.8% for the year ended December 31, 1994.
Income taxes were insignificant in both periods and resulted from state and
local taxes. CIC had no Federal income tax benefit in either period because of
the valuation allowances established against deferred tax assets generated
from net operating losses.
9
<PAGE>
Interest expense for fiscal 1994 decreased by $6.5 million or 61.8% compared
to fiscal 1993 primarily due to the conversion of subordinated notes to common
stock pursuant to CIC's prepackaged bankruptcy plan of reorganization filed on
December 15, 1993. This decrease was partially offset by an increase of $0.3
million in interest expense resulting from an increase in interest rates on
its long term debt obligations.
CIC recorded a non-cash charge of $1.3 million in 1994 relating to the
imputed value of an equity conversion feature related to management loans
pursuant to CIC's plan of reorganization. Such feature was surrendered in
connection with the Coinmach Acquisition.
CIC recognized an extraordinary gain of $20.4 million on the early
extinguishment of debt in 1994 in connection with CIC's plan of
reorganization.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share" ("FAS 128"). This standard changes the method of
calculating earnings per share and will be effective for periods ending after
December 15, 1997. Earlier application is not permitted. However, when adopted
all prior period earnings per share data presented will be required to be
restated to conform with the new standard. The Company anticipates that the
impact of FAS 128 will not be material on the calculation of earnings per
share.
Effective March 30, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"), which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting treatment for long-
lived assets that are expected to be disposed of. The effect of the Company's
adoption of FAS 121 did not have an effect on the Company's results of
operations or financial condition for the 1997 Fiscal Year.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. FAS 123 is effective for transactions entered
into in fiscal years beginning after December 15, 1995. The Company has
elected to account for stock-based compensation awards pursuant to the
provisions of Accounting Principles Board Opinion No. 25, as permitted by FAS
123.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have substantial indebtedness and debt service
requirements. At March 28, 1997, the Company had outstanding long-term debt of
approximately $345.5 million and stockholders' equity of approximately $22.0
million.
FINANCING ACTIVITIES
Senior Notes
In December 1995, the Company issued 11 3/4% Senior Notes due 2005 pursuant
to the terms of an indenture, between the Company and Fleet Bank of
Connecticut (formerly Shawmut Bank Connecticut, National Association) (as
amended, the "Indenture") in an aggregate principal amount of $196,655,000. On
March 28, 1996, the Company consummated a registered exchange offer, pursuant
to which all issued and outstanding 11 3/4% Senior Notes due 2005 were
exchanged for Series B 11 3/4% Senior Notes due 2005 (the "Senior Notes").
The Senior Notes, which mature on November 15, 2005, are unsecured senior
obligations of Coinmach Corporation, a wholly-owned subsidiary of Coinmach
Laundry ("Coinmach Corporation") and are redeemable, at the Company's option,
in whole or in part at any time or from time to time, on and after November
15, 2000,
10
<PAGE>
upon not less than 30 nor more than 60 days notice, at the redemption prices
set forth in the Indenture, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption.
The Indenture contains a number of restrictive covenants and agreements,
including covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on certain payments (in the form of the
declaration or payment of certain dividends or distributions on the capital
stock of Coinmach Corporation or its subsidiaries, the purchase, redemption or
other acquisition of any capital stock of Coinmach Corporation, the voluntary
prepayment of subordinated indebtedness, or an Investment (as defined in the
Indenture) in any other person or entity); (iii) limitation on transactions
with affiliates; (iv) limitation on liens; (v) limitation on sales of assets;
(vi) limitation on sale and leaseback transactions; (vii) limitation on
conduct of business; (viii) limitation on dividends and other payment
restrictions affecting subsidiaries; and (ix) limitation on consolidations,
mergers and sales of substantially all of the assets of Coinmach Corporation.
The events of default under the Indenture include provisions that are
typical of senior unsecured debt financings. Upon the occurrence and
continuance of certain events of default, the trustee or the holders of not
less than 25% in aggregate principal amount of outstanding Senior Notes may
declare all unpaid principal and accrued interest on all of the Senior Notes
to be immediately due and payable.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Senior Notes will have the right to require that the Company
purchase all or a portion of such holder's Senior Notes pursuant to the offer
described in the Indenture, at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase.
Redemption of 12 3/4% Senior Notes due 2001
On February 18, 1997, Coinmach Corporation redeemed its outstanding 12 3/4%
Senior Notes due 2001 at a redemption price of 106.375% of the principal
amount thereof, together with accrued interest from January 15, 1997 to
February 18, 1997, in an aggregate amount of approximately $5.4 million.
New Credit Facility
On January 8, 1997, the Company entered into the Credit Agreement with
Bankers Trust Company, First Union National Bank of North Carolina, Lehman
Commercial Paper, Inc. and other lending institutions named therein
(collectively, the "Banks"), which provides for the New Credit Facility. The
New Credit Facility replaced the Company's then existing credit facility. The
New Credit Facility, as amended effective June 2, 1997, and prior to any
principal installment payments, consists of a $70 million revolving credit
facility and a $190 million term loan facility, which is comprised of a
Tranche A term loan in the amount of $30.0 million, payable quarterly
commencing March 1997, and a Tranche B term loan in the amount of $160.0
million, payable semi-annually commencing June 1997. The New Credit Facility
also provides for up to $10 million of letter of credit financings and short
term borrowings under a swing line facility of up to $5 million.
At March 28, 1997, $130 million was outstanding under the Credit Agreement.
Effective June 2, 1997, the Credit Agreement was amended to, among other
things, increase the Tranche B portion of the term loan facility to $160.0
million.
Subject to the terms and conditions of the Credit Agreement, the Company
may, at its option, convert Base Rate Loans (as defined in the Credit
Agreement) into Eurodollar Loans (as defined in the Credit Agreement).
Interest on the Company's borrowings under the Credit Agreement is payable at
a rate per annum no greater than the sum of the Applicable Base Rate Margin
plus the Base Rate or the sum of the Applicable Eurodollar Margin plus the
Eurodollar Rate (in each case, as defined in the Credit Agreement).
Indebtedness under the Credit Agreement is secured by all of the Company's
real and personal property. Coinmach Laundry has guaranteed the indebtedness
under the Credit Agreement and pledged to Bankers Trust Company, as Collateral
Agent, its interests in all of the issued and outstanding shares of capital
stock of Coinmach Corporation.
11
<PAGE>
The Credit Agreement contains a number of restrictive covenants and
agreements, including covenants with respect to limitations on (i)
indebtedness; (ii) certain payments (in the form of the declaration or payment
of certain dividends or distributions on the capital stock of Coinmach Laundry
or its subsidiaries or the purchase, redemption or other acquisition of any
capital stock of Coinmach Laundry or its subsidiaries); (iii) voluntary
prepayments of previously existing indebtedness; (iv) Investments (as defined
in the Credit Agreement); (v) transactions with affiliates; (vi) liens; (vii)
sales or purchases of assets; (viii) conduct of business; (ix) dividends and
other payment restrictions affecting subsidiaries; (x) consolidations and
mergers; (xi) capital expenditures; (xii) issuances of certain equity
securities of the Company; and (xiii) creation of subsidiaries. The Credit
Agreement also requires that the Company satisfy certain financial ratios,
including a maximum leverage ratio and a minimum consolidated interest
coverage ratio.
The Credit Agreement contains certain events of default, including the
following: (i) the failure of the Company to pay any of its obligations under
the Credit Agreement when due; (ii) certain failures by the Company to pay
principal or interest on indebtedness or certain breaches or defaults by the
Company in respect of certain indebtedness, in each case, after the expiration
of any applicable grace periods; (iii) certain defaults by the Company in the
performance or observance of the agreements or covenants under the Credit
Agreement or related agreements, beyond any applicable cure periods; (iv) the
falsity in any material respect of certain of the Company's representations or
warranties under the Credit Agreement; (v) certain judgments against the
Company; and (vi) certain events of bankruptcy or insolvency of the Company.
OPERATING ACTIVITIES
The Company's level of indebtedness will have several important effects on
its future operations including, but not limited to, the following: (i) a
significant portion of the Company's cash flow from operations will be
required to pay interest on its indebtedness and will not be available for
other purposes; (ii) the financial covenants contained in certain of the
agreements governing the Company's indebtedness will require the Company to
meet certain financial tests and will limit its ability to borrow additional
funds or to dispose of assets; (iii) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; and (iv) the
Company's ability to adapt to changes in the coin-operated laundry equipment
services industry and to economic conditions in general could be limited.
The Company anticipates that it will continue to utilize cash flows from
operations to finance its capital expenditures and working capital needs,
including interest payments on its outstanding indebtedness. Capital
expenditures for the 1997 Fiscal Year were approximately $213.0 million
(including approximately $16.2 million of promissory notes). Of such amount,
the Company spent approximately $171.5 million (including approximately $16.2
million of promissory notes) in acquisition and related transaction costs,
including the Kwik Wash Acquisition and the Allied Acquisition, and
approximately $12.4 million related to a net increase in the installed base of
machines. The balance was used to maintain the existing base and for general
corporate purposes. The full impact on revenues and EBITDA generated from
capital expended on acquisitions and the net increase in the installed base
are not expected to be reflected in the Company's financial results until
subsequent reporting periods, depending on the timing of the capital expended.
The Company anticipates that capital expenditures, excluding acquisitions and
internal growth, will be approximately $38.0 million for the twelve months
ending March 31, 1998. While the Company estimates that it will generate
sufficient cash flows from operations to finance anticipated capital
expenditures, there can be no assurances that it will be able to do so.
The Company's working capital requirements are, and are expected to continue
to be, minimal since a significant portion of the Company's operating expenses
are not paid until after cash is collected from the installed machines. The
Company is required to make monthly cash interest payments pursuant to the
Credit Agreement and semi-annual cash interest payments on the Senior Notes.
Management believes that the Company's future operating activities will
generate sufficient cash flow to repay borrowings under the Senior Notes, the
New Credit Facility, the Kwik Wash Note and the AW Notes and
12
<PAGE>
to permit any necessary refinancings thereof. An inability of the Company,
however, to comply with covenants or other conditions contained in the
Indenture or in the Credit Agreement could result in an acceleration of all
amounts due under the Senior Notes and the New Credit Facility. If the Company
is unable to meet its debt service obligations, it could be required to take
certain actions such as reducing or delaying capital expenditures, selling
assets, refinancing or restructuring its indebtedness, selling additional
equity capital or other actions. There is no assurance that any of such
actions could be effected on commercially reasonable terms or on terms
permitted under the Credit Agreement or the Indenture.
CERTAIN ACCOUNTING TREATMENT
The Company's depreciation and amortization expenses, aggregating
approximately $46.3 million for the 1997 Fiscal Year, have the effect of
reducing net income but not operating cash flow. In accordance with generally
accepted accounting principles, a significant amount of the purchase price of
businesses acquired by the Company is allocated to "contract rights", which
costs are amortized over periods of up to 15 years. Although such accounting
treatment can have a favorable effect on operating cash flow by reducing
taxes, such treatment also reduces net income.
INFLATION AND SEASONALITY
In general, the Company's laundry operating expenses and general and
administrative expenses are affected by inflation, and the effects of
inflation may be experienced by the Company in future periods. Management
believes that such effects have not been nor will be material to the Company.
The Company's business generally is not seasonal.
FORWARD LOOKING STATEMENTS
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward looking statements and
information that are based on the beliefs of the Company's management as well
as estimates and assumptions made by, and information currently available to,
the Company's management. When used in SEC Filings, the words "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan" and similar
expressions, as they relate to the Company or the Company's management,
identify forward looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors, shifts in market demand, and other risks
and uncertainties, including, in addition to any uncertainties specifically
identified in the text surrounding such statements, uncertainties with respect
to changes or developments in social, economic, business, industry, market,
legal and regulatory circumstances and conditions and actions taken or omitted
to be taken by third parties, including the Company's stockholders, customers,
suppliers, competitors, legislative, regulatory, judicial and other
governmental authorities. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may vary significantly from those anticipated, believed, estimated,
expected, intended or planned.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Audited consolidated financial statements and the notes thereto are
contained in pages F-1 through F-78 hereto.
13
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
ROSLYN, STATE OF NEW YORK ON NOVEMBER 21, 1997.
COINMACH LAUNDRY CORPORATION
/s/ STEPHEN R. KERRIGAN
By: _________________________________
Stephen R. Kerrigan Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
/s/ STEPHEN R. KERRIGAN
By: ____________________________
Date: November 21, Stephen R. Kerrigan
1997 Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ MITCHELL BLATT
By: ____________________________
Date: November 21, Mitchell Blatt
1997 Director, President and Chief
Operating Officer
/s/ ROBERT M. DOYLE
By: ____________________________
Date: November 21, Robert M. Doyle
1997 Chief Financial Officer, Senior Vice
President, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
/s/ JOHN E. DENSON
By: ____________________________
Date: November 21, John E. Denson
1997 Senior Vice President-Corporate
Development
/s/ MICHAEL STANKY
By: ____________________________
Date: November 21, Michael Stanky
1997 Senior Vice President
14
<PAGE>
/s/ DAVID A. DONNINI
By: ____________________________
Date: November 21, David A. Donnini
1997 Director
/s/ JAMES N. CHAPMAN
Date: November 21, By: ____________________________
1997 James N. Chapman
Director
/s/ BRUCE V. RAUNER
By: ____________________________
Date: November 21, Bruce V. Rauner
1997 Director
/s/ STEPHEN G. CERRI
Date: November 21, By: ____________________________
1997 Stephen G. Cerri
Director
/s/ ARTHUR B. LAFFER
By: ____________________________
Date: November 21, Arthur B. Laffer
1997 Director
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
Consolidated balance sheets of Coinmach Laundry Corporation and
Subsidiaries as of March 28, 1997 and March 29, 1996, and the related
combined consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the year ended March 28, 1997, the six-
month transition period ended March 29, 1996 and the period from April
5, 1995 to September 29, 1995 with accompanying notes and Report of
Independent Auditors thereon.......................................... F-2
COINMACH CORPORATION (FORMERLY SOLON AUTOMATED SERVICES, INC.)
Combined and consolidated balance sheets of Coinmach Corporation
(formerly Solon) as of September 29, 1995 and September 30, 1994 and
related combined and consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the years in
the two years ended September 29, 1995 with accompanying notes and
Reports of Independent Auditors thereon............................... F-23
TCC (AS SUCCESSOR TO CIC)
Consolidated balance sheet of CIC as of December 31, 1994 and related
consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the years in the two-year
period ended December 31, 1994 with accompanying notes and Independent
Auditors' Report thereon.............................................. F-42
Consolidated balance sheet of CIC as of January 31, 1995 and related
consolidated statements of operations and accumulated deficit and cash
flows for the month ended January 31, 1995 with accompanying notes and
Independent Auditors' Report thereon.................................. F-55
Consolidated balance sheet of TCC as of March 31, 1995 and related
consolidated statements of operations and accumulated deficit and cash
flows for the two months ended March 31, 1995 with accompanying notes
and Independent Auditors' Report thereon.............................. F-67
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Coinmach Laundry Corporation
We have audited the accompanying consolidated balance sheets of Coinmach
Laundry Corporation and Subsidiaries (the "Company") as of March 28, 1997 and
March 29, 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year ended March 28,
1997, the six-month transition period ended March 29, 1996 and the period from
April 5, 1995 to September 29, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Coinmach
Laundry Corporation and Subsidiaries at March 28, 1997 and March 29, 1996, and
the consolidated results of their operations and their cash flows for the year
ended March 28, 1997, the six-month transition period ended March 29, 1996,
and for the period from April 5, 1995 to September 29, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Melville, New York
May 13, 1997, except for
Note 5b., as to which
the date is June 2,
1997
F-2
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
ASSETS 1997 1996
- ------ --------- ---------
<S> <C> <C>
Cash and cash equivalents.................................. $ 14,729 $ 19,858
Receivables, less allowance of $555 and $454............... 6,894 5,260
Inventories................................................ 7,959 4,443
Prepaid expenses........................................... 3,170 2,641
Advance rental payments.................................... 38,472 20,320
Property and equipment:
Laundry equipment and fixtures........................... 135,656 89,394
Land, building and improvements.......................... 14,266 10,965
Trucks and other vehicles................................ 4,211 1,849
-------- --------
154,133 102,208
Less accumulated depreciation............................ (42,017) (19,509)
-------- --------
Net property and equipment................................. 112,116 82,699
Contract rights, net of accumulated amortization of $19,815
and $8,925................................................ 180,557 59,745
Goodwill, net of accumulated amortization of $5,574 and
$2,386.................................................... 95,771 44,071
Other assets............................................... 13,253 10,111
-------- --------
Total assets............................................... $472,921 $249,148
======== ========
<CAPTION>
MARCH 28, MARCH 29,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1997 1996
- ---------------------------------------------- --------- ---------
<S> <C> <C>
Accounts payable........................................... $ 8,941 $ 6,085
Accrued commissions........................................ 10,573 7,380
Accrued interest........................................... 9,712 7,745
Other accrued expenses..................................... 8,996 7,557
Deferred income taxes...................................... 65,650 18,924
11 3/4% senior notes....................................... 196,655 196,655
Credit facility............................................ 130,000 --
9 7/8% promissory note..................................... 15,000 --
12 3/4% senior notes....................................... -- 5,000
Other long-term debt....................................... 3,831 1,110
Stockholders' equity (deficit):
Common stock............................................. 105 62
Capital in excess of par value........................... 53,160 17,841
Accumulated deficit...................................... (29,263) (18,719)
-------- --------
24,002 (816)
Receivables from stockholders............................ (439) (492)
-------- --------
Total stockholders' equity (deficit)....................... 23,563 (1,308)
-------- --------
Total liabilities and stockholders' equity (deficit)....... $472,921 $249,148
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX-MONTH
YEAR TRANSITION APRIL 5, 1995
ENDED PERIOD ENDED TO
MARCH 28, MARCH 29, SEPTEMBER 29,
1997 1996 1995
--------- ------------ -------------
<S> <C> <C> <C>
Revenues................................ $206,852 $ 89,070 $89,719
Costs and expenses:
Laundry operating expenses............ 139,446 60,536 62,905
General and administrative............ 4,613 1,844 2,351
Depreciation and amortization......... 46,316 18,212 18,423
Stock based compensation charge....... 2,152 -- --
Restructuring expenses................ -- -- 2,200
-------- -------- -------
192,527 80,592 85,879
-------- -------- -------
Operating income........................ 14,325 8,478 3,840
Interest expense, net................... 26,859 11,999 11,818
-------- -------- -------
Loss before income taxes and extraordi-
nary items............................. (12,534) (3,521) (7,978)
-------- -------- -------
Provision (benefit) for income taxes:
Currently payable..................... 200 50 420
Deferred.............................. (2,507) (1,048) (2,282)
-------- -------- -------
(2,307) (998) (1,862)
-------- -------- -------
Loss before extraordinary items......... (10,227) (2,523) (6,116)
Extraordinary items, net of income tax
benefit of $206 for the year ended
March 28, 1997 and $5,305 for the six-
month transition period ended March 29,
1996................................... (296) (8,925) --
-------- -------- -------
Net loss................................ $(10,523) $(11,448) $(6,116)
======== ======== =======
Loss per share:
Before extraordinary items............ $ (1.11)
Extraordinary items................... (.03)
--------
Net loss per share...................... $ (1.14)
========
Pro forma loss per share:
Before extraordinary items............ $ (.32) $ (.79)
Extraordinary items................... (1.15) --
-------- -------
Pro forma net loss per share............ $ (1.47) $ (.79)
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AND SHARES)
<TABLE>
<CAPTION>
BALANCE BALANCE BALANCE
APRIL 5, NET SEPTEMBER 29, RECAPITALIZATION MARCH 29,
1995 LOSS 1995 NET LOSS OF COMMON STOCK 1996
-------- ------- ------------- -------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Voting Class A common
stock, par value $.01:
Authorized shares--
15,000,000 issued
shares, end of
period--0, 0 and
10,004,278............ $ -- $ -- $ -- $ -- $ -- $ --
Non-voting Class B common
stock, par value $.01:
Authorized shares--
1,000,000 issued
shares, end of
period--0, 0 and
480,648............... -- -- -- -- -- --
Class A common stock, par
value $.01:
Authorized shares--
1,959,021 issued
shares, end of
period--1,959,021,
1,783,584 and 0....... 19 -- 19 -- (1) 18
