##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
 For the quarterly period ended December 31, 2004 or o
    
    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: 001-32359 Coinmach Service Corp. (Exact name of registrant as specified in its charter)
 Delaware
    
    20-0809839(State or other jurisdiction of
incorporation or organization)
    
    (I. R. S. Employer
Identification No.)
 303 Sunnyside Blvd., Suite 70, Plainview, New York
    
    11803(Address of principal executive offices)
    
    (zip code)
 Registrants telephone number, including area code: (516) 349-8555 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yeso   Noþ. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yeso   Noþ. As of the close of business on February 11, 2005, Coinmach Service Corp. had outstanding 18,911,532
shares of Class A common stock, par value $0.01 per share (the Class A Common Stock) and
outstanding 24,980,445 shares of Class B common stock, par value $.01 per share (the Class B
Common Stock).




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES INDEX Page No.PART I.Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets -
December 31, 2004 (Unaudited) and March 31, 2004
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) -
Three months and Nine months Ended December 31, 2004 and 2003
    
    
    4Condensed Consolidated Statement of Stockholders Equity (Deficit)
for the Nine months Ended December 31, 2004
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months Ended December 31, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    50Item 4. Controls and Procedures
    
    
    51PART II.Other InformationItem 1. Legal Proceedings
    
    
    52Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 3. Defaults Upon Senior Securities
    
    
    54Item 4. Submission of Matters to a Vote of Security Holders
    
    
    54Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    54Signature Page
    
    
    59
 2




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data) December 31, 2004
    
    
    March 31, 20041(Unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    56,245
    
    
    $
    31,620Receivables, net
    
    
    7,118
    
    
    
    6,207Inventories
    
    
    12,081
    
    
    
    11,508Assets held for sale
    
    
    2,475
    
    
    
    2,560Prepaid expenses
    
    
    5,216
    
    
    
    5,097Interest rate swap asset
    
    
    40
    
    
    
    Other current assets
    
    
    1,959
    
    
    
    1,974Total current assets
    
    
    85,134
    
    
    
    58,966Advance location payments
    
    
    72,219
    
    
    
    73,253Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $310,127 and $253,736
    
    
    270,935
    
    
    
    283,688Contract rights, net of accumulated amortization of $97,500 and $87,139
    
    
    313,107
    
    
    
    323,152Goodwill
    
    
    204,780
    
    
    
    204,780Other assets
    
    
    20,372
    
    
    
    15,669Total assets
    
    $
    966,547
    
    
    $
    959,508LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT):Current liabilities:Accounts payable and accrued expenses
    
    $
    33,721
    
    
    $
    28,806Accrued rental payments
    
    
    30,087
    
    
    
    31,855Accrued interest
    
    
    14,657
    
    
    
    7,549Interest rate swap liability
    
    
    
    
    
    
    3,597Current portion of long-term debt
    
    
    5,920
    
    
    
    9,149Total current liabilities
    
    
    84,385
    
    
    
    80,956Deferred income taxes
    
    
    65,171
    
    
    
    73,775Long-term debt, less current portion
    
    
    703,178
    
    
    
    708,482Redeemable preferred stock  $2.5 million par value; 82 shares
authorized; 74.89 shares issued and outstanding (liquidation
preference of $265,914 at March 31, 2004)
    
    
    
    
    
    
    265,914Total liabilities
    
    
    852,734
    
    
    
    1,129,127Stockholders equity (deficit):Class A Common Stock  $0.01 par value; 100,000,000 shares
authorized; 18,911,532 shares issued and outstanding
    
    
    189
    
    
    
    Class B Common Stock  $0.01 par value; 100,000,000 shares
authorized; 24,980,445 shares issued and outstanding
    
    
    250
    
    
    
    Common stock
 $2.50 par value; 76,000 shares authorized;
66,825.83 shares issued and outstanding at March 31, 2004
    
    
    
    
    
    
    167Capital in excess of par value
    
    
    319,049
    
    
    
    5,022Carryover basis adjustment
    
    
    (7,988
    )
    
    
    (7,988
    )Accumulated other comprehensive income (loss), net of tax
    
    
    24
    
    
    