Class B common stock, par
value $.01:
Authorized shares--
345,710 issued shares,
end of each period--
265,044, 265,044 and
0..................... 3 -- 3 -- -- 3
Class C common stock, par
value $.01:
Authorized shares--
305,212 issued shares,
end of period--0,
305,212 and 0......... -- -- -- -- 3 3
Class D common stock, par
value $.01:
Authorized shares--
305,212 issued shares,
end of each period--0. -- -- -- -- -- --
Class E common stock, par
value $.01:
Authorized shares--
175,436 issued shares,
end of period--0,
175,436
and 0................. -- -- -- -- 2 2
Class F common stock, par
value $.01:
Authorized shares--
3,086,045 issued
shares, end of
period--0, 3,086,045
and 0................. -- -- -- -- 30 30
Class G common stock, par
value $.01:
Authorized shares--
618,428 issued shares,
end of period--0,
578,509
and 0................. -- -- -- -- 6 6
Series A Preferred stock,
par value $.01: 10,000
authorized, issued
shares, end of period--
0....................... -- -- -- -- -- --
Capital in excess of par
value................... 17,881 -- 17,881 -- (40) 17,841
Accumulated deficit...... (1,155) (6,116) (7,271) (11,448) -- (18,719)
------- ------- ------- -------- ---- --------
16,748 (6,116) 10,632 (11,448) -- (816)
Receivables from
stockholders............ (492) -- (492) -- -- (492)
------- ------- ------- -------- ---- --------
Total stockholders'
equity (deficit)........ $16,256 $(6,116) $10,140 $(11,448) $ -- $(1,308)
======= ======= ======= ======== ==== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AND SHARES)
<TABLE>
<CAPTION>
BALANCE
MARCH 29, ISSUANCE REDEMPTION ISSUANCE NET
1996, OF OF OF ACTIVITY BALANCE
BROUGHT RECLASSIFICATION PREFERRED PREFERRED COMMON STOCK STOCK BASED IN LOANS TO MARCH 28,
FORWARD NET LOSS OF COMMON STOCK STOCK STOCK STOCK DIVIDEND COMPENSATION STOCKHOLDERS 1997
--------- -------- ---------------- --------- ---------- -------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Voting Class A
common stock, par
value $.01:
Authorized
shares--
15,000,000
issued shares,
end of period--
0, 0 and
10,004,278...... $ -- $ -- $57 $ -- $ -- $ 43 $ -- $ -- $-- $ 100
Non-voting Class
B common stock,
par value $.01:
Authorized
shares--
1,000,000 issued
shares, end of
period--0, 0 and
480,648......... -- -- 5 -- -- -- -- -- -- 5
Class A common
stock, par value
$.01:
Authorized
shares--
1,959,021 issued
shares, end of
period--
1,959,021,
1,783,584 and 0. 18 -- (18) -- -- -- -- -- -- --
Class B common
stock, par value
$.01:
Authorized
shares--345,710
issued shares,
end of each
period--265,044,
265,044 and 0... 3 -- (3) -- -- -- -- -- -- --
Class C common
stock, par value
$.01:
Authorized
shares--305,212
issued shares,
end of period--
0, 305,212 and
0............... 3 -- (3) -- -- -- -- -- -- --
Class D common
stock, par value
$.01:
Authorized
shares--305,212
issued shares,
end of each
period--0....... -- -- -- -- -- -- -- -- -- --
Class E common
stock, par value
$.01:
Authorized
shares--175,436
issued shares,
end of period--
0, 175,436 and
0............... 2 -- (2) -- -- -- -- -- -- --
Class F common
stock, par value
$.01:
Authorized
shares--
3,086,045 issued
shares, end of
period--0,
3,086,045 and 0. 30 -- (30) -- -- -- -- -- -- --
Class G common
stock, par value
$.01:
Authorized
shares--618,428
issued shares,
end of period--
0, 578,509 and
0............... 6 -- (6) -- -- -- -- -- -- --
Series A
Preferred stock,
par value $.01:
10,000
authorized,
issued shares,
end of period--
0............... -- -- -- 19,207 (19,207) -- -- -- -- --
Capital in excess
of par value..... 17,841 -- -- (19,207) -- 53,764 (398) 1,160 -- 53,160
Accumulated
deficit.......... (18,719) (10,523) -- -- -- -- (21) -- -- (29,263)
------- -------- --- ------- -------- ------- ----- ------ --- -------
(816) (10,523) -- -- (19,207) 53,807 (419) 1,160 -- 24,002
Receivables from
stockholders..... (492) -- -- -- -- -- -- -- 53 (439)
------- -------- --- ------- -------- ------- ----- ------ --- -------
Total
stockholders'
equity (deficit). $(1,308) $(10,523) $-- $ -- $(19,207) $53,807 $(419) $1,160 $53 $23,563
======= ======== === ======= ======== ======= ===== ====== === =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX-MONTH
TRANSITION
YEAR PERIOD APRIL 5, 1995
ENDED ENDED TO
MARCH 28, MARCH 29, SEPTEMBER 29,
1997 1996 1995
--------- ---------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $ (10,523) $(11,448) $ (6,116)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............. 46,316 18,212 18,423
Deferred income taxes..................... (2,507) (1,048) (2,000)
Amortization of debt discount and
deferred issue costs..................... 627 508 735
Stock based compensation.................. 2,152 -- --
Extraordinary charges for early
extinguishment of debt, net of taxes..... 296 8,925 --
Increase or decrease in operating assets
and liabilities, net of businesses
acquired:
(Increase) decrease in other assets..... (2,462) 24 (1,054)
Increase in receivables, net............ (1,100) (1,489) (197)
(Increase) decrease in inventories and
prepaid expenses....................... (3,008) (1,100) 930
Increase (decrease) in accounts payable. 2,002 (6) (610)
Increase (decrease) in accrued interest. 1,956 3,193 (25)
Increase (decrease) in other accrued
expenses, net.......................... 983 (3,434) 1,980
--------- -------- --------
Net cash provided by operating activities.. 34,732 12,337 12,066
--------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment........ (29,779) (10,757) (9,550)
Advance rental payments to location owners. (11,809) (3,462) (3,569)
Additions to net assets related to
acquisitions of businesses (net of
promissory notes of $16,208 in 1997)...... (155,247) -- (11,925)
Sales of property and equipment............ 137 57 5
--------- -------- --------
Net cash used in investing activities...... (196,698) (14,162) (25,039)
--------- -------- --------
FINANCING ACTIVITIES
Debt transactions:
Proceeds from issuance of 11 3/4% senior
notes.................................... -- 72,655 --
Proceeds from issuance of term loans from
credit facility.......................... 130,000 -- --
Net (repayments) borrowings of bank and
other borrowings......................... (325) (48,715) 6,126
Repayment of 12 3/4% senior notes......... (5,000) -- --
Principal payments on capitalized lease
obligations.............................. (1,007) (262) (143)
Deferred debt issuance costs.............. (178) (5,397) --
Debt extinguishment costs................. (319) (6,909) --
Equity transactions:
Proceeds from public offering of common
stock.................................... 52,894 -- --
Redemption of preferred stock............. (19,207) -- --
Dividend paid--preferred stock............ (21) -- --
Loans to stockholders..................... -- -- (154)
Sale of common stock...................... -- -- 6,681
--------- -------- --------
Net cash provided by financing activities.. 156,837 11,372 12,510
--------- -------- --------
Net (decrease) increase in cash and cash
equivalents............................... (5,129) 9,547 (463)
Cash and cash equivalents, beginning of
period.................................... 19,858 10,311 10,774
--------- -------- --------
Cash and cash equivalents, end of period... $ 14,729 $ 19,858 $ 10,311
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid.............................. $ 24,845 $ 8,500 $ 10,900
========= ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Coinmach Laundry
Corporation ("Coinmach Laundry") and Subsidiaries (the "Company") include the
accounts of its wholly-owned subsidiary, Coinmach Corporation ("Coinmach")
(formerly Solon Automated Services, Inc. ("Solon") and the consolidated
accounts of The Coinmach Corporation ("TCC")). The Company was formed on April
5, 1995, at which time it acquired Solon (the "Solon Acquisition"), and is
controlled by Golder Thoma Cressey Rauner, Inc. ("GTCR"). TCC was formed in
January 1995 by an investor group, comprised principally of the same investors
who formed the Company, and acquired Coinmach Industries Co. ("Industries")
and Super Laundry Equipment Co. L.P. ("Super Laundry LP") on January 31, 1995
(the "TCC Acquisition"). Both the Solon Acquisition and the TCC Acquisition
were accounted for as purchases and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair values at the respective
acquisition dates.
As described in Note 2, Solon completed a merger with TCC on November 30,
1995. This transaction was accounted for in a manner similar to a pooling of
interests. As a result of the common investor group's control over both Solon
and TCC, the accompanying consolidated financial statements have been prepared
to reflect the accounts of the Company, Solon and TCC and their wholly-owned
subsidiaries on a consolidated basis since the date of common control, April
5, 1995.
The Company is primarily engaged in providing coin-operated laundry
equipment services to multi-family housing properties throughout the United
States. The Company owns and operates approximately 337,000 coin-operated
washers and dryers in over 30,000 multi-family housing units on routes located
in 30 states and the District of Columbia and in 150 retail laundromats
located throughout Texas. The Company's wholly-owned subsidiary, Super Laundry
Equipment Corp. ("Super Laundry"), also is a construction and laundromat
equipment distribution company.
All material intercompany accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR
Prior to the merger of Solon and TCC, the Company's fiscal year was the
fifty-two or fifty-three week period which ended on the Friday nearest
September 30th. Effective with the merger of Solon and TCC, the Company
changed its fiscal year end to the last Friday in March. The period from April
5, 1995 to September 29, 1995 is referred to as "1995", the period from
September 30, 1995 to March 29, 1996 is referred to as "1996T" and the year
ended March 28, 1997 is referred to as "1997".
RECOGNITION OF LAUNDRY REVENUES
The Company has agreements with various property owners which provide for
the Company's installation and operation of laundry machines at various
locations in return for a commission. These agreements provide for both
contingent (percentage of revenues) and fixed commission payments. The Company
reports revenues from laundry machines on the accrual basis and has accrued
the cash computed to be in the machines at the end of the fiscal period.
Super Laundry's customers generally sign sales contracts pursuant to which
Super Laundry constructs and equips complete laundromat operations, including
location identification, construction, plumbing, electrical
F-8
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
wiring and all required permits. Revenue is recognized on the completed
contract method. A contract is considered complete when all costs have been
incurred and either the installation is operating according to specifications
or has been accepted by the customer. The duration of such contracts is
normally less than six months. Sales of laundromats amounted to approximately
$18.8 million, $7.8 million and $7.9 million in 1997, 1996T, and 1995,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1997 1996
--------- ---------
<S> <C> <C>
Laundry equipment..................................... $6,198 $3,774
Machine repair parts.................................. 1,761 669
------ ------
$7,959 $4,443
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are carried at cost and are
depreciated or amortized on a straight-line basis over the lesser of the
estimated useful lives or lease life, whichever is shorter:
<TABLE>
<S> <C>
Laundry equipment, installation costs and fixtures.......... 3 to 10 years
Leasehold improvements and decorating costs................. 4 to 10 years
Trucks and other vehicles................................... 3 to 4 years
</TABLE>
Upon the sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts, and the
resulting gain or loss is included in income. Maintenance and repairs are
charged to operations currently, and replacements of laundry machines and
significant improvements are capitalized.
Depreciation expense was $22.6 million, $9.4 million and $9.5 million for
1997, 1996T and 1995, respectively.
GOODWILL AND CONTRACT RIGHTS
Goodwill, under purchase accounting, represents the excess of cost over fair
value of net assets acquired. Goodwill recorded as a result of the Solon
Acquisition on April 5, 1995 (see Note 2) is being amortized on a straight-
line basis over 20 years. Goodwill recorded on acquisitions subsequent thereto
is being amortized over 15 years on a straight-line basis.
F-9
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Contract rights represent amounts expended for location contracts arising
from the acquisition of laundry machines on location. These amounts, which
arose solely from purchase price allocations, are amortized on a straight-line
basis over the period of expected benefit ranging from 3 to 15 years based on
independent appraisals or present valued future cash flows at prevailing
discount rates.
Management periodically evaluates the realizability of the goodwill and
contract rights balances based upon the Company's expectations of undiscounted
cash flows and operating income. Based upon present operations and strategic
plans, management believes that no impairment of goodwill or contract rights
has occurred.
ADVANCE RENTAL PAYMENTS
Advance rental payments to location owners are amortized on a straight-line
basis over the contract term, which generally ranges from 5 to 10 years.
INTEREST EXPENSE
Interest expense is reported net of interest income of approximately
$966,000, $277,000 and $148,000 for 1997 and 1996T and 1995, respectively.
RECLASSIFICATION
Certain 1996T balances have been reclassified to conform with the 1997
presentation.
LOSS PER SHARE
Loss per share for 1997 was calculated based upon the weighted average
number of common shares outstanding of 9,232,530. Pro forma loss per share for
1996T and 1995 was calculated based upon the weighted average number of common
shares of 7,774,017, which amount gives effect to the transactions discussed
below.
The Company's historical capitalization differs significantly from its
capitalization effective with its July 23, 1996 initial public offering of
stock (see Note 8a). Accordingly, historical net loss per common share for the
six month transition period ended March 29, 1996 and the period from April 5,
1995 to September 29, 1995 is not considered meaningful and has not been
presented herein; rather, a pro forma net loss per share is presented for
these periods in the accompanying statement of operations. The calculation of
the shares used in computing pro forma net loss per share includes the effect
of the stock issued and options granted discussed further in Note 8a, as well
as the redemption of preferred stock, as more fully described in Note 8c.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock sold or issued at prices below the initial public offering
price per share in the twelve months preceding the initial public offering
have been included in the calculation as if outstanding for 1996T and 1995.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This standard changes the method of calculating earnings per share and
will be effective for periods ending after December 15, 1997. Earlier
application is not permitted; however, when adopted, all prior period earnings
per share data presented will be required to be restated to conform with the
new standard. The Company has determined that the impact of SFAS No. 128 will
not have a material effect on the calculations of earnings per share.
EMPLOYEE STOCK OPTIONS
The Company has a stock option program which is more fully described in Note
8d. The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting
F-10
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
for Stock Issued to Employees." Under the Company's stock option program,
options are granted with an exercise price not less than the market price of
the underlying common stock of the Company on the date of grant.
Accordingly, no compensation expense is recognized in connection with the
grant of these stock options.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123 defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but
are not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to account
for such transactions under APB No. 25, but are required to disclose in the
financial statement footnotes, pro forma net (loss) income and per share
amounts as if the Company had applied the new method of accounting for all
grants made during 1997 and 1996. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements. Effective March 30,
1996, the Company adopted the disclosure requirements of SFAS No. 123.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires the asset and liability method of
accounting for income taxes. Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. SFAS No. 109 requires that any tax benefits recognized for net
operating loss carryforwards and other items be reduced by a valuation
allowance where it is more likely than not that the benefits may not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective March 30, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The adoption of
SFAS No. 121 did not have an effect on the results of operations or financial
condition of the Company.
2. BUSINESS COMBINATIONS
A. THE KWIK WASH ACQUISITION
On January 8, 1997, pursuant to the terms and conditions of a Stock Purchase
Agreement dated as of November 25, 1996, Coinmach completed the acquisition of
100% of the outstanding voting securities of each of KWL, Inc. ("KWL"), a
Nevada corporation, and Kwik-Wash Laundries, Inc. ("Kwik Wash"), a Nevada
corporation, for approximately $125 million in cash (excluding transaction
expenses) and a $15 million promissory note issued by Coinmach Laundry (the
"Kwik Wash Acquisition"). KWL and Kwik Wash are the sole partners of Kwik Wash
Laundries, L.P. (the "Kwik Wash Partnership"), a Texas limited partnership.
The Kwik Wash Partnership, based in Dallas, Texas, provides coin-operated
laundry equipment services to multi-
F-11
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BUSINESS COMBINATIONS--(CONTINUED)
family dwellings in Texas, Louisiana, Arkansas and Oklahoma and operates
approximately 150 retail laundromats located throughout Texas. Simultaneously
with the acquisition, KWL, Kwik Wash and the Kwik Wash Partnership merged with
and into Coinmach.
Concurrently with the Kwik Wash Acquisition, Coinmach entered into a new
senior financing arrangement providing up to $200 million (the "New Credit
Facility") (see Note 5). The New Credit Facility, proceeds of which were used
in part to fund the Kwik Wash Acquisition, replaced the Company's then
existing credit facility and will provide financing to support the Company's
acquisition strategy.
The Kwik Wash Acquisition has been accounted for as a purchase and,
accordingly, assets and liabilities were recorded at fair value at the date of
acquisition and the results of operations are included subsequent to that
date. The excess of cost over the net tangible assets acquired was allocated
to contract rights of approximately $123.3 million, goodwill of $49.4 million
and deferred taxes payable of approximately $49.4 million.
The following table reflects unaudited pro forma combined results of
operations of the Company and Kwik Wash as if such acquisition had taken place
at the beginning of each of the periods presented (in thousands except per
share data):
<TABLE>
<CAPTION>
SIX-MONTH
TRANSITION
YEAR PERIOD
ENDED ENDED
MARCH MARCH 29,
28, 1997 1996
-------- ----------
<S> <C> <C>
Revenues............................................. $255,605 $121,687
Loss before extraordinary items...................... (11,148) (3,190)
Net loss............................................. (11,444) (12,115)
Loss before extraordinary items per common share..... (1.21) (.41)
Net loss per common share............................ (1.24) (1.56)
</TABLE>
These unaudited pro forma results have been presented for comparative
purposes only and include certain adjustments, such as increased interest
expense on the related acquisition debt and additional amortization expense of
intangible assets, offset by the capitalization of installation and decorating
costs to conform to the accounting policy of the Company.
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the Kwik Wash Acquisition been consummated at the beginning of each period
or the results of future operations of the combined companies under the
ownership and management of the Company.
B. OTHER ACQUISITIONS
During the 1997 fiscal year, the Company made acquisitions of several small
route businesses or assets of businesses with purchase prices aggregating
approximately $26.3 million, of which the Company paid approximately $25.2
million in cash and $1.2 million in promissory notes issued by the Company,
which are included in other long-term debt. Such promissory notes have a
conversion option which allows the holder of the option to convert these
promissory notes, after the one-year anniversary of the issue date, into
shares of the Company's Class A Common Stock at the principal amount then
outstanding at a conversion price equal to 115% of the average daily closing
price per share of Common Stock over the twenty business day period
immediately preceding the issue date.
F-12
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BUSINESS COMBINATIONS--(CONTINUED)
C. THE SOLON ACQUISITION
Solon entered into a Stock Purchase Agreement, dated as of March 7, 1995,
with Ford Coin Laundries, Inc. ("Ford"), and certain other parties named
therein, whereby Ford purchased all of Solon's outstanding Common Stock (the
"Common Stock") and substantially all of Solon's Class A Common Stock (the
"Class A Common Stock") (collectively, the "Shares"). The purchase price for
the Shares was $11.5 million. The foregoing transaction closed on April 5,
1995. The source of funds used by Ford for the Shares was the cash proceeds
from the sales by Ford to the Company of (i) Ford's non-voting Class A Common
Stock (the "Ford Non-Voting Common Stock") pursuant to a Stock Purchase
Agreement, dated April 4, 1995, and (ii) an option to purchase Ford's voting
common stock (the "Ford Voting Common Stock") pursuant to a Letter Agreement
dated April 4, 1995. As of April 5, 1995, Ford beneficially owned, and had the
sole power to dispose of, the Shares. The Shares beneficially owned by Ford
represented 100% of the outstanding Common Stock and approximately 97% of the
outstanding Class A Common Stock.
Pursuant to the Stock Purchase Agreement with Ford, the Company purchased
from Ford all of the outstanding shares of Ford Non-Voting Common Stock. The
purchase price for the Ford Non-Voting Common Stock was of $11.4 million. The
sources of the funds used by the Company for the Ford Non-Voting Common Stock
were certain shareholders of TCC, including GTCR. As of April 5, 1995, the
Company beneficially owned, and had the sole power to dispose of, 1,000 shares
of Ford Non-Voting Common Stock.
Pursuant to the Letter Agreement dated April 4, 1995, Ford granted to the
Company, among other things, an option (the "Option") to purchase, subject to
the terms and conditions contained therein, all of the Ford Voting Common
Stock, for an aggregate purchase price of $100,000. On April 28, 1995, the
Company exercised the Option. The sources of funds used by the Company to
exercise the Option were substantially the same sources used to purchase Ford
Non-Voting Common Stock. As of April 28, 1995, the Company beneficially owned,
and had the sole power to vote and dispose of, ten shares of Ford Voting
Common Stock.
D. THE TCC ACQUISITION
TCC was incorporated in January 1995 and was capitalized primarily through
an equity investment by an investor group led by the majority shareholder,
GTCR, and senior management and bank financing.
TCC was a holding company which was formed to acquire partnership interests
in Industries and Super Laundry LP. On January 31, 1995, TCC acquired its
partnership interests in Industries and Super Laundry from CIC I Acquisition
Corp. ("CIC I"). The transaction resulted in TCC owning 100% interests in both
Industries and Super Laundry LP. The aggregate purchase price for these
interests was $8.57 million, paid in cash. The acquisition was accounted for
using the purchase method of accounting. The fair value of assets acquired
(based on an independent appraisal for certain assets) less liabilities
assumed exceeded the purchase price by approximately $7.7 million. The excess
was allocated against property, equipment and intangible assets ratably based
on their respective fair values.
F-13
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BUSINESS COMBINATIONS--(CONTINUED)
E. THE MERGER WITH TCC
On November 30, 1995, Solon completed a merger ("Merger") with TCC through
an exchange of stock. Shares of common stock of the Company were issued in
exchange for all of the issued and outstanding shares of common stock of TCC.