    (2,006
    )Accumulated deficit
    
    
    (197,681
    )
    
    
    (164,728
    )Deferred compensation
    
    
    (30
    )
    
    
    (86
    )Total stockholders equity (deficit)
    
    
    113,813
    
    
    
    (169,619
    )Total liabilities and stockholders equity (deficit)
    
    $
    966,547
    
    
    $
    959,508
 See accompanying notes.   1
    
    The March 31, 2004 balance sheet has been derived from the audited consolidated financial
statements of Coinmach Laundry Corporation as of that date. 3




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
(in thousands of dollars, except per share data) Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003REVENUES
    
    $
    135,627
    
    
    $
    135,740
    
    
    $
    402,076
    
    
    $
    398,208COSTS AND EXPENSES:Laundry operating expenses (exclusive of
depreciation and amortization and
amortization of advance location
payments)
    
    
    92,270
    
    
    
    93,612
    
    
    
    274,902
    
    
    
    274,182General and administrative (including
stock-based compensation expense of $19,
$51, $56 and $153, respectively)
    
    
    2,502
    
    
    
    2,362
    
    
    
    7,229
    
    
    
    6,950Depreciation and amortization
    
    
    19,029
    
    
    
    18,207
    
    
    
    57,087
    
    
    
    54,245Amortization of advance location payments
    
    
    4,928
    
    
    
    4,952
    
    
    
    14,780
    
    
    
    15,312Amortization of intangibles
    
    
    3,580
    
    
    
    3,800
    
    
    
    10,840
    
    
    
    11,313Other items, net
    
    
    
    
    
    
    96
    
    
    
    500
    
    
    
    96122,309
    
    
    
    123,029
    
    
    
    365,338
    
    
    
    362,098OPERATING INCOME
    
    
    13,318
    
    
    
    12,711
    
    
    
    36,738
    
    
    
    36,110INTEREST EXPENSE
    
    
    14,781
    
    
    
    14,424
    
    
    
    43,406
    
    
    
    43,132INTEREST EXPENSE  preferred stock
    
    
    4,862
    
    
    
    6,292
    
    
    
    18,230
    
    
    
    18,324INTEREST EXPENSE  escrow interest
    
    
    941
    
    
    
    
    
    
    
    941
    
    
    
    TRANSACTION COSTS
    
    
    17,135
    
    
    
    
    
    
    
    17,135
    
    
    
    LOSS BEFORE INCOME TAXES
    
    
    (24,401
    )
    
    
    (8,005
    )
    
    
    (42,974
    )
    
    
    (25,346
    )PROVISION (BENEFIT) FOR INCOME TAXES:Current
    
    
    160
    
    
    
    103
    
    
    
    195
    
    
    
    253Deferred
    
    
    (8,260
    )
    
    
    (748
    )
    
    
    (10,216
    )
    
    
    (2,323
    )(8,100
    )
    
    
    (645
    )
    
    
    (10,021
    )
    
    
    (2,070
    )NET LOSS
    
    $
    (16,301
    )
    
    $
    (7,360
    )
    
    $
    (32,953
    )
    
    $
    (23,276
    )BASIC AND DILUTED NET LOSS PER SHARENet loss per
common share  Class A
    
    $
    (0.37
    )
    
    $
    (0.17
    )
    
    $
    (0.75
    )
    
    $
    (0.53
    )Net loss per
common share  Class B
    
    $
    (0.37
    )
    
    $
    (0.17
    )
    
    $
    (0.75
    )
    
    $
    (0.53
    )Weighted average common shares  Class A
    
    
    18,911,532
    
    
    
    18,911,532
    
    
    
    18,911,532
    
    
    
    18,911,532Weighted
average common shares  Class B
    
    
    24,980,445
    
    
    
    24,980,445
    
    
    
    24,980,445
    
    
    
    24,980,445
 See accompanying notes. 4




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders Equity (Deficit)(UNAUDITED)
(in thousands of dollars) AccumulatedOther
    
    
    
    
    
    
    
    
    
    
    TotalClass A
    
    
    Class B
    
    
    
    
    