The Company then contributed its stock of TCC to Solon. Solon became the
surviving corporation after the merger, whereupon it changed its name to
Coinmach Corporation. Details of the results of operations of TCC and Solon
for the periods prior to the Merger are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 5, 1995 SEPTEMBER 30,
TO 1995 TO
SEPTEMBER 29, NOVEMBER 29,
1995 1995
------------- -------------
<S> <C> <C>
REVENUES
Solon......................................... $51,256 $17,909
TCC........................................... 38,463 13,018
------- -------
Combined...................................... $89,719 $30,927
======= =======
NET (LOSS) INCOME
Solon......................................... $(5,496) $ (525)
TCC........................................... (450) 49
------- -------
Combined...................................... $(5,946) $ (476)
======= =======
</TABLE>
The combined financial results presented above include an adjustment to
decrease TCC's net loss by approximately $180,000 in 1995 and $70,000 for the
period from September 30, 1995 to November 29, 1995, to conform its accounting
policy for the capitalization of machine installation costs to that of Solon.
Intercompany transactions between the two companies for the period presented
were not material.
3. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1997 1996
--------- ---------
<S> <C> <C>
Trade receivables..................................... $5,551 $3,113
Notes receivable...................................... 1,225 1,811
Finance lease receivables............................. 380 625
Other................................................. 293 165
------ ------
7,449 5,714
Allowance for doubtful accounts....................... 555 454
------ ------
$6,894 $5,260
====== ======
</TABLE>
Notes receivable, which arise from the sale of laundromats, bear interest at
a weighted average rate of approximately 10% per annum and mature through
1998. The notes are collateralized by the underlying laundry equipment. The
Company periodically sells notes receivable arising from the sale of
laundromats to third party finance companies. Included in other receivables
are finance reserves, which arise when the Company sells notes and a portion
of the proceeds are retained by the finance company. As the notes are
collected, the finance companies remit a portion of the collections to the
Company. Many of the notes receivable are sold with recourse to the Company
(see Note 9). Control of the notes sold with recourse is surrendered by the
Company on the date of transfer. The Company generally sells its receivables
with recourse at cost, recognizing no gain or loss.
F-14
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. RESTRUCTURING COSTS
Restructuring charges for 1995 consist of costs aggregating approximately
$2.2 million, which includes approximately $1.3 million of severance payments
for 55 of Solon's management, administrative and regional personnel,
approximately $300,000 of costs to relocate Solon's financial and
administrative functions to Roslyn, New York, approximately $100,000 of costs
to integrate certain financial and operating systems, and approximately
$500,000 of costs related to the consolidation of certain of Solon's regional
offices. Of the total restructuring costs of $2.2 million, approximately
$300,000 was paid during the period ended September 29, 1995, approximately
$1.3 million was paid during the six months ended March 29, 1996, and the
remaining portion of approximately $600,000 was paid during the fiscal year
ending March 28, 1997. The 55 employee terminations include 5 management
employees, 17 corporate staff financial and administrative employees and 33
regional laundry operational employees. Notifications to employees were made
on various dates through September 1995.
5. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH MARCH
28, 1997 29, 1996
-------- --------
<S> <C> <C>
11 3/4% Senior Notes due 2005.......................... $196,655 $196,655
12 3/4% Senior Notes due 2001.......................... -- 5,000
Credit facility........................................ 130,000 --
9 7/8% Promissory Note due 2004........................ 15,000 --
Obligations under capital leases....................... 1,711 686
Other long-term debt with varying terms and maturities. 2,120 424
-------- --------
$345,486 $202,765
======== ========
</TABLE>
A. SENIOR NOTES
On November 30, 1995, Coinmach completed an exchange offer with
substantially all the holders of certain 12 3/4% Senior Notes due 2001 (the
"Senior Notes") and certain 13 3/4% Senior Subordinated Debentures due 2002
(the "Subordinated Debentures"). Through December 14, 1995, Coinmach issued a
total of $196.7 million of 11 3/4% Senior Notes due 2005 (the "Notes") which
enabled it to complete this exchange offer, consummate the merger with TCC,
retire its remaining debt, and provide additional working capital. Coinmach
incurred costs of approximately $4.0 million, net of income taxes, related to
a 5.5% premium paid to retire its Senior Notes and Subordinated Debentures,
wrote-off the unamortized balance of the related original issue discount and
deferred finance costs of approximately $1.3 million and $1.8 million, net of
income taxes, respectively, and also incurred costs related to the retirement
of a revolving credit facility of TCC of approximately $1.8 million, net of
income taxes. The aggregate of the foregoing items totaling $8.9 million, net
of income taxes, is shown as an extraordinary item in 1996T.
Interest on the Notes is payable semi-annually on May 15 and November 15.
The Notes are redeemable at the option of Coinmach at any time after November
15, 2000 at a price equal to 105 7/8% declining to par if redeemed after
November 15, 2002. The Notes contain certain financial covenants and were
exchanged for identical notes in a registered exchange offer in April 1996.
Additionally, the Notes restrict the payment of certain dividends,
distributions or other payments from Coinmach to Coinmach Laundry.
In February 1997, Coinmach redeemed all of its outstanding Senior Notes at a
redemption price of 106.375% of the principal amount thereof, together with
accrued interest from January 15, 1997 to February 18,
F-15
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT--(CONTINUED)
1997, in an aggregate amount of approximately $5.4 million. As part of the
premium paid to redeem the Senior Notes, together with the writeoff of all
unamortized financing costs associated with the Senior Notes, Coinmach
recognized an extraordinary charge of $502,000 (net of a tax benefit of
$206,000).
B. CREDIT FACILITY
On November 30, 1995, Coinmach entered into a revolving credit facility
("Credit Facility"), which provided up to a maximum of $35 million and which
replaced certain credit facilities of both Solon and TCC. Availability under
the Credit Facility was limited by an amount equal to one semi-annual interest
payment on the Notes. Interest on the borrowings was payable monthly at a rate
per annum no greater than the sum of LIBOR plus 2.50%. The Company was
obligated to pay an unused line fee in an amount equal to 0.5% of the unused
availability payable monthly in arrears. Borrowings under the Credit Facility
were secured by real and personal property of the Company and also required
the Company, among other things, to maintain certain financial ratios and
restrict additional investments and indebtedness.
On January 8, 1997, the Company entered into a senior financing arrangement
under the New Credit Facility with Bankers Trust Company, First Union National
Bank of North Carolina, Lehman Commercial Paper, Inc. and certain other
lending institutions named therein (collectively, the "Banks"), replacing the
Company's then existing credit facility. The New Credit Facility, as amended
effective June 2, 1997 and prior to any principal installments made, consists
of a $70 million revolving credit facility and a $190 million term loan
facility, which is comprised of a Tranche A term loan in the amount of $30
million and a Tranche B term loan in the amount of $160 million. The Tranche B
term loan was increased by $60 million effective June 2, 1997. The New Credit
Facility also provides for up to $10 million of letter of credit financing and
short term borrowings under a swing line facility of up to $5 million.
Interest on the Company's borrowings under the New Credit Facility is
payable quarterly in arrears with respect to Base Rate Loans and the last day
of each applicable interest period with respect to Eurodollar Loans and at a
rate per annum no greater than the sum of the Applicable Base Rate Margin plus
the Base Rate or the sum of the Applicable Eurodollar Margin plus the
Eurodollar Rate (in each case, as defined in the New Credit Facility).
Indebtedness under the New Credit Facility is secured by all of the
Company's real and personal property. The Company has guaranteed the
indebtedness under the New Credit Facility and pledged to Bankers Trust
Company, as Collateral Agent, its interests in all of the issued and
outstanding shares of capital stock of Coinmach. In addition to certain terms
and provisions, events of default, as defined, and customary restrictive
covenants and agreements, the New Credit Facility contains certain covenants
including, but not limited to, a maximum leverage ratio, a minimum
consolidated interest coverage ratio, and limitations on indebtedness, capital
expenditures, advances, investments and loans, mergers and acquisitions,
dividends, stock issuances and transactions with affiliates.
Debt outstanding under the New Credit Facility as of March 28, 1997,
consisted of the following (in thousands):
<TABLE>
<S> <C>
Term loan A, quarterly payments of $750 commencing March 31, 1997,
and increasing to $1,000 March 31, 1998, $1,250 March 31, 1999,
and
$2,000 March 31, 2002. (Interest rate of 7.6875% at March 28,
1997)............................................................. $ 30,000
Term loan B, semi-annual payments of $500 commencing June 30, 1997
with the final three payments of $31,333 on June 30, 2003,
December
31, 2003 and June 30, 2004. (Interest rate of 8.125% at March 28,
1997)............................................................. 100,000
Revolving line of credit........................................... --
--------
$130,000
========
</TABLE>
F-16
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT--(CONTINUED)
C. PROMISSORY NOTE
Pursuant to the Kwik Wash Acquisition, Coinmach Laundry issued a $15.0
million 9 7/8% promissory note due June 15, 2004. Annual payments (in
thousands) of $1,000 commence January 15, 1998 and increasing to $2,000
January 15, 2000, $3,000 January 15, 2003 and $4,000 June 15, 2004.
6. RETIREMENT SAVINGS PLANS
Coinmach maintains several defined contribution plans (including the
Coinmach Plan, Solon Plan and Kwik Wash Plan collectively, the "Plans")
meeting the guidelines of Section 401(k) of the Internal Revenue Code. All of
the Plans require employees to meet certain age, employment status and minimum
entry requirements as allowed by law.
Contributions to the Plans for 1997, 1996T and 1995 amounted to
approximately $140,000, $43,000 and $43,000, respectively.
The Company does not provide any other post-retirement benefits.
7. INCOME TAXES
The components of the Company's net deferred tax liabilities were as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation and contract rights........ $73,809 $26,537
Other, net.......................................... 1,516 1,449
------- -------
75,325 27,986
------- -------
Deferred tax assets:
Net operating loss carryforwards.................... 9,544 8,549
Stock compensation expense.......................... 476 --
Other............................................... 115 973
Valuation allowance for deferred tax assets......... (460) (460)
------- -------
9,675 9,062
------- -------
Net deferred tax liabilities.......................... $65,650 $18,924
======= =======
</TABLE>
Deferred taxes arise primarily from timing differences resulting from using
accelerated depreciation for tax purposes and straight-line depreciation for
financial reporting purposes, and contract rights acquired which are not
deductible for tax purposes.
As of April 5, 1995, the deferred tax asset and related valuation allowance
relating to Solon were netted and reduced to $2.6 million to reflect the net
operating loss available pursuant to limitations imposed under provisions of
the Internal Revenue Code regarding changes in ownership. In addition, as of
April 5, 1995, TCC had recorded a deferred tax asset of $460,000 with a
valuation allowance of the same amount. The deferred tax assets recorded
subsequently do not reflect a valuation allowance because the loss can be
utilized against the deferred tax liabilities in the carryforward period. The
net operating loss carryforwards, which expire between fiscal years 2001
through 2008, consist of approximately $7 million (after the limitation)
relating to Solon and approximately $16.3 million relating to the Company.
F-17
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
The benefit for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEAR PERIOD APRIL 5, 1995
ENDED ENDED TO
MARCH 28, MARCH 29, SEPTEMBER 29,
1997 1996 1995
--------- --------- -------------
<S> <C> <C> <C>
Federal................................. $(2,039) $(5,215) $(1,760)
State................................... (474) (1,088) (102)
------- ------- -------
$(2,513) $(6,303) $(1,862)
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
YEAR PERIOD APRIL 5, 1995
ENDED ENDED TO
MARCH 28, MARCH 29, SEPTEMBER 29,
1997 1996 1995
--------- --------- -------------
<S> <C> <C> <C>
Expected tax benefit................... $(4,563) $(1,201) $(2,655)
State tax benefit, net of federal tax-
es.................................... (308) (170) (320)
Permanent book/tax differences:
Goodwill............................. 1,100 373 1,000
Stock compensation expense........... 311 -- --
Other................................ 947 -- 113
------- ------- -------
Tax provision/(benefit)................ $(2,513) $ (998) $(1,862)
======= ======= =======
</TABLE>
The Company made cash payments for income taxes of approximately $204,000
and $36,000 for 1997 and 1996T, respectively.
8. STOCKHOLDERS' EQUITY
A. INITIAL PUBLIC OFFERING
On July 23, 1996, the Company completed its initial public offering (the
"Offering") of 4,120,000 shares of its Common Stock at an initial public
offering price of $14.00 per share. The Company's Registration Statement for
4,000,000 shares of Common Stock was filed with the Securities and Exchange
Commission on May 13, 1996 and subsequently declared effective on July 17,
1996. On July 18, 1996, the Company filed an additional registration statement
on Form S-1 with respect to the registration of an additional 120,000 shares
of Common Stock, which registration statement was effective upon filing.
In connection with the Offering, the underwriters were granted a 30-day
option to purchase up to an aggregate of 618,000 additional shares of Common
Stock to cover over-allotments (the "Over-Allotment Option"), which Over-
Allotment Option was exercised on August 16, 1966 with respect to the purchase
of an additional 63,642 shares of Common Stock.
Proceeds from the Offering were approximately $54.5 million (after giving
effect to the exercise of the Over-Allotment Option), after underwriting
discounts and commissions and before expenses. After giving effect to the
redemption of the Preferred Stock (as described below), proceeds from the
Offering were approximately $35.3 million, before expenses.
Prior to the Offering, the Company issued, in privately negotiated
transactions, 79,029 shares of its Class B common stock to certain members of
management. The Company recorded a stock based compensation charge
F-18
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
in an amount of approximately $887,000 attributable to the issuance of such
stock in 1997. In addition, approximately $103,000 of outstanding receivables
relating to loans to management in connection with prior purchases of the
Company's common stock were forgiven and have been accounted for as a stock-
based compensation charge in 1997.
B. RECLASSIFICATION AND STOCK SPLIT
In connection with the Offering, the Company approved a reclassification
(the "Reclassification") of all of its capital stock pursuant to which all
seven classes of the previously issued and outstanding capital stock of the
Company prior to the Offering were converted into a class of preferred stock,
a class of voting common stock and a class of non-voting common stock. As part
of the Reclassification, holders of the Company's Class A common stock, Class
E common stock and Class F common stock immediately prior to the Offering
(collectively, the "Preference Shares") also received a distribution
consisting of shares of Common Stock and shares of Series A preferred stock,
par value $.01 per share (the "Preferred Stock"), representing an amount equal
to the sum of: (a) preferred dividends on such Preference Shares in an amount
equal to the accrued yield (at a rate of 8% per annum, compounded quarterly)
on the original investment in such Preference Shares through July 23, 1996;
and (b) an amount equal to the original investment in such Preference Shares.
Holders of Preference Shares who are members of the Company's management
received an aggregate of 28,425 shares of Common Stock, and holders of the
Preference Shares who were not members of the Company's management received an
aggregate of 1,000 shares of Preferred Stock.
In connection with the Reclassification, the Company also approved an
approximate 23-to-1 stock split (the "Stock Split") payable to shareholders of
record of the Company on July 12, 1996.
C. REDEMPTION OF PREFERRED STOCK
Immediately following the Offering, approximately $19.2 million of the
proceeds of the Offering were used by the Company to retire all of the issued
and outstanding shares of Preferred Stock.
D. STOCK OPTION PLAN
Prior to the Offering, the Company adopted the 1996 Employee Stock Option
Plan (as amended and restated, the "Stock Option Plan") which provides that
the Company may grant options for the purchase of up to 1,109,147 shares of
common stock to key employees of the Company over a period not to exceed ten
years. The Company may grant incentive stock options or options which do not
qualify as incentive stock options at an exercise price per share not less
than 100% of the fair market value of the Common Stock at the date of grant.
All options granted under the Stock Option Plan vest over four years in five
equal installments (20% immediately) and expire ten years from the date of
grant.
The Company has granted 181,250 options to various employees of the Company
pursuant to the Stock Option Plan, through March 28, 1997.
On July 23, 1996, in connection with the Offering, the Company granted
certain nonqualified options (the "Options") to certain members of management
(collectively, the "Option Holders") to purchase up to 735,618 shares of
Common Stock at 85% of the initial offering price of the Common Stock. On
September 17, 1996, for the purpose of preserving the Option Holders'
percentage interest of Common Stock represented by the Options (which
percentage interest was decreased as a result of the exercise of the Over-
Allotment Option), the Company granted to the Option Holders additional
nonqualified stock options to purchase up to 3,819 shares of Common Stock (the
"Additional Options"). The Options and Additional Options vest in equal annual
installments (20%
F-19
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
vested immediately on the date of grant and the remainder over a four year
period) commencing on July 23, 1996, the effective date of the Offering. With
respect to Options and Additional Options granted to employees of Coinmach,
Coinmach will record the difference between the exercise price and the initial
offering price of Common Stock as a stock-based compensation charge over the
applicable vesting period.
On September 17, 1996, the Company granted to certain directors each of whom
was appointed by the Board of Directors of the Company on such date to serve
as independent directors, options entitling each such director to purchase up
to 60,000 shares of Common Stock (the "Independent Director Options"). The
Independent Director Options vest in equal annual installments (25% vest
immediately on the date of grant and the remainder over a three year period),
commencing on September 17, 1996, and entitle each such director to purchase
shares of Common Stock at the initial public offering price of the Common
Stock. Coinmach will record the difference between the exercise price of the
Independent Director Options and the fair market value of the Common Stock on
September 17, 1996 as a stock-based compensation charge over the applicable
vesting period.
For the year ended March 28, 1997, the Company has recorded a stock-based
compensation charge of approximately $1,162,000 relating to the Options, the
Additional Options and the Independent Director Options.
The Company has elected to comply with APB No. 25 and related
interpretations in accounting for its employee stock options because the
alternate fair value accounting provided for under SFAS No. 123 requires use
of option valuation models which were not developed for use in valuing such
employee stock options. Under APB No. 25, compensation expense is recognized
only when the exercise price of the Company's employee stock options is less
than the market price of the underlying stock on the date of grant.
In accordance with SFAS No. 123, pro-forma information regarding net loss
and loss per common share has been determined as if the Company had accounted
for its employee stock options under the fair value method required by SFAS
No. 123. The fair value for these options was estimated at the date of each
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1997: risk-free interest rate of 6.6%; dividend yields
of 0%, volatility factor of the expected market price of the Company's common
stock of 24.5% and a weighted-average expected life of the options of five
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
In management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options due to
changes in subjective input assumptions which may materially affect the fair
value estimate, and because the Company's employee stock options have
characteristics significantly different from those of traded options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma net loss and net loss per share as of March 31, 1997 is as
follows:
<TABLE>
<S> <C>
Pro forma net loss......................................... $(11,584,000)
Pro forma net loss per share............................... $ (1.25)
</TABLE>
SFAS No. 123 is applicable only to options granted subsequent to March 30,
1996 (no options were granted in fiscal 1996).
F-20
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
Information with respect to options for the year ended March 28, 1997 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED FAIR
AVERAGE VALUE OF
EXERCISE OPTIONS
OPTIONS PRICE GRANTED
--------- -------- --------
<S> <C> <C> <C>
Options outstanding--beginning of year -- $ -- $ --
Options granted:
Nonqualified options issued at market price...... 181,250 14.00 4.87
Directors' options issued at below market price.. 120,000 14.00 9.36
Nonqualified options issued at below market
price........................................... 739,437 11.90 6.00
Options exercised.................................. -- -- --
Options cancelled and expired...................... -- -- --
--------- ------ -----
Options outstanding--end of year................... 1,040,687 $12.51 $6.17
========= ====== =====
Options exercisable at end of year................. 214,151 $12.55 $6.26
========= ====== =====
</TABLE>
Exercise prices for options outstanding as of March 28, 1997 were as follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF
OPTIONS EXERCISE PRICES
- --------- ----------------
<S> <C>
1,040,687 $11.90 to $14.00
</TABLE>
The weighted average remaining contractual life of those options is
approximately 9.2 years.
Shares of Common Stock reserved for future issuance as of March 28, 1997 are
as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Stock options................................................... 1,968,584
Conversion shares............................................... 480,648
Convertible notes............................................... 56,466
---------
2,505,698
=========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Rental expense for all operating leases, which principally cover office
facilities, laundromats and vehicles, was approximately $2,307, $1,235 and
$1,139 for 1997, 1996T and 1995, respectively (in thousands).
Future minimum rental commitments under all noncancellable operating leases
as of March 28, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 4,140
1999............................................................. 3,668
2000............................................................. 3,056
2001............................................................. 2,287
2002............................................................. 1,218
2003 and future periods.......................................... 1,096
-------
$15,465
=======
</TABLE>
F-21
<PAGE>
COINMACH LAUNDRY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company is contingently liable on receivables sold with recourse to
finance companies. The total amount of such receivables outstanding as of
March 28, 1997 is approximately $1.6 million.
The Company is party to various legal proceedings incidental to its
business. Although the ultimate disposition of these proceedings is not
presently determinable, management does not believe that adverse
determinations in any or all such proceedings would have a material adverse
effect upon the financial condition or results of operations of the Company.
In connection with insurance coverages, which include workers compensation,
general liability and other coverages, annual premiums are subject to limited
retroactive adjustment based on actual loss experience.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Under the provisions of SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the Company is required to disclose fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate the value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
The carrying amounts of cash and cash equivalents, receivables, the New
Credit Facility, the promissory note related to the Kwik Wash Acquisition and
other long-term debt approximates their fair market value at March 28, 1997.
The carrying amount and related estimated fair value for the Company's Senior
Notes at March 28, 1997 (the carrying amount approximated the estimated fair
market at March 29, 1996) are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
11 3/4% Senior Notes.................................. $196,655 $216,320
</TABLE>
The fair value of the Senior Notes has been determined through information
obtained from quoted market prices.
11. OTHER ASSETS
In connection with the Company's establishment of a corporate development
office in Charlotte, North Carolina and the relocation of an executive officer
of the Company to such office in September 1996, the Company extended a loan
to such officer in the principal amount of $500,000 payable in five equal
annual installments commencing in July 1997, with interest accruing at a rate
of 7.5% per annum. The amount of such loan is included in other assets as of
March 28, 1997.
12. SUBSEQUENT EVENTS
Through May 1997, the Company completed certain acquisitions of businesses
or assets of businesses, with purchase prices aggregating approximately $46.0
million, utilizing funds available under the New Credit Facility.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Coinmach Corporation
We have audited the accompanying combined consolidated balance sheet of
Coinmach Corporation and Subsidiaries (formerly Solon Automated Services,
Inc., which was combined with The Coinmach Corporation and Subsidiaries, a
company under common control, beginning April 5, 1995) (the "Company") as of
September 29, 1995, and the related combined consolidated statements of
operations, shareholders' equity (deficit), and cash flows for the period from
April 5, 1995 to September 29, 1995 ("Successor period") and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from October 1, 1994 to April 4, 1995 ("Predecessor
period"). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined consolidated financial position of
Coinmach Corporation and Subsidiaries at September 29, 1995, and the combined
consolidated results of its operations and its cash flows for the Successor
period from April 5, 1995 to September 29, 1995 and the consolidated results
of its operations and its cash flows for the Predecessor period from October
1, 1994 to April 4, 1995, in conformity with generally accepted accounting
principles.
As more fully described in Note 2 to the combined consolidated financial
statements, SAS Acquisitions Inc. purchased Solon Automated Services, Inc.
("Solon") as of April 5, 1995 in a business combination accounted for as a
purchase. Subsequent thereto, on November 30, 1995, The Coinmach Corporation,
a company under common control with Solon, was merged into Solon, who
thereupon changed its name to Coinmach Corporation, in a business combination
accounted for as though it were a pooling of interests. As a result, the
combined and consolidated financial statements for the Successor are presented
on a different basis of accounting than that of the Predecessor and,
therefore, are not comparable.
/s/ Ernst & Young LLP
Melville, NY
March 20, 1996
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Solon Automated Services, Inc.:
We have audited the consolidated balance sheet of Solon Automated Services,
Inc. (a Delaware corporation) and subsidiaries as of September 30, 1994 and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the fiscal year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Solon Automated Services,
Inc. and subsidiaries as of September 30, 1994, and the results of their
operations and their cash flows for the fiscal year then ended, in conformity
with generally accepted accounting principles.
As further discussed in Note 1 to the consolidated financial statements,
effective October 2, 1993, the Company implemented the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
December 19, 1994
F-24
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
COMBINED AND CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
SEPTEMBER 29 SEPTEMBER 30
1995 1994
------------ ------------
SUCCESSOR PREDECESSOR
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 9,282 $ 7,241
Receivables, less allowance of $360 and $34.......... 4,268 1,702
Inventories.......................................... 3,902 1,257
Prepaid expenses..................................... 2,084 833
Advance rental payments.............................. 19,772 17,646
Property and equipment:
Laundry equipment and fixtures..................... 81,599 84,576
Land, building and improvements.................... 8,027 13,239
Trucks and other vehicles.......................... 1,400 254
-------- --------
91,026 98,069
Less accumulated depreciation.................... 10,320 49,342
-------- --------
Net property and equipment....................... 80,706 48,727
Contract rights, net of accumulated amortization of
$4,869 and $15,171.................................. 63,801 15,432
Goodwill, net of accumulated amortization of $1,226
and $9,694.......................................... 45,231 45,881
Other assets, principally debt issuance costs........ 10,897 4,870
-------- --------
Total assets..................................... $239,943 $143,589
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable..................................... $ 6,220 $ 3,186
Accrued commissions.................................. 8,456 4,553
Accrued interest..................................... 4,551 4,657
Other accrued expenses............................... 10,241 3,395
Deferred income taxes................................ 25,277 8,032
12 3/4% senior notes................................. 99,000 100,000
13 3/4% senior subordinated debentures, net of
unamortized discount of
$1,326 and $1,513................................... 28,674 28,487
Long-term credit facility............................ 43,477
Other long-term debt................................. 264
Shareholders' equity (deficit)
Common stock, par value $.01:
Authorized shares--1,000 and 20,000,000
Issued shares--100 and 12,174,257.................. -- 122
Class A common stock, par value $.01:
3,247,885 shares authorized and issued in 1994..... -- 33
Capital in excess of par value....................... 23,222 14,221
Accumulated deficit.................................. (7,101) (23,097)
-------- --------
16,121 (8,721)
Receivables from shareholders........................ (2,338) --
-------- --------
Total shareholders' equity (deficit)................. 13,783 (8,721)
-------- --------
Total liabilities and shareholders' equity (defi-
cit)................................................ $239,943 $143,589
======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 5, 1995 OCTOBER 1,
TO 1994 TO YEAR ENDED
SEPTEMBER 29, APRIL 4, SEPTEMBER 30,
1995 1995 1994
------------- ----------- -------------
SUCCESSOR PREDECESSOR PREDECESSOR
<S> <C> <C> <C>
Revenues............................... $89,719 $52,207 $104,553
Costs and expenses:
Laundry operating expenses........... 62,905 33,165 66,527
Depreciation and amortization........ 18,423 10,304 21,347
General and administrative........... 2,458 1,539 2,839
Gain on sale of equipment............ -- -- (109)
Restructuring costs.................. 2,200 -- --
------- ------- --------
85,986 45,008 90,604
------- ------- --------
Operating income....................... 3,733 7,199 13,949
Interest expense, net................ 11,541 8,928 18,105
------- ------- --------
Loss before income taxes and
extraordinary item.................... (7,808) (1,729) (4,156)
------- ------- --------
Provision (benefit) for income taxes:
Currently payable.................... 420 270 200
Deferred............................. (2,282) (220) 2,562
------- ------- --------
(1,862) 50 2,762
------- ------- --------
Loss before extraordinary item......... (5,946) (1,779) (6,918)
Extraordinary item, net of income
taxes of $0......................... -- 848 --
------- ------- --------
Net loss............................... $(5,946) $(2,627) $ (6,918)
======= ======= ========
Loss per share:
Before extraordinary item............ $ -- $ (.12) $ (.44)
Extraordinary item................... -- (.05) --
------- ------- --------
Net loss per share..................... $ -- $ (.17) $ (.44)
======= ======= ========
</TABLE>
See accompanying notes.
F-26
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON CLASS A COMMON EXCESS OF ACCUMULATED RECEIVABLES FROM TOTAL SHAREHOLDERS'
STOCK STOCK PAR VALUE DEFICIT SHAREHOLDER EQUITY (DEFICIT)
------ -------------- ---------- ----------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1,
1993................... $ 124 $ 33 $14,386 $(16,179) $ -- $(1,636)
Net loss................ -- -- -- (6,918) -- (6,918)
Repurchase of 270,000
shares of common
stock.................. (3) -- (267) -- -- (270)
Contribution to
retirement savings
plan................... 1 -- 102 -- -- 103
-------------------------------------------------------------------------------------
Balance, September 30,
1994................... 122 33 14,221 (23,097) -- (8,721)
Net loss--Predecessor
period................. -- -- -- (2,627) -- (2,627)
Repurchase of 45,459
shares of common
stock.................. -- -- (68) -- -- (68)
Purchase accounting
adjustments............ -- -- (2,308) 25,724 -- 23,416
Recapitalization of
common stock........... (122) (33) 155 -- -- --
Merger of TCC........... -- -- 11,222 (1,155) (338) 9,729
Advance to SAS.......... -- -- -- -- (2,000) (2,000)
Net loss--Successor
period................. -- -- -- (5,946) -- (5,946)
-------------------------------------------------------------------------------------
Balance, September 29,
1995................... $ -- $ -- $23,222 $ (7,101) $(2,338) $13,783
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
APRIL 5, 1995 OCTOBER 1,
TO 1994 TO YEAR ENDED
SEPTEMBER 29, APRIL 4, SEPTEMBER 30,
1995 1995 1994
------------- ----------- -------------
SUCCESSOR PREDECESSOR PREDECESSOR
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $ (5,946) $(2,627) $ (6,918)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization....... 18,423 10,304 21,347
Deferred income taxes............... (2,000) (220) 2,649
Amortization of debt discount and
deferred issue costs............... 735 440 878
Decrease (increase) in other
assets............................. (717) 106 (233)
Decrease (increase) in receivables,
net................................ (73) 164 78
Decrease (increase) in inventories
and prepayments.................... 930 (676) 2,074
Increase (decrease) in accounts
payable............................ (668) 1,725 (2,173)
Decrease in accrued interest........ (25) (81) (24)
Increase in other accrued expenses,
net................................ 1,980 1,081 236
-------- ------- --------
Net cash provided by operating
activities........................... 12,639 10,216 17,914
-------- ------- --------
INVESTING ACTIVITIES
Additions to property and equipment... (9,550) (4,815) (11,224)
Advance payments to location owners... (3,569) (2,129) (5,555)
Sales of property and equipment....... 5 407 16
-------- ------- --------
Net cash used in investing
activities........................... (13,114) (6,537) (16,763)
-------- ------- --------
FINANCING ACTIVITIES
Advance to SAS........................ (2,000) -- --
Repurchase of senior notes............ -- (1,000) --
Net borrowings (repayments) of bank
and other borrowings................. 1,126 -- --
Principal payments of capitalized
lease obligations.................... (143) -- --
Repurchases of common stock........... -- (68) (270)
-------- ------- --------
Net cash used in financing
activities........................... (1,017) (1,068) (270)
-------- ------- --------
Net increase (decrease) in cash....... (1,492) 2,611 881
Cash and cash equivalents, beginning
of period............................ 10,774 7,241 6,360
-------- ------- --------
Cash and cash equivalents, end of
period............................... $ 9,282 $ 9,852 $ 7,241
======== ======= ========
</TABLE>
See accompanying notes.
F-28
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying successor financial statements combine the consolidated
accounts of Coinmach Corporation and Subsidiaries, formerly Solon Automated
Services, Inc. ("Solon") with the consolidated accounts of The Coinmach
Corporation ("TCC") (collectively, the "Company") for the periods under common
control. The Predecessor financial statements reflect the consolidated
accounts of Solon only. Solon was acquired on April 5, 1995 by SAS
Acquisitions, Inc. ("SAS") (the "Solon Acquisition") a company controlled by
Golder Thoma Cressey Rauner ("GTCR"). TCC was formed in January 1995 by an
investor group, comprised principally of the same investors who formed SAS,
and acquired Coinmach Industries Co. and Super Laundry Equipment Co. L.P. on
January 31, 1995 (the "TCC Acquisition"). Both the Solon Acquisition and the
TCC Acquisition were accounted for as purchases and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair values at the
respective acquisition dates.
As described in Note 2, Solon completed a merger with TCC on November 30,
1995. This transaction was accounted for in a manner similar to a pooling of
interests. As a result of the common investor groups control over both Solon
and TCC, the accompanying financial statements have been prepared to reflect
the accounts of Solon and TCC and their wholly-owned subsidiaries on a
combined basis since the date of common control, April 5, 1995.
References to the Successor refer to the Company during the common control
period, while references to the Predecessor refer to Solon for prior periods.
The Predecessor period from October 1, 1994 to April 4, 1995 is referred to as
1995P while the Successor period from April 5, 1995 to September 29, 1995 is
referred to as 1995S. As a result of the acquisition of Solon by SAS and the
subsequent merger with TCC, the combined consolidated financial statements for
the Successor are presented on a different basis of accounting than that for
the Predecessor and therefore, are not comparable.
The Company is primarily engaged in providing coin-operated laundry equipment
services to multi-family housing complexes throughout much of the United
States. The Company owns and operates over 220,000 coin-operated washers and
dryers on routes in over 20,000 multi-family housing units in 20 states and
the District of Columbia. Such routes are located throughout the New York
Metropolitan, Mid-Atlantic, Southeast and South-Central regions of the United
States. The Company, through its subsidiary, Super Laundry, also is a supplier
of coin-operated laundromat equipment and turnkey laundromat retail stores in
the New York Metropolitan area.
Certain reclassifications have been made to the 1994 financial statements to
conform to the 1995 presentation.
All material intercompany accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR
Prior to the merger with TCC, Solon's fiscal year was the fifty-two or fifty-
three week period which ended on the Friday nearest September 30th. The fiscal
years ended September 29, 1995 and September 30, 1994 are fifty-two week
periods. Effective with the merger of Solon and TCC, the Company has changed
its fiscal year end to the Friday nearest to March 31.
F-29
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RECOGNITION OF LAUNDRY REVENUES
The Company has agreements with various property owners which provide for the
Company's installation and operation of laundry machines at various locations
in return for a commission. These agreements provide for both contingent
(percentage of revenues) and fixed commission payments. The Company reports
revenues from laundry machines on the accrual basis and has accrued the cash
computed to be in the machines at the end of the fiscal period.
Super Laundry's customers generally sign sales contracts pursuant to which
Super Laundry constructs and equips complete laundromat operations, including
location identification, construction, plumbing, electrical wiring and all
required permits. Revenue is recognized on the completed contract method. A
contract is considered complete when all costs have been incurred and either
the installation is operating according to specifications or has been accepted
by the customer. The duration of such contracts is normally less than six
months. Sales of laundromats were approximately $7.9 million for 1995S.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 29, 1995 SEPTEMBER 30, 1994
------------------ ------------------
SUCCESSOR PREDECESSOR
<S> <C> <C>
Machine repair parts................. $1,941 $1,257
Laundry equipment.................... 1,961 --
------ ------
$3,902 $1,257
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated on a straight-
line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Laundry equipment and fixtures............................... 3 to 10 years
Improvements................................................. 4 to 10 years
Trucks and other vehicles.................................... 3 to 4 years
</TABLE>
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts, and the
resulting gain or loss is included in income. Maintenance and repairs are
charged to operations currently, and replacements of laundry machines and
significant improvements are capitalized.
F-30
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation expense was $9.5 million, $6.2 million and $13.0 million for
1995S, 1995P, and fiscal year 1994, respectively.
On April 5, 1995, TCC revised its estimate of the useful life of its laundry
equipment from 5 to 8 years. The effect of this change in estimate was to
decrease loss before extraordinary item and net loss for the Successor period
by approximately $470,000.
GOODWILL
Goodwill as of September 30, 1994 represents the excess of cost over fair
value of net assets acquired, arising primarily as a result of the purchase of
Solon in 1987 by an investor group. Goodwill as of September 29, 1995
represents the excess of cost over fair value of net assets acquired arising
from the purchase of Solon on April 5, 1995 (see Note 2). Goodwill was
amortized on a straight-line basis over 40 years for the Predecessor and is
being amortized over 20 years for the Successor. Management periodically
evaluates the realizability of the goodwill balance based upon the Company's
expectations of nondiscounted cash flows and operating income. Based upon
present operations and strategic plans, management believes that no impairment
of goodwill has occurred.
CONTRACT RIGHTS
Contract rights represent amounts expended for location contracts arising from
the acquisition of laundry machines on location. These amounts, which arose
solely from purchase price allocations, are amortized on a straight-line basis
over the period of expected benefit of approximately 13 years for the
Predecessor, and ranging from 3 to 15 years for the Successor based on
independent appraisals.
ADVANCE RENTAL PAYMENTS
Advance payments to location owners are amortized on a straight-line basis
over the contract term, which generally ranges from 5 to 10 years.
INTEREST EXPENSE
Interest expense is reported net of interest income of $148,000, $112,000 and
$75,000 for 1995S, 1995P, and fiscal year 1994, respectively.
LOSS PER SHARE
In the 1995P period and in fiscal 1994, loss per share for the Predecessor
company was calculated based upon the weighted average number of common shares
and Class A common shares outstanding. Stock options outstanding, which are
common stock equivalents, have not been included as they are antidilutive.
Weighted average shares outstanding were 15,455,000 for 1995P and 15,559,000
for fiscal 1994. Loss per share data is not presented for the 1995S period as
Solon became a wholly-owned subsidiary of GTCR.
TRANSACTIONS WITH AFFILIATES
During 1995S, the Company reimbursed its parent company $114,000 for certain
restructuring costs.
F-31
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Effective October 2, 1993, Solon implemented the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). The accounting change had an immaterial effect on the
consolidated financial statements. Statement 109 requires the asset and
liability method of accounting for income taxes. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Statement 109 requires that any tax benefits
recognized for net operating loss carryforwards and other items be reduced by
a valuation allowance where it is more likely than not that the benefits may
not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("Statement 121"), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. Statement
121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The Company is required to adopt Statement 121 effective March
30, 1996 and, based on current circumstances, does not believe the effect of
adoption will be material.
2. BUSINESS COMBINATIONS
THE SOLON ACQUISITION
Solon entered into a Stock Purchase Agreement, dated as of March 7, 1995, with
Ford Coin Laundries, Inc. ("Ford"), Kwik Wash Laundries, Inc. ("Kwik Wash"),
and certain stockholders of the Predecessor company (the "Sellers"), whereby
Ford purchased from the Sellers all of the Solon's outstanding Common Stock
(the "Common Stock") and substantially all of the Solon's Class A Common Stock
(the "Class A Common Stock") (collectively, the "Shares"). The purchase price
for the Shares was $.7457 per share, for an aggregate purchase price of $11.5
million. The foregoing transaction closed and the purchase price was funded on
April 5, 1995. The source of funds used by Ford for the Shares was the cash
proceeds from the sales by Ford to (i) SAS of the Ford Non-Voting Common
Stock, pursuant to a Stock Purchase Agreement, dated April 4, 1995, and (ii)
to the holders of the Ford Voting Common Stock (collectively, the "Ford
Holders"), an option pursuant to a Letter Agreement dated April 4, 1995. As of
April 5, 1995, Ford beneficially owned, and had the sole power to dispose of,
the Shares. The Shares beneficially owned by Ford represented 100% of the
outstanding Common Stock and approximately 97% of the outstanding Class A
Common Stock.
Pursuant to the Stock Purchase Agreement with Ford, SAS purchased from Ford
all of the outstanding shares of Ford's non-voting Class A Common Stock (the
"Ford Non-Voting Common Stock"). The purchase price for the Ford Non-Voting
Common Stock was $11,400 per share, for an aggregate purchase price of $11.4
million. The sources of the funds used by SAS for the Ford Non-Voting Common
Stock were certain shareholders of TCC, including Golder Thoma Cressey Rauner
Fund IV, L.P. ("GTCR"). As of April 5, 1995, SAS beneficially owns, and has
the sole power to dispose of, 1,000 shares of the Ford Non-Voting Common
Stock.
F-32
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the Letter Agreement dated April 4, 1995, with the Ford Holders
and TCC, the Ford Holders granted to SAS, among other things, an option (the
"Option") to purchase from the Ford Holders, subject to the terms and
conditions contained therein, all of the voting shares of Ford's Common Stock
(the "Ford Voting Common Stock"), for an aggregate purchase price of $100,000.
On April 28, 1995, SAS exercised the Option. The sources of funds used by SAS
to exercise the Option were substantially the same sources used to purchase
the Ford Non-Voting Common Stock. As of April 28, 1995, SAS beneficially owns,
and has the sole power to vote and dispose of, ten shares of the Ford Voting
Common Stock.
Current shareholders of TCC and their affiliates were entitled to participate
in the equity of entities that control Solon on a pro rata basis generally in
accordance with their respective equity interests in TCC.
Solon incurred costs aggregating $848,000 in connection with the foregoing
transactions (collectively, the "Change of Control"), including a total of
$387,000 in lump sum payments made to fourteen management employees pursuant
to certain contractual arrangements relating to the Change of Control. The
total costs have been reflected as an extraordinary item in the accompanying
financial statements.
The Stock Purchase Agreement was accounted for as a purchase and, according to
a practice known as "push-down" accounting, as of April 5, 1995, Solon
adjusted its consolidated assets and liabilities to their estimated fair
values, based on preliminary independent appraisals, evaluations, estimations
and other studies. Reflected below is a summary of these adjustments (in
thousands):
<TABLE>
<S> <C>
Increase in property and equipment............................... $ 9,065
Increase in contract rights...................................... 34,063
Increase in goodwill............................................. 1,268
Increase in deferred income taxes................................ (19,465)
Other............................................................ (1,515)
--------
Increase in shareholders' equity................................. $ 23,416
========
</TABLE>
THE TCC ACQUISITION
TCC was incorporated in January 1995 and was capitalized primarily through an
equity investment by an investor group led by the majority shareholder, GTCR,
and senior management and bank financing.
TCC is a holding company which was formed to acquire partnership interests in
Coinmach Industries Co. ("Industries") and Super Laundry Equipment Co. L.P.
("Super Laundry"). On January 31, 1995, TCC acquired its partnership interests
in Industries and Super Laundry from CIC I Acquisition Corp. ("CIC I"). The
transaction resulted in TCC owning 100% interests in both Industries and Super
Laundry. The aggregate purchase price for these interests was $8.57 million,
paid in cash. The acquisition was accounted for using the purchase method of
accounting. The fair value of assets acquired (based on an independent
appraisal for certain assets) less liabilities assumed exceeded the purchase
price by approximately $7.7 million. The excess was allocated to property,
equipment and intangible assets ratably based on their respective fair values.