    
    Capital
    
    
    Carryover
    
    
    Comprehensive
    
    
    
    
    
    
    
    
    
    
    StockholdersCommon
    
    
    Common
    
    
    Common
    
    
    in Excess
    
    
    Basis
    
    
    Income (Loss),
    
    
    Accumulated
    
    
    Deferred
    
    
    (Deficit)Stock
    
    
    Stock
    
    

Stock
    
    
    of Par
    
    
    Adjustment
    
    
    net of tax
    
    
    Deficit
    
    
    Compensation
    
    
    EquityBalance at March
31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    167
    
    
    $
    5,022
    
    
    $
    (7,988
    )
    
    $
    (2,006
    )
    
    $
    (164,728
    )
    
    $
    (86
    )
    
    $
    (169,619
    )Issuance of common
stock (net of
issuance costs of
$12,468)
    
    
    189
    
    
    
    
    
    
    
    
    
    
    
    129,180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,369Exchange of
preferred and
common stock for
Class B Common Sock
    
    
    
    
    
    
    250
    
    
    
    (167
    )
    
    
    184,847
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,930Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,953
    )
    
    
    
    
    
    
    (32,953
    )Gain on
derivative
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,030
    
    
    
    
    
    
    
    
    
    
    
    2,030Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,923
    )Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    56Balance at December
31, 2004
    
    $
    189
    
    
    $
    250
    
    
    $
    
    
    
    $
    319,049
    
    
    $
    (7,988
    )
    
    $
    24
    
    
    $
    (197,681
    )
    
    $
    (30
    )
    
    $
    113,813
 See accompanying notes. 5




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
(In thousands of dollars) Nine Months EndedDecember 31, 2004
    
    
    December 31, 2003OPERATING ACTIVITIES:Net loss
    
    $
    (32,953
    )
    
    $
    (23,276
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    57,087
    
    
    
    54,245Amortization of advance location payments
    
    
    14,780
    
    
    
    15,312Amortization of intangibles
    
    
    10,840
    
    
    
    11,313Deferred income taxes
    
    
    (10,216
    )
    
    
    (2,323
    )Preferred stock interest expense
    
    
    18,230
    
    
    
    18,324Premium on redemption of 9% senior notes
    
    
    11,295
    
    
    
    Write-off of deferred financing costs
    
    
    3,475
    
    
    
    Amortization of deferred issue costs
    
    
    1,795
    
    
    
    1,810Gain on sale of investment and equipment
    
    
    (472
    )
    
    
    (1,836
    )Stock based compensation
    
    
    56
    
    
    
    153Change in operating assets and liabilities, net of businesses acquired:Other assets
    
    
    470
    
    
    
    (897
    )Receivables, net
    
    
    (911
    )
    
    
    3,888Inventories and prepaid expenses
    
    
    (573
    )
    
    
    2,251Accounts payable and accrued expenses, net
    
    
    3,104
    
    
    
    (7,376
    )Accrued interest
    
    
    7,108
    
    
    
    9,639Net cash provided by operating activities
    
    
    83,115
    
    
    
    81,227INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (41,019
    )
    
    
    (50,505
    )Advance location payments to location owners
    
    
    (13,250
    )
    
    
    (16,029
    )Acquisition of net assets related to acquisitions of businesses
    
    
    (613
    )
    
    
    (3,423
    )Proceeds from sale of investment
    
    
    277
    
    
    
    1,022Proceeds from sale of property and equipment
    
    
    653
    
    
    
    334Net cash used in investing activities
    
    
    (53,952
    )
    
    
    (68,601
    )FINANCING ACTIVITIES:Proceeds from issuance of IDSs
    
    
    257,983
    
    
    
    Proceeds from issuance of third party senior secured notes
    
    
    20,000
    
    
    
    Redemption of preferred stock
    
    
    (99,208
    )
    
    
    Proceeds from credit facility
    
    
    
    
    
    
    8,200Repayments under credit facility
    
    
    (19,830
    )
    
    
    (8,200
    )Redemption of 9 % Senior Notes
    
    
    (125,500
    )
    
    
    Payment of premium on 9 % Senior Notes
    
    
    (11,295
    )
    