F-33
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE MERGER WITH TCC
On November 30, 1995, Solon completed a merger ("Merger") with TCC and Solon
through an exchange of stock. Shares of common stock of SAS were issued in
exchange for all of the issued and outstanding shares of common stock of TCC.
SAS then contributed its stock of TCC to Solon. Solon became the surviving
corporation after the merger, whereupon it changed its name to Coinmach
Corporation. Details of the results of operations of TCC and Solon for the
period prior to the merger are as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 5, 1995 TO SEPTEMBER 29, 1995
----------------------------------------
SOLON TCC COMBINED
----------- ----------- --------------
<S> <C> <C> <C>
Revenues............................. $ 51,256 $ 38,463 $ 89,719
Operating income..................... 1,410 2,323 3,733
Net loss............................. (5,496) (450) (5,946)
</TABLE>
The combined financial results presented above include an adjustment to
decrease TCC's net loss by approximately $185,000, to conform its accounting
policy for the capitalization of machine installation costs to that of Solon.
Intercompany transactions between the two companies for the period presented
were not material.
3. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 29, 1995 SEPTEMBER 30, 1994
------------------ ------------------
SUCCESSOR PREDECESSOR
<S> <C> <C>
Trade receivables...................... $1,529 $ 236
Notes receivable....................... 1,783 --
Finance lease receivables.............. 905 816
Other.................................. 411 684
------ ------
4,628 1,736
Allowance for doubtful accounts........ 360 34
------ ------
$4,268 $1,702
====== ======
</TABLE>
Notes receivable, which arise from the sale of laundromats, bear interest at a
weighted average rate of approximately 10% per annum and mature through 1998.
The notes are collateralized by the underlying laundry equipment. The Company
periodically sells notes receivable arising from the sale of laundromats to
third party finance companies. Included in other receivables are finance
reserves, which arise when the Company sells notes and a portion of the
proceeds are retained by the finance company. As the notes are collected, the
finance companies remit a portion of the collections to the Company. Many of
the notes receivable are sold with recourse to the Company (see Note 7).
Control of the notes sold with recourse is surrendered by the Company on the
date of transfer. The Company generally sells its receivables with recourse at
cost; recognizing no gain or loss.
Finance lease receivables relate to lease agreements that the Company has
entered into with one customer. Pursuant to the agreements, the Company
installs and services laundry equipment at apartment complexes owned and
operated by the customer. The difference between the aggregate lease rentals
and the cost of the related equipment is earned over the terms of the leases,
which range from 40 to 60 months. Annual future payments due under these
leases at September 29, 1995, are as follows (in thousands) 1996--$232; 1997--
$222; 1998--$185; 1999--$126; 2000--$81 and 2001--$59.
F-34
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SALE OF EQUIPMENT
Effective September 30, 1994, Solon sold approximately 600 machines for a
total of $407,000 resulting in a pretax gain of $109,000 and a related tax of
$84,000. Prior to the sale, these machines contributed revenues of $343,000
and operating income of $78,000 for fiscal year 1994.
5. RESTRUCTURING COSTS
Restructuring charges consist of one-time costs aggregating approximately $2.2
million, which include approximately $1.3 million of severance payments for 55
of Solon's management, administrative and regional personnel, approximately
$300,000 of costs to relocate Solon's financial and administrative functions
to Roslyn, New York, approximately $100,000 of costs to integrate certain
financial and operating systems, and approximately $500,000 of costs related
to the consolidation of certain of Solon's regional offices. Of the total
restructuring costs of $2.2 million, approximately $300,000 was paid during
the period ended September 29, 1995, approximately $1.4 million is expected to
be paid during the six months ending March 29, 1996, and the remaining portion
of approximately $500,000 is expected to be paid during the fiscal year ending
March 28, 1997. The 55 employee terminations include 5 management employees,
17 corporate staff financial and administrative employees and 33 regional
laundry operational employees. Notifications to employees were made on various
dates through September 1995.
6. DEBT
Substantially all of the Company's debt was retired on November 30, 1995
through an exchange offer (see Note 12).
On June 18, 1992, Solon sold in concurrent private offerings (i) $100 million
principal amount of 12 3/4% Senior Notes due 2001 (the "Senior Notes") and
(ii) $30 million principal amount of 13 3/4% Senior Subordinated Debentures
due 2002 (the "Debentures") with 3,247,885 shares (the "Shares") of the newly
granted Class A Common Stock. Effective November 6, 1992, Solon completed an
exchange offer whereby the holders of the Senior Notes and Senior Subordinated
Debentures exchanged such securities for securities with similar terms and
form which were registered under the Securities Act of 1933.
Interest was payable semiannually on January 15 and July 15 for the Senior
Notes and April 15 and October 15 for the Subordinated Debentures. The Senior
Notes were entitled to mandatory sinking fund payments of $15 million on July
15, 1998 and July 15, 1999, and $20 million on July 15, 2000. In addition,
Solon was obligated annually to offer to purchase Senior Notes at par in an
amount equal to 75% of its excess cash flow (as defined) and the proceeds of
asset dispositions ("Annual Mandatory Purchases"). Solon would have received
credit against Annual Mandatory Purchases for any amounts paid in open market
or other purchases. Solon would have received a credit against the sinking
fund payment requirements for the principal amount of Senior Notes acquired.
No annual mandatory purchases have been required in 1994. The Debentures had
no mandatory principal repayment requirements until they matured on October
15, 2002.
The Senior Notes were redeemable at Solon's option at a price equal to 106
3/8% after January 15, 1997, declining to par if redeemed after January 15,
1999. The Subordinated Debentures were redeemable at a price equal to 106 7/8%
after October 15, 1997, declining to par if redeemed after October 15, 1999.
During November 1994, Solon purchased in the open market and immediately
retired $1.0 million of the Senior Notes.
The estimated fair value of Solon's Senior Notes and Subordinated Debentures
at September 29, 1995, based upon limited quoted market activity, approximated
its recorded value.
F-35
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt issue costs totaling $5.4 million incurred in connection with the 1992
debt offerings are included in other assets and were being amortized over the
term of the Senior Notes and Debentures. Accumulated amortization is $2.2
million and $1.5 million at September 29, 1995 and September 30, 1994,
respectively.
On December 30, 1992, Solon entered into a loan and security agreement
("Credit Facility") which provided for a three-year revolving line of credit
in the amount of up to $5 million. Interest on the borrowing was based on
prime plus 2.875%, but in no event would the interest be less than the greater
of 8% per annum or $15,000 per month. Solon was also required to pay a monthly
service fee of $2,000 and an annual facility fee of 1% of the $5 million
available under the Credit Facility. Borrowings under the Credit Facility were
secured by accounts receivable, bank deposit accounts, equipment and general
intangibles of Solon. Additionally, Solon was required to maintain a joint
cash depository account with the lender. All cash collections were required to
be deposited in this account before being transferred to Solon's account.
Amounts borrowed and repaid during fiscal 1995 and 1994 totaled $2.0 million
and $10.1 million, respectively. No borrowings were outstanding under the
Credit Facility at September 29, 1995 and September 30, 1994.
Debt outstanding under the long-term credit facility and other debt of TCC as
of September 29, 1995, consists of the following (in thousands):
<TABLE>
<S> <C>
Revolving line of credit, due January 31, 2000. Interest at prime
plus 1.25% (10.25% at September 29, 1995)....................... $ 2,880
Term loan A, quarterly payments of $250 commencing April 1, 1996,
and increasing to $500 April 1, 1997, $1,250 April 1, 1998 and
$1,500 April 1, 1999. Interest at prime plus 1.25% (10.25% at
September 29, 1995)............................................. 14,000
Term loan B, quarterly payments of $1,750 commencing April 1,
2000 and increasing to $2,000 April 1, 2001 with the final two
payments of $1,750 on April 1, 2002 and July 1, 2002. Interest
at prime plus 1.75% (10.75% at September 29, 1995).............. 18,500
Term loan C, due July 1, 2002. Interest at 12.5%................. 7,500
-------
42,880
Other debt....................................................... 597
-------
$43,477
=======
</TABLE>
The long-term credit facility provided for $40 million in term loans and $10
million in aggregate for revolving credit and acquisition loan facilities.
The revolving line of credit agreement provided for up to $5 million in
borrowings, including letters of credit up to a maximum of $1 million. There
was a one-half of one percent fee per annum on the unused portion of this
facility and a two percent letter of credit fee.
The long-term credit facility also provided for acquisition loans of up to $5
million. The acquisition loans were to be used to finance acquisitions or
capital expenditures attributed to growth. Any amounts outstanding under the
acquisition line as of January 31, 2000 were to be repaid in equal quarterly
installments through July 1, 2002. Borrowings under the acquisition line bear
interest at prime plus 1.75%. There were no acquisition loans outstanding as
of September 29, 1995.
F-36
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Financing Agreement relating to the long-term credit facility required
TCC, among other things, to maintain certain financial ratios and restricted
additional investments and indebtedness. Management believes TCC was in
compliance with all covenants contained in this Financing Agreement. Loans
outstanding under this agreement were subject to prepayment upon the
occurrence of certain events such as asset dispositions, public offerings and
the generation of excess cash flow, as defined. TCC may be subject to
prepayment penalty on any fixed rate borrowings.
Industries and Super Laundry are the borrowers under the Financing Agreement.
The facility is guaranteed by TCC. Borrowings are secured by all of the assets
of TCC.
Other debt includes payments due under noncompete agreements.
Maturities of debt for TCC at September 29, 1995 are contractually payable as
follows (in thousands):
<TABLE>
<S> <C>
Years ending September:
1996............................................................. $ 873
1997............................................................. 1,724
1998............................................................. 3,500
1999............................................................. 5,500
2000............................................................. 7,630
Thereafter....................................................... 24,250
-------
$43,477
=======
</TABLE>
The Company made cash payments for interest of $10.9 million, $8.5 million and
$17.1 million for 1995S, 1995P, and fiscal year 1994, respectively.
7. RETIREMENT SAVINGS PLAN
Effective October 1, 1987, Solon formed the Solon Automated Services
Retirement Savings Plan (the "Plan"). The Plan is a defined contribution plan
available to all full-time Solon employees who have completed one year of
service. Under the terms of the Plan, Solon matches employee contributions at
a percentage determined annually by the Board of Directors. Solon provided for
matching contributions of 25% in each of 1995 and 1994. During fiscal 1994,
Solon issued $103,000 of its Common Stock to satisfy its accrued obligations
to the Plan. The number of shares issued to the Plan is based upon the
appraised value of the stock which is determined annually by an independent
appraiser. During fiscal 1995, Solon made a cash contribution of $80,000 to
satisfy its fiscal 1994 obligations to the Plan. Solon will fund the fiscal
1995 Company match through a cash contribution in 1996.
TCC has established a defined contribution plan for substantially all of its
employees. TCC's contributions to the plan for 1995S amounted to approximately
$42,500.
The Company has no obligations for other postretirement benefits.
8. STOCK OPTION PLAN
Solon adopted a stock option plan (the "Plan") in September 1987. The Plan
authorized the granting of incentive stock options, nonqualified options, or a
combination of the foregoing, to certain key employees and directors.
F-37
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Plan, 1,250,000 common shares were reserved for
issuance upon exercise of options. Shares for options that had expired or had
been surrendered or canceled without having been exercised may again have been
optioned under the Plan.
Each option granted was exercisable into one common share of Solon. In
general, 50% of stock options granted became exercisable five years after the
date of grant, with 12 1/2% of the options becoming exercisable in each of the
subsequent four years.
As of September 29, 1995 and September 30, 1994, there was a total of 212,000
and 970,000 stock options outstanding, respectively, exercisable at prices
between $.98 and $1.23 per common share. No options had been exercised since
Solon adopted the Plan. As a result of the merger with TCC, the Plan was
canceled; participants in the Plan received in aggregate consideration of
approximately $34,000.
9. INCOME TAXES
As of September 29, 1995 and September 30, 1994, the components of the
Company's net deferred tax liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 30,
1995 1994
------------- -------------
SUCCESSOR PREDECESSOR
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated tax depreciation................... $26,804 $ 9,239
Other, net..................................... 3,355 2,293
------- -------
30,159 11,532
------- -------
DEFERRED TAX ASSETS:
Net operating loss carryforwards............... 4,600 7,200
Book over tax depreciation..................... 742 --
Valuation allowance for deferred tax assets.... (460) (3,700)
------- -------
4,882 3,500
------- -------
Net deferred tax liabilities..................... $25,277 $ 8,032
======= =======
</TABLE>
As of April 5, 1995, the deferred tax asset and related valuation allowance
relating to Solon were netted and reduced to $2.6 million to reflect the net
operating loss available pursuant to limitations imposed under provisions of
the Internal Revenue Code regarding changes in ownership. In addition, as of
April 5, 1995, TCC recorded a deferred tax asset of $460,000 with a valuation
allowance of the same amount. The deferred tax asset recorded in the Successor
period does not reflect a valuation allowance because the loss can be utilized
against the deferred tax liabilities in the carryforward period. The net
operating loss carryforwards, which expire between fiscal years 2001 through
2007, consist of approximately $7 million (after the limitation) relating to
the Predecessor company and approximately $5 million relating to the Successor
company.
During the fourth quarter of fiscal 1994, Solon evaluated the realizability of
previously recorded deferred tax assets and concluded that due to certain
transactions which have occurred subsequent to October 1, 1993, it was more
likely than not that such assets would not be fully realizable. Accordingly,
Solon established a $3.7 million valuation allowance as of September 30, 1994.
The charge for this valuation allowance is included in the deferred tax
provision in the accompanying Consolidated Statement of Operations.
F-38
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
APRIL 5, 1995 OCTOBER 1,
TO 1994 TO YEAR ENDED
SEPTEMBER 29, APRIL 4, SEPTEMBER 30,
1995 1995 1994
------------- ----------- -------------
SUCCESSOR PREDECESSOR PREDECESSOR
<S> <C> <C> <C>
Federal............................... $(1,760) $ -- $2,517
State................................. (102) 50 245
------- ----- ------
$(1,862) $ 50 $2,762
======= ===== ======
</TABLE>
Deferred taxes relate primarily from timing differences resulting from using
accelerated depreciation for tax purposes and straight-line depreciation for
financial reporting purposes.
The effective income tax rate differs from the amount computed by applying the
U.S. federal statutory rate to loss before taxes as a result of state taxes
and permanent book/tax differences as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 5, 1995 OCTOBER 1,
TO 1994 TO YEAR ENDED
SEPTEMBER 29, APRIL 4, SEPTEMBER 30,
1995 1995 1994
------------- ----------- -------------
SUCCESSOR PREDECESSOR PREDECESSOR
<S> <C> <C> <C>
Expected tax benefit................. $(2,655) $(588) $(1,413)
State tax benefit, net of federal
taxes............................... (320) (69) (55)
Permanent book/tax differences:
Goodwill and other................... 1,113 394 530
Valuation allowance.................. -- 313 3,700
------- ----- -------
Recorded tax provision/(benefit)..... $(1,862) $ 50 $ 2,762
======= ===== =======
</TABLE>
The Company made cash payments for income taxes of approximately $280,000 and
$29,000 for 1995S and fiscal year 1994, respectively. There were no income tax
payments made in 1995P.
10. COMMON STOCK
Solon and its stockholders had entered into a Stockholders' Agreement dated as
of September 28, 1987. Pursuant to this Agreement, Solon was required to
purchase shares of its common stock from selling management stockholders or
their estates in the event of death, disability, termination of employment,
and certain other circumstances. Pursuant to the terms of the Stockholders'
Agreement, such purchases were made based on the higher of the stockholders'
cost or by an earnings related formula defined in the Agreement. During fiscal
1994 Solon acquired 270,000 shares, pursuant to this Agreement at a total cost
of $270,000, from management stockholders. Such shares have been retired and
canceled. The Stockholders' Agreement was terminated effective July 12, 1994.
Class A Common stockholders have no voting rights other than on matters
involving consolidation or merger, sale or transfer of all or substantially
all assets or any liquidation, dissolution or winding up of Solon. Solon's
Certificate of Incorporation provides that immediately prior to the closing of
any initial public offering of Common Stock, all outstanding shares of Class A
Common Stock will be deemed to have been converted into a like number of
shares of Common Stock.
F-39
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 30, 1995, the Company effected a recapitalization, whereby it
reduced its authorized $.01 par value common stock to 1,000 shares and issued
100 shares to the holders of the then outstanding stock. All references in the
Successor period reflect this recapitalization.
Receivables from shareholders reflect advances to SAS of $2,000,000 and notes
receivable from management who are shareholders of SAS of $338,000. Such
amounts have been reflected as reductions of shareholders' equity in the
accompanying Successor period balance sheet.
11. COMMITMENTS AND CONTINGENCIES
Rental expense for all operating leases, which principally cover office
facilities and vehicles, was $1,139,000, $807,000 and $1,577,000 for 1995S,
1995P, and fiscal year 1994, respectively.
The following is a schedule of the future minimum rental commitments under all
noncancelable leases as of September 29, 1995 (in thousands):
<TABLE>
<S> <C>
1996............................................................... $1,885
1997............................................................... 1,359
1998............................................................... 943
1999............................................................... 534
2000 and future periods............................................ 1,217
------
$5,938
======
</TABLE>
The Company is contingently liable on receivables sold with recourse to
finance companies by TCC. The total amount of such receivables outstanding as
of September 29, 1995 is approximately $4 million.
The Company is party to various legal proceedings incidental to its business.
Although the ultimate disposition of these proceedings is not presently
determinable, management does not believe that adverse determinations in any
or all such proceedings would have a material adverse effect upon the
financial condition or results of operations of the Company.
In connection with insurance coverages, which include workers compensation,
general liability and other coverages, annual premiums are subject to limited
retroactive adjustment based on actual loss experience.
As of September 30, 1994, Solon had a program pursuant to which change of
control and severance payments would be made to 14 management employees
following any sale of all of the Common Stock held by nonemployee
stockholders. Change of control payments were based on annual salaries at the
time of such sale. Severance payments were provided if, following any such
sale, the participant was not retained in a position comparable to that held
prior to the sale for a period between three to four months. In connection
with the change in control described in Note 2, payments aggregating $387,000
were made pursuant to this program.
12. SUBSEQUENT EVENT
On November 30, 1995, the Company completed an exchange offer with
substantially all the holders of the Senior Notes and Subordinated Debentures.
Through December 14, 1995, the Company issued a total of $196.7 million of 11
3/4% Senior Notes due 2005 (the "Notes") which enabled the Company to complete
this exchange offer, consummate the merger with TCC and retire its remaining
debt, and provide additional working capital. The Company incurred costs of
$4.2 million, net of income taxes, related to a 5.5% premium paid to retire
its
F-40
<PAGE>
COINMACH CORPORATION AND SUBSIDIARIES
(FORMERLY SOLON AUTOMATED SERVICES, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Notes and Subordinated Debentures and wrote-off the unamortized balance
of the related original issue discount and deferred finance costs of
approximately $800,000 and $1.9 million, net of income taxes, respectively.
The Company also incurred costs related to the retirement of a revolving
credit facility of TCC of approximately $1.9 million, net of income taxes.
Interest on the Notes is payable semi-annually on May 15 and November 15. The
Notes are redeemable at the option of the Company at any time after November
15, 2000 at a price equal to 105 7/8% declining to par if redeemed after
November 15, 2002. The Notes contain certain financial covenants and a
registration rights agreement, whereby the Company has agreed to file a
Registration Statement with the Securities and Exchange Commission.
On November 30, 1995, the Company entered into a new revolving credit
facility, ("New Credit Facility"), which provides up to a maximum of $35.0
million. Availability under the New Credit Facility is limited by an amount
equal to one semi-annual interest payment on the Notes. Interest on the
borrowings is payable monthly at a rate per annum no greater than the sum of
LIBOR plus 2.50%. The Company is obligated to pay an unused line fee in an
amount equal to 0.5% of the unused availability payable monthly in arrears.
Borrowings under the New Credit Facility are secured by real and personal
property of the Company.
F-41
<PAGE>
LETTERHEAD OF KPMG PEAT MARWICK
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CIC I Acquisition Corp.:
We have audited the accompanying consolidated balance sheets of CIC I
Acquisition Corp. and subsidiaries (the Company) as of December 31, 1994, and
the related consolidated statements of operations, stockholders' deficiency
and cash flows for each of the years in the two-year period ended December 31,
1994. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in note 14 of the accompanying notes to the consolidated
financial statements, on January 31, 1995, the Company sold its partnership
interests in its operating subsidiaries to a new corporation, The Coinmach
Corporation.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CIC I
Acquisition Corp. and subsidiaries as of December 31, 1994, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
April 28, 1995
F-42
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994
--------
<S> <C>
ASSETS
Cash................................................................. $ 987
Receivables, net of reserves of $473................................. 4,198
Inventories.......................................................... 2,154
Prepaid commissions.................................................. 3,264
Property and equipment:
Laundry equipment.................................................. 21,487
Leasehold improvements............................................. 10,438
Office equipment................................................... 1,900
Automobiles and trucks............................................. 2,903
--------
36,728
Less accumulated depreciation...................................... 20,443
--------
Net property and equipment....................................... 16,285
Goodwill, net of accumulated amortization of $1,845.................. 6,710
Other intangibles, net of accumulated amortization of $8,678......... 2,209
Other assets......................................................... 1,117
--------
$ 36,924
========
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIENCY
Accounts payable..................................................... $ 2,365
Accrued expenses..................................................... 2,012
Accrued interest..................................................... --
Commissions payable.................................................. 3,156
Long-term debt (including $350 of management loans).................. 42,184
Other long-term liabilities.......................................... 488
Minority interest.................................................... 135
Common stockholders' deficiency:
Common stock, par value $.01; authorized 1,000,000 shares; issued
and outstanding 87,000 shares in 1994 and 148,729 shares in 1993.. 1
Consideration to continuing predecessor interests in excess of book
value............................................................... --
Additional paid-in capital........................................... 39,869
Accumulated deficit.................................................. (53,286)
--------
Total stockholders' deficiency..................................... (13,416)
--------
$ 36,924
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
Revenues..................................................... $73,857 $ 71,859
Laundry operating expenses................................... 54,737 52,805
General and administrative expenses.......................... 4,938 5,570
Depreciation and amortization of property and equipment...... 7,785 8,011
Amortization of intangibles and other assets................. 6,719 7,245
------- --------
Operating loss............................................... (322) (1,772)
Interest expense............................................. 4,012 3,685
Interest expense--subordinated notes......................... 0 6,824
Non-cash charges related to management loans................. 1,341 0
------- --------
Loss before income taxes and extraordinary item.............. (5,675) (12,281)
Income taxes................................................. 27 17
------- --------
Loss before extraordinary item............................... (5,702) (12,298)
Extraordinary item--early extinguishment of debt............. 20,420 0
------- --------
Net (loss) income............................................ $14,718 $(12,298)
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONSIDERATION TO
COMMON STOCK CONTINUING PREDECESSOR ADDITIONAL TOTAL
---------------- INTERESTS IN EXCESS PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT OF BOOK VALUE CAPITAL DEFICIT DEFICIENCY
-------- ------ ---------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1,
1993................... 148,729 $ 1 $(11,756) $ 0 $(42,240) $(53,995)
Accrued preferred
dividends.............. (1,710) (1,710)
Net loss................ (12,298) (12,298)
-------- --- -------- ------- -------- --------
Balance December 31,
1993................... 148,729 1 (11,756) 0 (56,248) (68,003)
Net income.............. 14,718 14,718
Effects of restructuring
transaction (see note
7):
Shares surrendered
pursuant to
restructuring.......... (148,729) (1) 11,756 (11,756) (1)
Shares issued pursuant
to restructuring....... 87,000 1 24,164 24,165
Surrender of preferred
stock.................. 14,364 14,364
Non-cash charge related
to issuance of
management loan........ 1,341 1,341
-------- --- -------- ------- -------- --------
Balance December 31,
1994................... 87,000 $ 1 $ 0 $39,869 $(53,286) $(13,416)
======== === ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income........................................ $ 14,718 $(12,298)
Adjustments to reconcile net (loss) income to net cash
provided by
operating activities:
Depreciation and amortization.......................... 14,504 15,256
Minority interest in loss of consolidated subsidiary... (10) (19)
Provision for bad debts................................ 229 73
Increase in accrued interest........................... 0 6,824
Non-cash charges relating to management loans.......... 1,341 0
Non-cash portion of extraordinary item................. (23,487) 0
Changes in assets and liabilities:
Change in receivables................................ 732 (160)
Change in prepaid commissions, net of commissions
payable............................................. (1,236) (1,600)
(Increase) decrease in inventories................... (349) 500
(Increase) decrease in other assets.................. 2,766 (2,025)
(Decrease) increase in accounts payable and accrued
expenses............................................ (484) 1,185
-------- --------
Net cash provided by operating activities............ 8,724 7,736
-------- --------
Cash flows from investing activities:
Purchase of laundry equipment............................ (4,710) (4,089)
Purchase of fixed assets................................. (1,861) (1,790)
Additions to intangibles................................. (6) (240)
-------- --------
Net cash used in investing activities.................. (6,577) (6,119)
-------- --------
Cash flows from financing activities:
Net repayments under revolving credit facility........... (2,019) (857)
Payment of other debt.................................... (474) (200)
Management loans......................................... 350 0
Principal payments of capital lease obligations.......... (404) (348)
-------- --------
Net cash used in financing activities.................. (2,547) (1,405)
-------- --------
Net (decrease) increase in cash........................ (400) 212
Cash at beginning of period................................ 1,387 1,175
-------- --------
Cash at end of period...................................... $ 987 $ 1,387
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(1)ORGANIZATION AND BASIS OF PRESENTATION
See note 14 for subsequent event.
CIC I Acquisition Corp. ("CIC" or "Company") is a holding company that owns
Coinmach Industries Co. ("Coinmach") and Super Laundry Equipment Co. L.P.
("Super Laundry"). CIC was formed in 1989 expressly for the purpose of
acquiring an 85% general partnership interest in Coinmach and all of the
common stock of Super Laundry Equipment Corp., a predecessor company to
Super Laundry.
Coinmach is principally engaged in providing laundry equipment and related
services to multi-family housing complexes in the New York metropolitan
area. Super Laundry is principally a supplier of coin-operated laundromat
equipment, and turnkey laundromat retail stores in the New York
metropolitan area.
On January 31, 1995, the Company sold its partnership interest in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation (see note
14).
On December 15, 1993, CIC, on a stand alone basis, completed a "pre-
packaged" voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Plan"), which was approved by 100% of
the Company's shareholders and creditors. Neither Coinmach nor Super
Laundry were parties to this agreement. The Plan provided for the Company's
existing senior subordinated notes, junior subordinated promissory notes,
preferred stock and common stock to be exchanged for 87,000 shares of
common stock valued at $24,163. The Plan, which was confirmed and court
approved on January 21, 1994, and became effective February 4, 1994, has
been reflected in the 1994 financial statements and has been recorded in
accordance with the guidelines provided by the Financial Accounting
Standards Board (FASB 15 "Accounting for Troubled Debt Restructuring").
Pursuant to the Plan, the Company also amended its then existing revolving
and term loan agreement (see note 6(a)). As a result of the above, the
Company recognized an extraordinary gain, net of legal fees and other
direct costs of $20,420 on the early extinguishment of the debt. The
Company also incurred $1,341 in non-cash expenses related to the estimated
fair value of the equity conversion feature of debt issued pursuant to the
Plan (see note 6). In addition, the minority partners in Coinmach
extinguished their ownership positions and the Company now effectively owns
100% of Coinmach (see note 7).
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CIC, Coinmach
and Super Laundry. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b)INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method. Inventories include
laundry equipment, spare parts and construction costs.
(c)REVENUE RECOGNITION
Super Laundry's customers generally sign sales contracts whereby Super
Laundry will construct and equip a complete laundromat operation, including
location identification, construction, plumbing, electrical wiring and all
required permits. Revenue is recognized on the completed contract method. A
contract is considered
F-47
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
complete when all costs have been incurred and either the installation is
operating according to specifications or has been accepted by the customer.
The duration of such contracts is normally less than six months.
Sales of laundromats were approximately $14,579 and $13,054 for the years
ended December 31, 1994 and 1993, respectively.
(d)PROPERTY AND EQUIPMENT
Laundry equipment, consisting primarily of commercial washers and dryers,
and fixed assets, are stated at cost. The cost of remanufacturing equipment
is included in the cost of laundry equipment. The cost of laundry room
improvements is included in leasehold improvements. The Company capitalized
remanufacturing and laundry room improvement costs of approximately $2,848
and $2,639 for the years ended December 31, 1994 and 1993, respectively.
Depreciation of laundry equipment and fixed assets is calculated using the
straight-line method over their estimated useful lives, generally five
years. Leasehold improvements are amortized using the straight line method
over the shorter of the lease term or estimated useful life of the asset.
The Company's policy is to write-off fully depreciated assets and the
related accumulated depreciation and amortization. Depreciation expense was
approximately $7,785 and $8,011 for the years ended December 31, 1994 and
1993, respectively.
The Company reviews the undiscounted cash flows of its laundry locations in
assessing whether its property and equipment (primarily laundry equipment
and laundry room improvements) may be impaired. The Company does not
believe that the adoption of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to be Disposed Of" will have a material impact on the
Company's financial position or results of operations.
(e)PREPAID COMMISSIONS
The Company capitalizes contractually required advance commissions and
certain incentive payments paid in connection with the acquisition of its
contractual rights to laundry room locations. Such amounts are amortized on
a straight-line basis over the life of the related lease or the related
contractual agreement. Amortization expense on prepaid commissions amounted
to approximately $593 and $557 for the years ended December 31, 1994 and
1993, respectively.
(f)CONTRACTS RIGHTS
Contract rights represent amounts expended for location contracts arising
from the acquisition of laundry machines on location. These amounts are
amortized on a straight-line basis over the remaining life of the
corresponding contract. Amortization expense on contract rights was $3,443
and $4,075 for the years ended December 31, 1994 and 1993, respectively.
(g)INTANGIBLES
Intangibles, consisting principally of covenants not to compete, computer
software and deferred financing costs are amortized over their estimated
useful lives. Amortization expense on intangibles amounted to approximately
$2,375 and $2,100 for the years ended December 31, 1994 and 1993,
respectively.
(h)GOODWILL
Goodwill is being amortized, using the straight-line method, over 40 years.
Amortization expense on goodwill amounted to $308 and $301 for the years
ended December 31, 1994 and 1993, respectively. The Company periodically
evaluates the recoverability of goodwill based on the undiscounted cash
flows of the businesses acquired.
F-48
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(i)INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Statement 109 required a change from the deferred method of accounting for
income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company adopted Statement 109 as of January 1, 1993,
the effect of which was not material to the Company's consolidated
financial statements.
(3)RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
1994
------
<S> <C>
Accounts receivable............................................. $1,627
Notes receivable................................................ 2,437
Finance reserves................................................ 607
------
4,671
Allowance for doubtful accounts................................. (473)
------
$4,198
======
</TABLE>
At December 31, 1994, notes receivable bear interest at a weighted average
interest rate of approximately 10% and mature through 1998. The notes are
collateralized by the underlying laundry equipment. The Company
periodically sells notes receivable arising from the sale of laundromats to
third party finance companies. Finance reserves arise when the Company
sells notes and a portion of the proceeds are retained by the finance
company. As the notes are collected, the finance companies remit a portion
of the collections to the Company. Many of the notes receivable are sold
with recourse to the Company (see note 8). Control of the notes sold with
recourse is surrendered by the Company on the date of transfer. The Company
generally sells its receivables with recourse at cost, recognizing no gain
or loss.
(4)TRANSACTIONS WITH AFFILIATES
The company sold certain trade notes receivable to Cointrol Credit Co.,
L.P. ("Credit"), a company created in 1991 and owned by certain officers
and directors of the Company and outside investors.
All such notes were sold to yield a fair market rate of return as
determined by rates available from unrelated finance companies for similar
notes. The aggregate outstanding balance of all notes sold to Credit as of
December 31, 1994 was $641. These notes are with recourse to the Company
and mature through 1998. In April 1995, the Company entered into an
agreement with Credit to repurchase the remaining receivables outstanding
at their then face value.
F-49
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(5)INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
1994 USEFUL LIVES
------- ------------
<S> <C> <C>
Covenants not to compete........................... $ 4,313 5 years
Computer software.................................. 4,050 5 years
Deferred financing costs........................... 1,552 Life of debt
Other.............................................. 972 5 years
-------
10,887
Accumulated amortization........................... 8,678
-------
$ 2,209
=======
</TABLE>
(6)LONG-TERM DEBT
Long Term debt consists of the following:
<TABLE>
<CAPTION>
1994
-------
<S> <C>
Revolving line of credit, due February 28, 1995, interest at
prime plus 1.75% (a).......................................... $25,848
Term loan, due February 28, 1995 (a)........................... 15,000
Senior subordinated notes, originally due October 1999,
interest at 14.5% (c)......................................... --
Junior subordinated promissory notes, originally due October
2000 (d)...................................................... --
Management loans, due February, 2004, interest at prime plus
1.75%, convertible into 7,000 shares of common stock after
February, 1999 (b)............................................ 350
Other (e)...................................................... 986
-------
$42,184
=======
</TABLE>
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation.
In connection with this sale, the Company paid off all amounts owed under
its revolver and term loan debt (see note 14). The accompanying financial
statements do not reflect the sale or the related repayment of debt.
On December 15, 1993, the Company finalized negotiations with the holders
of the revolving line of credit, term loan, senior subordinated note
holders, and the junior subordinated promissory note holders. Pursuant to
the Plan, the holders of the subordinated note and the junior notes
exchanged their notes, including accrued interest through December 15,
1993, for 87,000 shares of the restructured company's common stock. The
Plan was confirmed and court approved in January 1994.
(a) On March 16, 1990, the Company entered into a bank agreement that
provided for a term loan of $15,000 originally payable in eight
quarterly installments of $1,875 commencing April 1, 1994, and a
revolving line of credit of up to $35,000 for a term of five years. On
February 4, 1994, the maximum revolver facility was reduced to $29,413.
In addition, commencing March 1, 1994 and continuing on
F-50
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
the first day of each month thereafter, the revolving credit facility
will be reduced by $175 per month through June 1994, and then $212 per
month, until the termination of the facility, including the term loan,
on February 28, 1995.
The interest rate for bank borrowing is the prime rate plus 1.75%. As of
December 31, 1994, the interest rate on these loans was 10.25%. In
addition, the agreement provides for the payment of a facility fee of
.125% per annum on average daily outstanding balances and an unused line
fee of .50% per annum on the average daily balance of the revolving
loans. The agreement contains certain restrictive covenants and requires
the Company, among other things, to maintain certain financial ratios
and to restrict investments, additional indebtedness and payment of
dividends. The loan is secured by all of the assets of the Company. See
Note 14 for description of subsequent event.
(b) Pursuant to the Plan, senior management loaned the Company $350 due
February 4, 2004. Interest is payable monthly, at the rate of 1.75%
over prime. As of December 31, 1994, the interest rate on these loans
was 10.25%. The loans are convertible, upon the earlier of five years
or upon certain circumstances, into 7% of the Company's fully diluted
common stock. These loans, which are subordinated to the revolving line
of credit and the term loan, were funded February 4, 1994 (see note 7).
Based on an independent appraisal, the estimated value of the 7%
interest of the Company (issuable upon conversion of the loans)
exceeded the principal amount of the loans by $1,341. Accordingly, a
non-cash charge equal to such amount was recorded in 1994. The loans
were repaid in connection with the subsequent event described in Note
14.
(c) In 1989 and 1990, the Company sold $30,000 of its 14.5% senior
subordinated notes due October 1999. Interest was payable on April 15
and October 15 of each year commencing April 15, 1990. The notes were
redeemable, at the option of the Company, at amounts decreasing from
114.5% of par value at October 15, 1989 to par value at October 15,
1998. Pursuant to the Plan, the notes were cancelled and an
extraordinary gain was recognized on the early extinguishment of the
debt in 1994 (see note 7).
(d) In 1989, the Company issued junior subordinated promissory notes to the
prior owners of Coinmach. The notes, along with accrued interest, were
cancelled in 1994 pursuant to the Plan (see note 7).
(e) Other debt includes payments due under non-compete agreements.
Maturities of long-term debt at December 31, 1994 are contractually
payable as follows:
<TABLE>
<S> <C>
1995................................. $41,329
1996................................. 376
1997................................. 129
1998................................. 0
Thereafter........................... 350
-------
$42,184
=======
</TABLE>
(7)RESTRUCTURING
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation (see note
14).
On December 15, 1993, CIC, on a stand alone basis, completed a "pre-
packaged" voluntary petition for reorganization under Chapter 11 for the
United States Bankruptcy Code, which was approved by 100% of the Company's
shareholders and creditors (see note 1). Neither Coinmach nor Super Laundry
were parties to this agreement. The Plan provided for the Company's
existing senior subordinated notes, junior subordinated promissory notes,
preferred stock and common stock to be exchanged for 87,000 shares of
common stock valued at $24,163. The carrying value of the senior
subordinated notes, junior subordinated
F-51
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
notes and related accrued interest was $30,000, $1,500, and $16,149,
respectively. The preferred stock and common stock had a net carrying value
of $2,609, consisting of preferred stock of $14,364, and common stock of
$1, offset by the carrying value of the consideration to continuing
predecessor interests in excess of book value of $11,756. The Plan was
confirmed and court approved on January 21, 1994, became effective February
4, 1994, and has been reflected in the 1994 financial statements. In
addition, pursuant to the Plan, the Company amended its then existing
revolving and term loan agreement. As a result of the above, the Company
recognized an extraordinary gain of $20,420, net of legal fees and other
direct costs of $3,067, on the early extinguishment of the debt in 1994. In
addition, $14,364, representing the carrying value of the preferred stock,
is included in stockholders' deficiency. Pursuant to the Plan, the equity
position of the shareholder to which the continuing predecessor interests
were attributed surrendered such position. Consequently, the carrying value
of the continuing predecessor interests has been charged to the accumulated
deficit account. The restructuring has been treated as a tax free exchange
of debt for equity in accordance with the provisions of the Internal
Revenue Service Code.
The Plan required two members of senior management to loan the Company
$350. These loans have an interest rate of prime plus 1.75% and are due in
2004. The loans were funded February 4, 1994, and are reflected in the
accompanying financial statements as long-term debt.
Also pursuant to the Plan the Company entered into non-compete agreements
with two former shareholders totaling approximately $954.
(8)COMMITMENTS AND CONTINGENCIES
Coinmach is obligated under long-term leases relating to revenue equipment
locations. The terms of these leases principally range from three to six
years, most of which provide for fixed monthly commission payments and
contain renewal options. The majority of these leases contain provisions
permitting the cancellation of the lease and/or adjustment of the
commission by Coinmach if minimum revenue levels are not achieved. In
addition, Coinmach rents office and warehouse space from SSB Corporation
("SSB"). SSB is owned by certain individuals who were also owners of the
Company, prior to the Plan. The lease, expiring on May 1, 1995, provides
for annual rentals of $368 and for the payment by Coinmach of all operating
expenses.
Super Laundry leases its facilities from a related party under an operating
lease that expires on December 31, 1996 and provides for a minimum annual
rental of $57 in 1993 increasing to $60 in 1994 and $63 in 1996. Under the
terms of the lease, Super Laundry is required to pay operating costs.
Rental expense for this lease amounted to $72 and $71 for the years ended
December 31, 1994 and 1993, respectively. In addition, Super Laundry also
leases a warehouse from a related party on a month-to-month basis. Rental
expense for this lease amounted to $39 and $42 for the years ended December
31, 1994 and 1993, respectively. Effective January 1, 1993, Super Laundry
entered into a five year lease for a sales office. This lease expires
December 31, 1997 and provides for a minimum annual rental of $23 in 1993,
increasing by 4% each successive year through 1997. The lease also calls
for Super Laundry to pay operating costs. Rental expense including
operating costs for this lease amounted to $24 and $30 for the years ended
December 31, 1994 and 1993, respectively.
Future minimum lease payments under noncancellable operating leases
(excluding commissions for laundry equipment locations) as of December 31,
1994 are as follows:
<TABLE>
<S> <C>
1995.............................................................. $367
1996.............................................................. 108
1997.............................................................. 27
----
Total future minimum lease payments............................. $502
====
</TABLE>
F-52
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
Rent expense, excluding commission payments for laundry equipment
locations, amounted to approximately $642 and $599 for the years ended
December 31, 1994 and 1993, respectively.
Super Laundry is contingently liable on receivables sold, with recourse, to
finance companies. The total amount outstanding is approximated at $7,919
as of December 31, 1994.
Under agreements between Super Laundry and certain finance companies, a
portion of the notes receivable sales price is retained by the finance
company until the receivable is collected. Amounts retained under the
agreements amounted to $607 as of December 31, 1994, and are shown in the
accompanying consolidated balance sheets as receivables.
Coinmach has entered into leasing arrangements for automobiles and trucks
and office equipment which are accounted for as capital leases. At December
31, 1994, the gross amount of such assets amounted to $1,646, and
accumulated amortization amounted to $889. Future minimum lease payments as
of December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995.............................................................. $359
1996.............................................................. 133
1997.............................................................. 99
----
Minimum lease payments............................................ 591
Less amount representing interest................................. 103
----
Present value of net minimum lease payments....................... $488
====
</TABLE>
The Company is party to certain lawsuits and claims relating to its
operations. It is the opinion of management, based on the advice of outside
counsel, that such lawsuits and claims will be resolved without material
effect to the Company's consolidated financial statements.
(9)INCOME TAXES
Income tax expense of $27 and $17 for the years ended December 31, 1994 and
1993, respectively, represents state and local taxes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1994 are presented
below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 21,200
Fixed and intangible assets, principally due to differences
between tax and financial reporting bases................. 3,117
Allowance for doubtful accounts.............................. 189
--------
Gross deferred tax assets.................................. 24,506
Less valuation allowance..................................... (24,506)
--------
Net deferred tax asset..................................... $ -0-
========
</TABLE>
CIC files a consolidated Federal income tax return with Super Laundry and
includes its equity in the earnings or loss of Coinmach. At December 31,
1994, net operating loss carryforwards of approximately $53,000 are
available to offset future taxable income and expire commencing 2004
through 2009.
F-53
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(10)MULTI-EMPLOYER PLAN
Coinmach participated with other companies in making contributions to a
multi-employer pension plan for the benefit of its union employees.