    
    IDS and third party senior secured notes issuance costs
    
    
    (23,597
    )
    
    
    Principal payments on capitalized lease obligations
    
    
    (3,249
    )
    
    
    (3,093
    )Borrowings from bank and other borrowings
    
    
    159
    
    
    
    548Receivables from shareholders
    
    
    (1
    )
    
    
    2Net cash used in financing activities
    
    
    (4,538
    )
    
    
    (2,543
    )Net increase in cash and cash equivalents
    
    
    24,625
    
    
    
    10,083CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    31,620
    
    
    
    27,428CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    56,245
    
    
    $
    37,511SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    35,608
    
    
    $
    31,722Income taxes paid
    
    $
    199
    
    
    $
    364NON-CASH FINANCING ACTIVITIES:Acquisition of fixed assets through capital leases
    
    $
    3,770
    
    
    $
    3,842
 See accompanying notes. 6




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COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) 1. Basis of Presentation The condensed consolidated financial statements of Coinmach Service Corp., a Delaware
corporation (CSC), include the accounts of all of its subsidiaries. CSC was incorporated on
December 23, 2003 as a wholly-owned subsidiary of Coinmach Holdings, LLC (Holdings). Holdings, a
Delaware limited liability company, was formed on November 15, 2002. Unless otherwise specified
herein, references to the Company, we,
our shall mean Coinmach Service Corp. and its subsidiaries. CSC had no operating activity from the date of its incorporation through November 24, 2004.
Holdings and its other subsidiaries agreed to fund CSCs ongoing operations through the date of its
initial public offering of Income Deposit Securities (IDSs). The Board of Directors of CSC
authorized the filing of a registration statement on Form S-1 with the Securities and Exchange
Commission for the offering of IDSs (each IDS consisting of one share of Class A Common Stock, par
value $0.01 per share, and an 11% senior secured note due 2024 in a principal amount of $6.14) and
a contemporaneous offering of 11% senior secured notes due 2024 (together with the 11% senior
secured notes underlying IDSs, the 11% senior secured notes) separate and apart from the IDSs.
Immediately following the offering and certain corporate reorganization transactions, Coinmach
Laundry Corporation (Coinmach Laundry), a wholly owned subsidiary of Holdings, became a direct
wholly owned subsidiary of CSC. The offerings and related transactions and use of proceeds therefrom are referred to herein
collectively as the IDS Transactions. The corporate reorganization transactions were recorded by
CSC at carryover basis. Accordingly, the accompanying financial statements include the accounts of
Coinmach Laundry and its subsidiaries as if they had been wholly-owned by CSC as of the beginning
of the earliest period reported. All significant intercompany accounts and transactions have been
eliminated. Coinmach Laundry and its wholly owned subsidiaries are providers of outsourced laundry
equipment services for multi-family housing properties in North America. The Companys core
business (which the Company refers to as the route business) involves leasing laundry rooms from
building owners and property management companies, installing and servicing laundry equipment,
collecting revenues generated from laundry machines and operating 162 retail laundromats located
throughout Texas and Arizona. Through Appliance Warehouse of America, Inc. (AWA), a Delaware
corporation jointly-owned by the Company and Coinmach Corporation (Coinmach), a wholly-owned
subsidiary of Coinmach Laundry, the Company rents laundry machines and other household appliances
to property owners, managers of multi-family housing properties, and to a lesser extent,
individuals and corporate relocation entities. Super Laundry Equipment Corp. (Super Laundry), a
wholly-owned subsidiary of Coinmach, constructs, designs and retrofits laundromats and distributes
laundromat equipment. In addition, Super Laundry, through its wholly-owned subsidiary American
Laundry Franchising Corp. (ALFC), builds and develops laundromat facilities for sale as franchise
locations. 7