Contributions to the Plan were $40 for the year ended December 31, 1993.
Effective January 1, 1994, Coinmach no longer participates in the pension
plan.
(11)STOCK OPTION PLAN
Pursuant to the Plan, the Company adopted two stock option plans, which
provide for the grant and exercise of options to purchase up to 6,000
shares of the Company's common stock upon attainment of certain annual
earnings performance goals through 1997. One of the plans is for the
employees of the Company, and provides for the grant and exercise of 5,000
shares. On February 4, 1994, options representing 1,000 shares under this
plan were granted to certain employees and were immediately vested but were
not to be exercisable unless 1994 earnings performance goals were attained.
The employee plan also provides for the grant of options to purchase an
additional 1,000 shares in 1994 and each year through December 31, 1997.
Such options will be vested when granted. The second stock option plan
provides for the grant of options to purchase 1,000 shares to a financial
advisor upon attainment of annual earnings performance goals through 1995.
Under both plans, the options were to expire ten years from the dates of
grant and were exercisable at $50 per share. No options have been exercised
and in connection with the subsequent event described in note 14, the stock
option plans were terminated and all outstanding options were cancelled.
(12)PROFIT SHARING PLAN
Effective April 1, 1994, the Company established a profit sharing and
retirement plan (the "Coinmach Profit Sharing Plan") for substantially all
of its employees. Pursuant to the Coinmach Profit Sharing Plan, eligible
employees may defer up to 15% of their salaries up to a maximum level
imposed by applicable federal law. Coinmach makes matching contributions in
increasing amounts, based upon the number or years of service performed by
eligible participants, up to a maximum of 6% of an eligible employee's
salary. Matching contribution percentages range from 5% for one to two
years of service up to 25% for five or more years of service and vest over
a six year period. Company contributions to the plan for the year ended
December 31, 1994 amounted to $64.
(13)SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $4,012 and $3,744 for interest for the years
ended December 31, 1994 and 1993, respectively.
The Company entered into leasing arrangements accounted for as capital
leases in the amount of approximately $207 and $406 for the years ended
December 31, 1994 and 1993, respectively.
(14)SUBSEQUENT EVENT
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation ("Corp.").
In connection with this sale, the Company, Coinmach and Super Laundry paid
off all amounts owed under their existing revolver and term loan debt (see
note 6). Corp. is owned by an investor group (83%) and the management of
Coinmach and Super Laundry (17%). Corp. financed the transaction with
approximately $11,600 of new equity, and debt financing of up to $50,000.
Under the terms of the financing, no principal payments on the debt are due
until April 1996.
F-54
<PAGE>
LETTERHEAD OF KPMG PEAT MARWICK
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CIC I Acquisition Corp.:
We have audited the accompanying consolidated balance sheet of CIC I
Acquisition Corp. and subsidiaries (the Company) as of January 31, 1995, and
the related consolidated statements of operations and accumulated deficit and
cash flows for the one-month period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As discussed in note 13 of the accompanying notes to the consolidated
financial statements, on January 31, 1995, the Company sold its partnership
interests in its operating subsidiaries to a new corporation, The Coinmach
Corporation. The accompanying consolidated financial statements reflect the
financial position, results of operations and cash flows of the Company
immediately prior to the sale.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CIC I
Acquisition Corp. and subsidiaries as of January 31, 1995, and the results of
their operations and their cash flows for the one-month period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
April 28, 1995
F-55
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Cash................................................................. $ 1,162
Receivables, net of reserve of $447.................................. 3,261
Inventories.......................................................... 2,353
Prepaid commissions.................................................. 3,333
Property and equipment:
Laundry equipment.................................................. 21,848
Leasehold improvements............................................. 10,604
Office equipment................................................... 1,917
Automobiles and trucks............................................. 2,934
--------
37,303
Less accumulated depreciation........................................ 21,183
--------
Net property and equipment......................................... 16,120
Goodwill, net of accumulated amortization of $1,883.................. 6,672
Other intangibles, net of accumulated amortization of $8,802......... 2,053
Other assets......................................................... 1,115
--------
$ 36,069
========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable..................................................... $ 2,197
Accrued expenses..................................................... 2,134
Commissions payable.................................................. 2,935
Long-term debt (including $350 of management loans).................. 41,800
Other long-term liabilities.......................................... 461
Minority interest.................................................... 133
Stockholders' deficiency:
Common stock, par value $.01; authorized 1,000,000 shares; issued
and outstanding 87,000 shares..................................... 1
Additional paid-in capital........................................... 39,869
Accumulated deficit.................................................. (53,461)
--------
Total stockholders' deficiency................................... (13,591)
--------
$ 36,069
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE MONTH ENDED JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues............................................................. $ 5,879
Laundry operating expenses........................................... 4,229
General and administrative expenses.................................. 450
Depreciation and amortization of property and equipment.............. 739
Amortization of intangibles and other assets......................... 241
--------
Operating income..................................................... 220
Interest expense..................................................... 395
--------
Net loss............................................................. (175)
Accumulated deficit at beginning of period........................... (53,286)
--------
Accumulated deficit at end of period................................. $(53,461)
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE MONTH ENDED JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................................. $ (175)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization...................................... 980
Minority interest in loss of consolidated subsidiary............... (2)
Changes in assets and liabilities:
Decrease in receivables.......................................... 937
Change in prepaid commissions, net of commission payable......... (302)
(Increase) in inventories........................................ (199)
Decrease in other assets......................................... 2
(Decrease) in accounts payable and accrued expenses.............. (44)
------
Net cash provided by operating activities........................ 1,197
------
Cash flows from investing activities:
Purchase of laundry equipment........................................ (361)
Purchase of other fixed assets....................................... (215)
Additions to intangibles............................................. (35)
------
Net cash used in investing activities.............................. (611)
------
Cash flows from financing activities:
Net repayments under revolving credit facility....................... (332)
Payment of other debt................................................ (52)
Principal payments of capital lease obligations...................... (27)
------
Net cash used in financing activities.............................. (411)
------
Net increase in cash............................................... 175
Cash at beginning of period............................................ 987
------
Cash at end of period.................................................. $1,162
======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
(1)ORGANIZATION AND BASIS OF PRESENTATION
See note 13 for subsequent event.
CIC I Acquisition Corp. ("CIC" or "Company") is a holding company that owns
Coinmach Industries Co. ("Coinmach") and Super Laundry Equipment Co. L.P.
("Super Laundry"). CIC was formed in 1989 expressly for the purpose of
acquiring an 85% general partnership interest in Coinmach and all of the
common stock of Super Laundry Equipment Corp., a predecessor company to
Super Laundry.
Coinmach is principally engaged in providing laundry equipment and related
services to multi-family housing complexes in the New York metropolitan
area. Super Laundry is principally a supplier of coin-operated laundromat
equipment, and turnkey laundromat retail stores in the New York
metropolitan area.
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation (see note
13). The accompanying consolidated financial statements reflect the
financial position, results of operations, and cash flows of the Company
immediately prior to the sale.
On December 15, 1993, CIC, on a stand alone basis, completed a "pre-
packaged" voluntary capital restructuring (the "Plan") which was approved
by 100% of the Company's shareholders and creditors. Neither Coinmach nor
Super Laundry were parties to this agreement. The Plan provided for the
Company's existing senior subordinated notes, junior subordinated
promissory notes, preferred stock and common stock to be exchanged for
87,000 shares of common stock valued at $24,163. The Plan, which was
confirmed and court approved on January 21, 1994, and became effective
February 4, 1994, was reflected in the 1994 financial statements, and was
recorded in accordance with the guidelines provided by the Statement of
Financial Accounting Standards Board (FASB 15 "Accounting for Troubled Debt
Restructuring"). Pursuant to the Plan, the Company also amended its
existing revolving and term loan agreement (see note 6(a)). As a result of
the above, the Company recognized an extraordinary gain, net of legal fees
and other direct costs, of $20,420 on the early extinguishment of the debt
in 1994. The Company also incurred $1,341 in non-cash expenses related to
the estimated fair value of the equity conversion feature of debt issued
pursuant to the Plan (see note 6). In addition, the minority partners in
Coinmach extinguished their ownership positions and the Company effectively
owned 100% of Coinmach (see note 7).
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CIC, Coinmach
and Super Laundry. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b)INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method. Inventories include
laundry equipment, spare parts and construction costs.
(c)REVENUE RECOGNITION
Super Laundry's customers generally sign sales contracts whereby Super
Laundry will construct and equip a complete laundromat operation, including
location identification, construction, plumbing, electrical wiring
F-59
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
and all required permits. Revenue is recognized on the completed contract
method. A contract is considered complete when all costs have been incurred
and either the installation is operating according to specifications or has
been accepted by the customer. The duration of such contracts is normally
less than six months.
Sales of laundromats were $451 for the one month ended January 31, 1995.
(d)PROPERTY AND EQUIPMENT
Laundry equipment, consisting primarily of commercial washers and dryers,
and other fixed assets, are stated at cost. The cost of remanufacturing
equipment is included in the cost of laundry equipment. The cost of laundry
room improvements is included in leasehold improvements. The Company
capitalized remanufacturing and laundry room improvement costs of
approximately $273 for the month ended January 31, 1995.
Depreciation of laundry equipment and fixed assets is calculated using the
straight-line method over their estimated useful lives, generally five
years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or estimated useful life of the asset.
The Company's policy is to write-off fully depreciated assets and the
accumulated depreciation and amortization. Depreciation and amortization
expense was approximately $739 for the month ended January 31, 1995.
The Company reviews the undiscounted cash flows of its laundry locations in
assessing whether its property and equipment (primarily laundry equipment
and laundry room improvements) may be impaired. The Company does not
believe that the adoption of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to be Disposed Of" will have a material impact on the
Company's financial position or results of operations.
(e)PREPAID COMMISSIONS
The Company capitalizes contractually required advanced commissions and
certain incentive payments paid in connection with the acquisition of its
contractual rights to laundry room locations. Such amounts are amortized on
a straight-line basis over the life of the related lease or the related
contractual agreement. Amortization expense on prepaid commission amounted
to approximately $12 for the month ended January 31, 1995.
(f)CONTRACT RIGHTS
Contract rights represent amounts expended for location contracts arising
from the acquisition of laundry machines on location. These amounts are
amortized on a straight-line basis over the remaining life of the
corresponding contract. Such amounts were fully amortized as of January 31,
1995.
(g)INTANGIBLES
Intangibles, consisting principally of covenants not to compete, computer
software and deferred financing costs are amortized over their estimated
useful lives. Amortization expense on intangibles amounted to approximately
$191 for the month ended January 31, 1995.
(h)GOODWILL
Goodwill is being amortized, using the straight-line method, over 40 years.
Amortization expense on goodwill amounted to $38 for the month ended
January 31, 1995.
F-60
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
(i)INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Statement 109 requires the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(3)RECEIVABLES
<TABLE>
<CAPTION>
1995
------
<S> <C>
Accounts receivable............................................... $1,033
Notes receivable.................................................. 2,153
Finance reserves.................................................. 522
------
3,708
Allowances for doubtful accounts.................................. (447)
------
$3,261
======
</TABLE>
At January 31, 1995, notes receivable bear interest at a weighted average
interest rate of approximately 10% and mature through 1998. The notes are
collateralized by the underlying equipment. The Company periodically sells
notes receivable arising from the sale of laundromats to third party
finance companies. Finance reserves arise when the Company sells notes and
a portion of the proceeds are retained by the finance company. As the notes
are collected, the finance companies remit a portion of the collections to
the Company. Many of the notes receivable are sold with recourse to the
Company (see note 8). Control of the notes sold with recourse is
surrendered by the Company on the date of transfer. The Company generally
sells its receivables with recourse at cost, recognizing no gain or loss.
(4)TRANSACTIONS WITH AFFILIATES
The Company sold certain trade notes receivable to Cointrol Credit Co.,
L.P. ("Credit"), a company created in 1991 and owned by certain officers
and directors of the Company and outside investors.
All such notes are sold to yield a fair market rate of return as determined
by rates available from unrelated finance companies for similar notes. The
aggregate outstanding balance of all notes sold to Credit as of January 31,
1995 was $590. These notes are with recourse to the Company and mature
through 1998. In April 1995, the Company entered into an agreement with
Credit to repurchase the remaining receivables outstanding.
F-61
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
(5)INTANGIBLES
<TABLE>
<CAPTION>
ESTIMATED
1995 USEFUL LIVES
------- ------------
<S> <C> <C>
Covenants not to compete............................. $ 4,281 5 years
Computer software.................................... 4,050 5 years
Deferred financing costs............................. 1,552 Life of debt
Other................................................ 972 5 years
-------
10,855
Accumulated amortization............................. 8,802
-------
$ 2,053
=======
</TABLE>
(6)LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Revolving line of credit, due February 28, 1995 interest at prime
plus 1.75%(a).................................................... $25,516
Term loan, due February 28, 1995(a)............................... 15,000
Management loans, due February, 2004, interest at prime plus
1.75%, convertible into 7,000 shares of common stock after
February, 1999(b)................................................ 350
Other(c).......................................................... 934
-------
$41,800
=======
</TABLE>
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation.
In connection with this sale, the Company paid off all amounts owed under
its revolver and term loan debt (see note 13). The accompanying financial
statements do not reflect the sale or the related repayment of debt.
On December 15, 1993, the Company finalized negotiations with the holders
of the revolving line of credit, term loan, senior subordinated note
holders, and the junior subordinated promissory note holders. Pursuant to
the Plan, the holders of senior subordinated notes in the amount of $30,000
and junior subordinated promissory notes in the amount of $1,979 exchanged
their notes, including accrued interest of approximately $16,150 through
December 15, 1993, for 87,000 shares of the restructured company's common
stock.
(a) On March 16, 1990, the Company entered into a bank agreement that
provided for a term loan of $15,000 originally payable in eight
quarterly installments of $1,875 commencing April 1, 1994, and a
revolving line of credit of up to $35,000 for a term of five years. On
February 4, 1994, the maximum revolver facility was reduced to $29,413.
In addition, commencing March 1, 1994 and continuing on the first day
of each month thereafter, the revolving credit facility will be reduced
by $175 per month through June 1994, and then $212 per month, until the
termination of the facility, including the term loan, on February 28,
1995.
F-62
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
The interest rate for bank borrowings is the prime rate plus 1.75%. As
of January 31, 1995, the interest rate on these loans was 10.25%. In
addition, the agreement provides for the payment of a facility fee of
.125% per annum on average daily outstanding balances and an unused
line fee of .50% per annum on the average daily balance of the
revolving loans. The agreement contains certain restrictive covenants
and requires the Company, among other things, to maintain certain
financial ratios and to restrict investments, additional indebtedness
and payment of dividends. The loan is secured by all of the assets of
the Company. See note 13 for a description of the subsequent event.
(b) Pursuant to the Plan, senior management loaned the Company $350 due
February 4, 2004. Interest is payable monthly, at the rate of 1.75%
over prime. As of January 31, 1995, the interest rate on these loans
was 10.25%. The loans are convertible, upon the earlier of five years
or upon certain circumstances, into 7% of the Company's fully diluted
common stock. These loans, which are subordinated to the revolving line
of credit and the term loan, were funded February 4, 1994 (see note 7).
The loans were repaid in connection with the subsequent event described
in note 13.
(c) Other debt includes payments due under non-compete agreements.
Maturities of long-term debt at January 31, 1995 are contractually
payable as follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
------------------------
<S> <C>
1996......................................... $40,945
1997......................................... 376
1998......................................... 129
2005......................................... 350
-------
$41,800
=======
</TABLE>
(7)RESTRUCTURING
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation (see note
13).
On December 15, 1993, CIC, on a stand alone basis, completed a "pre-
packaged" voluntary capital restructuring which was approved by 100% of the
Company's shareholders and creditors (see note 1). Neither Coinmach nor
Super Laundry were parties to this agreement. The Plan provided for the
Company's existing senior subordinated notes, junior subordinated
promissory notes, preferred stock and common stock to be exchanged for
87,000 shares of common stock valued at $24,163. The carrying value of the
senior subordinated notes, junior subordinated notes and related accrued
interest was $30,000, $1,500, and $16,149, respectively. The preferred
stock and common stock had a net carrying value of $2,609, consisting of
preferred stock of $14,364, and common stock of $1, offset by the carrying
value of the consideration to continuing predecessor interests in excess of
book value of $11,756. The Plan, which was confirmed and court approved on
January 21, 1994 and became effective February 4, 1994, was reflected in
the 1994 financial statements. In addition, pursuant to the Plan, the
Company amended its existing revolving and term loan agreement. As a result
of the above, the Company recognized an extraordinary gain of $20,420, net
of legal fees and other direct costs of $3,067, on the early extinguishment
of the debt. In addition, $14,364, representing the carrying value of the
preferred stock, is included in common stockholders' deficiency. Pursuant
to the Plan, the equity position of the shareholder to which the continuing
predecessor
F-63
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
interests was attributed surrendered such position. Consequently, the
carrying value of the continuing predecessor interests was charged to the
accumulated deficit account. The restructuring has been treated as a tax
free exchange of debt for equity in accordance with the provisions of the
Internal Revenue Service Code.
The Plan required two members of senior management to loan the Company
$350. These loans have an interest rate of prime plus 1.75% and are due in
2004. The loans were funded February 4, 1994, and are reflected in the
accompanying financial statements as long-term debt (see note 6).
Also pursuant to the Plan the Company entered into non-compete agreements
with two former shareholders totaling approximately $954.
(8)COMMITMENTS AND CONTINGENCIES
Coinmach is obligated under long-term leases relating to revenue equipment
locations. The terms of these leases principally range from three to six
years, most of which provide for fixed monthly commission payments and
contain renewal options. The majority of these leases contain provisions
permitting the cancellation and/or adjustment of the commission by Coinmach
if minimum revenue levels are not achieved. In addition, Coinmach rents
office and warehouse space from SSB Corporation ("SSB"). SSB is owned by
certain individuals who were also owners of the Company, prior to the Plan.
The lease, expiring on May 1, 1995, provides for annual rentals of $368 and
for the payment by Coinmach of all operating expenses.
Super Laundry leases its facilities from a related party under an operating
lease that expires on December 31, 1996 and provides for a minimum annual
rental of $60 in 1995 increasing to $63 in 1996. Under the terms of the
lease, Super Laundry is required to pay operating costs. Rental expense for
this lease amounted to $5 for the month ended January 31, 1995. In
addition, Super Laundry also leases a warehouse from a related party on a
month-to-month basis. Rental expense for this lease amounted to $3 for the
month ended January 31, 1995. Effective January 1, 1993, Super Laundry
entered into a five year lease for a sales office. This lease expires
December 31, 1997 and provides for a minimum annual rental of $23 in 1993,
increasing by 4% each successive year through 1997. The lease also calls
for Super Laundry to pay operating costs. Rental expense including
operating costs for this lease amounted to $9 for the month ended January
31, 1995.
Future minimum lease payments under noncancellable operating leases
(excluding commissions for laundry equipment locations) as of January 31,
1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
------------------------
<S> <C>
1996........................................... $314
1997........................................... 108
1998........................................... 27
----
Total future minimum lease payments............... $449
====
</TABLE>
Rent expense, excluding commission payments for laundry equipment
locations, amounted to approximately $54 for the month ended January 31,
1995.
F-64
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
Super Laundry is contingently liable on receivables sold, with recourse, to
finance companies. The total amount outstanding is approximately $7,822 as
of January 31, 1995.
Under agreements between Super Laundry and certain finance companies, a
portion of the notes receivable sales price is retained by the finance
company until the receivable is collected. Amounts retained under the
agreements amounted to $522 as of January 31, 1995, and are shown in the
accompanying consolidated balance sheets as receivables.
Coinmach has entered into leasing arrangements for automobiles and trucks
and office equipment which are accounted for as capital leases. At January
31, 1995, the gross amounts of such assets amounted to $1,646 and
accumulated amortization amounted to $901. Future minimum lease payments as
of January 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31,
------------------------
<S> <C>
1996........................................... $356
1997........................................... 144
1998........................................... 49
----
Minimum lease payments............................ 549
Less amount representing interest................. 88
----
Present value of net minimum lease payments....... $461
====
</TABLE>
The Company is party to certain lawsuits and claims relating to its
operations. It is the opinion of management, based on the advice of outside
counsel, that such lawsuits and claims will be resolved without material
effect to the Company's consolidated financial statements.
(9)INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at January 31, 1995 are presented
below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 21,278
Fixed and intangible assets, principally due to differences
between tax and financial reporting bases.................... 3,117
Allowance for doubtful accounts............................... 178
--------
Gross deferred tax assets................................... 24,573
Less valuation allowance...................................... (24,573)
--------
Net deferred tax asset...................................... $ -0-
========
</TABLE>
CIC files a consolidated Federal income tax return with Super Laundry and
includes its equity in the earnings or loss of Coinmach. At January 31,
1995, net operating loss carryforwards of approximately $53,200 are
available to offset future taxable income and expire commencing 2004
through 2009.
F-65
<PAGE>
CIC I ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
JANUARY 31, 1995
(DOLLARS IN THOUSANDS)
(10)STOCK OPTION PLAN
Pursuant to the Plan, the Company adopted two stock option plans, which
provided for the grant and exercise of options to purchase up to 6,000
shares of the Company's common stock upon attainment of certain annual
earnings performance goals through 1997. One of the plans was for the
employees of the Company, and provided for the grant and exercise of 5,000
shares. On February 4, 1994, options representing 1,000 of the shares under
this plan were granted to certain employees and were immediately vested but
were not to be exercisable unless 1994 earnings performance goals were
attained. The employee plan also provided for the grant of options to
purchase an additional 1,000 shares in 1994 and each year through December
31, 1997. The second stock option plan provided for the grant of options to
purchase 1,000 shares to a financial advisor upon attainment of annual
earnings performance goals through 1995. Under both plans, the options were
to expire ten years from the dates of grant and were exercisable at $50 per
share. No options have been exercised and in connection with the subsequent
event described in note 13, the stock option plans were terminated and all
outstanding options were cancelled.
(11)PROFIT SHARING PLAN
Effective April 1, 1994, The Company established a profit sharing and
retirement plan (the "Coinmach Profit Sharing Plan") for substantially all
of its employees. Pursuant to the Coinmach Profit Sharing Plan, eligible
employees may defer up to 15% of their salaries up to a maximum level
imposed by applicable federal law. Coinmach makes matching contributions in
increasing amounts, based upon the number or years of service performed by
eligible participants, up to a maximum of 6% of an eligible employee's
salary. Matching contribution percentages range from 5% for one to two
years of service up to 25% for five or more years of service and vest over
a six year period. Company contributions to the plan for the month ended
January 31, 1995 amounted to $6.
(12)SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $395 for interest for the month ended
January 31, 1995.
(13)SUBSEQUENT EVENT
On January 31, 1995, the Company sold its partnership interests in Coinmach
and Super Laundry to a new corporation, The Coinmach Corporation ("Corp.").
In connection with this sale, the Company, Coinmach and Super Laundry paid
off all amounts owed under their existing revolver and term loan debt (see
note 6). Corp. is owned by an investor group (83%) and the management of
Coinmach and Super Laundry (17%). Corp. financed the transaction with
approximately $11,600 of new equity, and debt financing of up to $50,000.
Under the terms of the financing, no principal payments on the debt are due
until April 1996.
F-66
<PAGE>
LETTERHEAD OF KPMG PEAT MARWICK
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Coinmach Corporation:
We have audited the accompanying consolidated balance sheet of The Coinmach
Corporation and subsidiaries (the Company) as of March 31, 1995, and the
related consolidated statements of operations and accumulated deficit and cash
flows for the two-month period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Coinmach Corporation and subsidiaries as of March 31, 1995, and the results of
their operations and their cash flows for the two-month period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
July 7, 1995
F-67
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Cash.................................................................. $ 922
Receivables........................................................... 3,163
Inventories........................................................... 2,584
Prepaid commissions................................................... 3,222
Property and equipment:
Laundry equipment................................................... 20,039
Leasehold improvements.............................................. 3,418
Office equipment.................................................... 578
Automobiles and trucks.............................................. 1,154
-------
25,189
Less accumulated depreciation....................................... 859
-------
Net property and equipment........................................ 24,330
Contract rights, net of accumulated amortization of $813.............. 19,327
Other intangibles, net of accumulated amortization of $364............ 6,692
Other assets.......................................................... 795
-------
$61,035
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................................................... $ 2,198
Accrued expenses...................................................... 3,230
Commissions payable................................................... 2,994
Long-term debt........................................................ 42,351
Other long-term liabilities........................................... 407
Minority interest..................................................... 126
Stockholders' equity:
Class A Common, par value $.01; 77,350 shares authorized, issued and
outstanding........................................................ 1
Class B Common, par value $.01; 15,500 shares authorized; 14,500
shares issued and outstanding...................................... --
Class C Common, par value $.01; 7,650 shares authorized, issued and
outstanding........................................................ --
Class D Common, par value $.01; 7,650 shares authorized; no shares
issued or outstanding.............................................. --
Preferred stock, par value $.01; 10,000 shares authorized; no shares
issued or outstanding.............................................. --
Additional paid-in capital.......................................... 11,221
Accumulated deficit................................................. (1,155)
-------
10,067
Notes receivable from management.................................... (338)
-------
Total stockholders' equity........................................ 9,729
-------
$61,035
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE TWO MONTHS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues.............................................................. $11,515
Laundry operating expenses............................................ 8,951
General and administrative expenses................................... 799
Depreciation and amortization of property and equipment............... 859
Amortization of intangibles and prepaid commissions................... 1,285
-------
Operating loss........................................................ (379)
Interest expense...................................................... 774
-------
Loss before income taxes.............................................. (1,153)
Income taxes.......................................................... 2
-------
Net loss.............................................................. (1,155)
Accumulated deficit, beginning of period.............................. --
-------
Accumulated deficit, end of period.................................... $(1,555)
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE TWO MONTHS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................................ $(1,155)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization..................................... 2,144
Minority interest in loss of consolidated subsidiary.............. (7)
Provision for bad debts........................................... 3
Changes in assets and liabilities:
Decrease in receivables......................................... 94
Decrease in prepaid commissions net of decrease in commissions
payable........................................................ (438)
(Increase) in inventories....................................... (231)
Decrease in other assets........................................ 209
(Decrease) in accounts payable and accrued liabilities.......... (546)
-------
Net cash provided by operating activities..................... 73
-------
Cash flows from investing activities:
Purchase of laundry equipment....................................... (918)
Purchase of fixed assets............................................ (72)
-------
Net cash used in investing activities......................... (990)
-------
Cash flows from financing activities:
Repayments under revolving credit facility.......................... (191)
Payment of other debt............................................... (82)
Principal payments of capital lease obligations..................... (54)
-------
Net cash used in financing activities......................... (327)
-------
Net decrease in cash.......................................... (1,244)
Cash at beginning of period........................................... 2,166
-------
Cash at end of period................................................. $ 922
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(1)ORGANIZATION AND ACQUISITION
The Coinmach Corporation ("Corp."; together with its subsidiaries, the
"Company") was incorporated in January 1995. The Company was capitalized
primarily through an equity investment by an investor group led by the
majority shareholder (the "Majority Shareholder") and senior management and
bank financing (see note 3 and note 6).
Corp. is a holding company which was formed to acquire partnership
interests in Coinmach Industries Co. ("Coinmach") and Super Laundry
Equipment Co. L.P. ("Super Laundry"). Coinmach is principally engaged in
providing laundry equipment and related services to multi-family housing
complexes in the New York metropolitan area. Super Laundry is principally a
supplier of coin-operated laundromat equipment and turnkey laundromat
retail stores in the New York metropolitan area.
On January 31, 1995, the Company acquired its partnership interests in
Coinmach and Super Laundry from CIC I Acquisition Corp. ("CIC I"). The
transaction resulted in the Company owning 100% interests in both Coinmach
and Super Laundry. The aggregate purchase price for these interests was
$8,570, paid in cash.
The acquisition was accounted for using the purchase method of accounting.
The fair value of assets acquired (based on an independent appraisal for
certain assets) less liabilities assumed exceeded the purchase price by
approximately $7,700. The excess was allocated to property, equipment and
intangible assets ratably based on their respective fair values as
prescribed by Accounting Principles Board Opinion No. 16, "Business
Combinations." The acquisition was funded by a net equity investment (see
Note 3) of approximately $10,884 and the assumption of liabilities
aggregating approximately $52,627. The total purchase price of $63,511 was
allocated to assets acquired, based on fair market value, as follows:
<TABLE>
<S> <C>
Cash............................................................. $ 2,166
Receivables...................................................... 3,260
Inventories...................................................... 2,353
Prepaids and other assets........................................ 4,337
Property and equipment........................................... 24,199
Contract rights.................................................. 20,140
Covenants not to compete......................................... 915
Computer software................................................ 3,271
Deferred financing costs......................................... 2,870
-------
$63,511
=======
</TABLE>
The Company was capitalized, acquired its interests in Coinmach and Super
Laundry, and entered into the financing agreement described in note 6 on
January 31, 1995. The Company's fiscal year-end is March 31.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
F-71
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(b)INVENTORIES
Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method. Inventories include
laundry equipment, spare parts and construction costs.
(c)REVENUE RECOGNITION
Super Laundry's customers generally sign sales contracts whereby Super
Laundry will construct and equip a complete laundromat operation, including
location identification, construction, plumbing, electrical wiring and all
required permits. Revenue is recognized on the completed contract method. A
contract is considered complete when all costs have been incurred and
either the installation is operating according to specifications or has
been accepted by the customer. The duration of such contracts is normally
less than six months.
Sales of laundromats were $1,574 for the two months ended March 31, 1995.
(d)PROPERTY AND EQUIPMENT
Laundry equipment, consisting primarily of commercial washers and dryers,
and fixed assets acquired in the purchase, are stated as described in Note
1, with subsequent additions recorded at cost. The cost of remanufacturing
equipment is included in the costs of laundry equipment. The cost of
laundry room improvements relating to new locations is included in
leasehold improvements. The Company capitalized remanufacturing and laundry
room improvement costs of approximately $259 for the two months ended March
31, 1995.
Depreciation of laundry equipment and fixed assets is calculated using the
straight-line method over their estimated useful lives, generally five
years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or estimated useful life of the asset.
The Company's policy is to write-off fully depreciated assets and the
related accumulated depreciation and amortization. Depreciation and
amortization expense was approximately $859 for the two months ended March
31, 1995.
The Company reviews the undiscounted cash flows of its laundry locations in
assessing whether its property and equipment (primarily laundry equipment
and laundry room improvements) may be impaired. The Company does not
believe that the adoption of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to be Disposed Of" will have a material impact on the
Company's financial position or results of operations.
(e)PREPAID COMMISSIONS
The Company capitalizes contractually required advance commissions and
certain incentive payments paid in connection with the acquisition of its
contractual rights to laundry room locations. Such amounts are amortized on
a straight-line basis over the life of the related lease or the related
contractual agreement. Amortization expense on prepaid commissions amounted
to approximately $108 for the two months ended March 31, 1995.
(f)CONTRACT RIGHTS
Contract rights represent amounts expended for location contracts arising
from the acquisition of laundry machines on location. The carrying amount
of contract rights acquired in connection with the purchase transaction is
based on the accounting described in note 1, and are amortized over periods
ranging from 3
F-72
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
to 15 years. Contract rights relating to written contracts are amortized on
a straight-line basis over the remaining life of the corresponding
contract, and verbal contracts are amortized over an estimated useful life
based on a turnover analysis performed by an independent appraisal company.
Amortization expense on contract rights was $813 for the two months ended
March 31, 1995.
(g)INTANGIBLES
Intangibles, consisting principally of covenants not to compete, computer
software and deferred financing costs are amortized over their estimated
useful lives. Amortization expense on intangibles amounted to $364 for the
two months ended March 31, 1995.
(h)INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Statement 109 requires the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(3)CAPITAL STOCK
In connection with the initial capitalization of the Company, 77,350 shares
of Class A, 14,500 shares of Class B and 7,650 shares of Class C Common
Stock were issued in exchange for gross proceeds of approximately $11,200,
$422 and $0, respectively. Such amounts aggregated approximately $11,222,
net of a transaction fee of $400 paid to the Majority Shareholder.
The Class A Common Stock is guaranteed a yield before any other class of
common stock receives dividends. In addition, the Class A Common Stock has
full liquidation preference, including its guaranteed yield, over all other
classes of common stock. The liquidation preference for Class A Common
Stock as of March 31, 1995, including the guaranteed yield, was
approximately $11,350. Class A and Class B Common Stock have equal voting
rights.
The Class B Common Stock was purchased by certain members of management of
the Company. Certain members of management also purchased Class A shares. A
portion of the purchase price of Class B Common Stock was financed through
the Company in the form of promissory notes. The notes, which bear interest
at 8% and are payable in four equal annual installments commencing January
31, 1996, are presented as a reduction of stockholders' equity in the
accompanying consolidated balance sheet. The underlying stock purchased was
pledged as collateral against these notes. The liquidation preference for
Class B Common Stock, which is subordinated to Class A Common Stock, as of
March 31, 1995 was approximately $422.
The Class C Common Stock, which was purchased by the lenders described in
note 6 for a nominal amount and whose value was deemed to not be material
at the date of purchase, is subordinated in liquidation to both Class A and
Class B Common Stock. Class C Common Stock has no voting rights and is
convertible
F-73
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
into Class D Common Stock (which has voting rights) upon the occurrence of
certain conversion events including public offerings of the Company's stock
or changes in control. No such events have occurred.
All of the agreements pursuant to which common stock was purchased contain
restrictions on the transfer of Company stock. In addition, pursuant to
management agreements with the purchasers of the Class B Common stock, the
Company may exercise certain call provisions based on agreed upon formulae.
Pursuant to a stockholders agreement with the Company, certain stockholders
are granted co-sale rights, whereby, if the Majority Shareholder proposes
to transfer (other than pursuant to a public offering or sale of the
Company), any shares of common stock that results in the Majority
Shareholder owning directly or indirectly less than 60% of the then
outstanding common stock of the Company, any stockholder of the Company is
given the opportunity to sell a ratable portion of his or her shares of
common stock contemporaneously with such sale by the Majority Shareholder.
The Majority Shareholder and other stockholders of the Company are also
entitled to certain registration rights pursuant to the terms of a
registration rights agreement entered into between such stockholders and
the Company.
The Company incurred fees and expenses in connection with the purchase
transaction and the related financing agreement aggregating $2,870. Such
fees are being amortized over the five year term of the revolving line of
credit agreement and are included in other intangibles in the accompanying
consolidated balance sheets.
The Company has entered into a management agreement with the Majority
Shareholder which provides for a fee of $100 per year.
(4)RECEIVABLES
Receivables consist of the following:
<TABLE>
<S> <C>
Accounts receivable............................. $1,045
Notes receivable................................ 1,705
Finance reserves................................ 413
------
$3,163
======
</TABLE>
At March 31, 1995, notes receivable bear interest at a weighted average
interest rate of approximately 10% and mature through 1998. The notes are
collateralized by the underlying laundry equipment. The Company
periodically sells notes receivable arising from the sale of laundromats to
third party finance companies. Finance reserves arise when the Company
sells notes and a portion of the proceeds are retained by the finance
company. As the notes are collected, the finance companies remit a portion
of the collections to the Company. Many of the notes receivable are sold
with recourse to the Company (see note 7). Control of the notes sold with
recourse is surrendered by the Company on the date of transfer. The Company
generally sells its receivables with recourse at cost, recognizing no gain
or loss.
F-74
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(5)INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
---------
<S> <C> <C>
Covenants not compete.............................. $ 915 Lives of Contract
Computer software.................................. 3,271 3 years
Deferred financing costs........................... 2,870 5 years
------
7,056
Accumulated Amortization........................... (364)
------
$6,692
======
</TABLE>
(6)LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Revolving line of credit, due January 31, 2000 interest at prime
plus 1.25% (10.25% at
March 31, 1995)(a)................................................ $ 1,499
Term loan A, quarterly payments of $250 commencing April 1, 1996,
and increasing to $500 April 1, 1997, $1,250 April 1, 1998 and
$1,500 April 1, 1999. Interest at prime plus 1.25% (10.25% at
March 31, 1995)(a)................................................ 14,000
Term loan B, quarterly payments of $1,750 commencing April 1, 2000
and increasing to $2,000 April 1, 2001 with the final two payments
of $1,750 on April 1, 2002 and
July 1, 2002. Interest at prime plus 1.75% (10.75% at March 31,
1995)(a).......................................................... 18,500
Term loan C, due July 1, 2002. Interest at 12.5%(a)................ 7,500
Other(b)........................................................... 852
-------
$42,351
=======
</TABLE>
(a) In connection with the purchase transaction described in note 1, the
Company entered into a financing agreement (the "Financing Agreement")
with a group of lenders (the "Lenders"). The Financing Agreement
provides for $40,000 in term loans and $10,000 in aggregate for
revolving credit and acquisition loan facilities.
The revolving line of credit agreement provides for up to $5,000 in
borrowings, including letters of credit up to a maximum of $1,000.
There is a one-half of one percent fee per annum on the unused portion
of this facility and a two percent letter of credit fee.
The Financing Agreement also provides for acquisition loans of up to
$5,000. The acquisition loans must be used to finance acquisitions or
capital expenditures attributed to growth. Any amounts outstanding
under the acquisition line as of January 31, 2000 will be repaid in
equal quarterly installments through July 1, 2002. Borrowings under the
acquisition line bear interest at prime plus 1.75%. The Company has no
acquisition loans outstanding as of March 31, 1995.
The Financing Agreement requires the Company, among other things, to
maintain certain financial ratios and restricts additional investments,
indebtedness and the payment of dividends. The Company is in compliance
with all covenants contained in the Financing Agreement. Loans
outstanding under
F-75
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
this agreement are subject to prepayment upon the occurrence of certain
events such as asset dispositions, public offerings and the generation
of excess cash flow, as defined. The Company may be subject to
prepayment penalty on any fixed rate borrowings.
Coinmach and Super Laundry are the borrowers under the Financing
Agreement. The facility is guaranteed by Corp. Borrowing under the
Financing Agreement are secured by all of the assets of the Company.
(b) Other debt includes payments due under noncompete agreements.
Maturities of long-term debt at March 31, 1995 are contractually
payable as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
----------------------
<S> <C>
1996........................................... $ 417
1997........................................... 1,380
1998........................................... 2,055
1999........................................... 5,000
2000........................................... 7,499
Thereafter..................................... 26,000
-------
$42,351
=======
</TABLE>
(7)COMMITMENTS AND CONTINGENCIES
Coinmach is obligated under long-term leases relating to revenue equipment
locations. The terms of these leases principally range from three to six
years, most of which provide for fixed monthly commission payments and
contain renewal options. The majority of these leases contain provisions
permitting cancellation of the lease and/or adjustment of the commission by
Coinmach if minimum revenue levels are not achieved. In addition, Coinmach
rents office and warehouse space. The lease, which expired on May 1, 1995,
provided for annual rentals of $368 and for the payment by Coinmach of all
operating expenses. The lease is currently on a month-to-month basis under
the same terms.
Super Laundry leases its facilities from a related party under an operating
lease that expires on December 31, 1996 and provides for a minimum annual
rental of $60 in 1995 increasing to $63 in 1996. Under the terms of the
lease, Super Laundry is required to pay operating costs. Rental expense for
this lease amounted to $17 for the two months ended March 31, 1995. In
addition, Super Laundry also leases a warehouse from a related party on a
month-to-month basis. Rental expense for this lease amounted to $6 for the
two months ended March 31, 1995. Effective January 1, 1993, Super Laundry
entered into a five year lease for a sales office. This lease expires
December 31, 1997 and provides for a minimum annual rental of $23 in 1993,
increasing by 4% each successive year through 1997. The lease also calls
for Super Laundry to pay operating costs. Rental expense including
operating costs for this lease amounted to $5 for the two months ended
March 31, 1995.
Future minimum lease payments under noncancellable operating leases
(excluding commissions for laundry equipment locations) as of March 31,
1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
----------------------
<S> <C>
1996.............................................. $558
1997.............................................. 167
1998.............................................. 37
----
Total future minimum lease payments............... $762
====
</TABLE>
F-76
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
Rent expense, excluding commission payments for laundry equipment
locations, amounted to approximately $90 for the two months ended March 31,
1995.
Super Laundry is contingently liable on receivables sold, with recourse, to
finance companies. The total amount outstanding is approximately $7,442 as
of March 31, 1995.
Coinmach has entered into leasing arrangements for automobiles and trucks
and office equipment which are accounted for as capital leases. Future
minimum lease payments as of March 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
----------------------
<S> <C>
1996.............................................. $307
1997.............................................. 123
1998.............................................. 32
----
Minimum lease payments............................ 462
Less amount representing interest................. 55
----
Present value of net minimum lease payments....... $407
====
</TABLE>
The Company is party to certain lawsuits and claims relating to its
operations. It is the opinion of management, based on the advice of outside
counsel, that such lawsuits and claims will be resolved without material
effect to the Company's consolidated financial statements.
(8)INCOME TAXES
Income tax expense of $2 for the two months ended March 31, 1995 primarily
represents state and local taxes.
Corp. will file a consolidated Federal Income tax return with Super Laundry
and include its equity in the earnings or loss of Coinmach. It is
anticipated that no Federal taxes will be due for the period ended March
31, 1995.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
<S> <C>
Deferred tax assets:
Difference between book and tax basis of
long-lived assets.......................... $ 460
Less valuation allowance.................... (460)
-----
Net deferred tax assets.................. $ -0-
=====
</TABLE>
(9)PROFIT SHARING PLAN
Effective April 1, 1994, the Company established a profit sharing and
retirement plan (the "Coinmach Profit Sharing Plan") for substantially all
of its employees. Pursuant to the Coinmach Profit sharing Plan, eligible
employees may defer up to 15% of their salaries up to a maximum level
imposed by applicable
F-77
<PAGE>
THE COINMACH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
federal law. Coinmach makes matching contributions in increasing amounts,
based upon the number of years of service performed by eligible
participants, up to a maximum of 6% of an eligible employee's salary.
Matching contribution percentages range from 5% for one to two years of
service up to 25% for five or more years of service and vest over a six
year period. Company contributions to the plan for the two months ended
March 31, 1995 amounted to $16.
(10)SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $774 for interest for the two months ended
March 31, 1995.
F-78