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 1. Basis of Presentation (continued) At December 31, 2004, the Company owned and operated approximately 875,000 laundry machines in
approximately 80,000 locations throughout North America. The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim
financial reporting and pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, such financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements. GAAP requires the Companys
management to make estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from such estimates. The interim results presented herein are not necessarily indicative of the results to be
expected for the entire year. In the opinion of management of the Company, these unaudited condensed consolidated financial
statements contain all adjustments of a normal recurring nature necessary for a fair presentation
of the financial statements for the interim periods presented. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements included in the Companys registration statement (the Registration
Statement) on Form S-1 (No. 333-114421), including the Prospectus contained therein, dated
November 19, 2004. Certain amounts in the financial statements have been reclassified for
presentation purposes. During November 2004 and December 2004, CSC completed its initial public offering of
18,911,532 IDSs (578,199 of which were issued in connection with the exercise of an over-allotment
option on December 21, 2004 granted to the underwriters in such offering) at an offering price of
$13.64 per IDS (which included 18,911,532 underlying shares of Class A Common Stock and
approximately $116.1 million aggregate principal amount of underlying 11% senior secured notes) and
a concurrent offering of $20 million of 11% senior secured notes which were sold separate and apart
from the IDSs. Immediately following the offerings and certain related corporate reorganization
transactions, Holdings exchanged its remaining Coinmach Laundry capital stock and all of its shares
of common stock of AWA to CSC for 24,980,445 shares of Class B Common Stock. Pursuant to these
transactions, Class B Common Stock of CSC became controlled by Holdings. Based on U.S. generally accepted accounting principles, the proceeds of the IDS offering and
the offering of the separate 11% senior secured notes were allocated to the shares of Class A
common stock and the underlying 11% senior secured notes based on their respective relative fair
values. The price paid for the IDSs was equivalent to the fair value of $7.50 per Class A Common
Stock and $6.14 in a principal amount of a 11% senior secured note due 2024 underlying the IDS, and
the fair value of the separate notes was equivalent to their face value. 8




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 1. Basis of Presentation (continued) Pursuant
to CSC certificate of incorporation, (i) on all matters for which a vote of CSC
stockholders is required, each holder of shares of Class A Common Stock is entitled to one vote per
share and (ii) only Class A common stockholders may vote, as a single class, to amend provisions of
our certificate of incorporation in a manner that adversely affects voting and dividend rights
which are exclusive to the Class A Common Stock and does not adversely affect the voting, dividend
or redemption rights of the Class B Common Stock, and any such amendment will require the
affirmative vote of the holders of a majority of such class. In addition, on all matters for which a vote of CSC stockholders is required, each holder of
Class B Common Stock is initially entitled to two votes per share. However, if at any time Holdings
and the permitted transferees collectively own less than 25% in the aggregate of our then
outstanding shares of Class A Common Stock and Class B Common Stock (subject to adjustment in the
event of any split, reclassification, combination or similar adjustments in shares of CSC common
stock), at such time, and at all times thereafter, all holders of Class B Common Stock shall only
be entitled to one vote per share on all matters for which a vote of CSC stockholders is required.
The dividend and redemption rights of Class B common stockholders and their exclusive right to vote
on the amendment of certain provisions of our certificate of incorporation would not be affected by
such event. Only the Class B stockholders may vote, as a single class, to amend provisions of our
certificate of incorporation relating to (i) an increase or decrease in the number of authorized
shares of Class B Common Stock or (ii) changes that affect voting, dividend or redemption rights
which are exclusive to the Class B Common Stock and do not adversely affect the dividend or voting
rights of the Class A Common Stock. Any such amendment will require the affirmative vote of the
holders of a majority of all the outstanding shares of Class B Common Stock. Payment
of dividends on all classes of CSC common stock will not be cumulative. Therefore,
prior to paying any dividend on our Class A Common Stock or
Class B Common Stock, CSC will not be
required to first pay any previously declared but not paid dividend on the Class A Common Stock or
any previously declared but not paid dividend on the Class B Common Stock. CSC intends to pay dividends on its Class A Common Stock on each March 1, June 1, September 1
and December 1 to holders of record as of the preceding February 25, May 25, August 25 and November
25, respectively, in each case with respect to the immediately preceding fiscal quarter, except for
such dividends payable on March 1, 2005, which will be payable for the period from November 24,
2004 (the closing of the offering) to December 31, 2004. CSC also intends to pay dividends on its
Class B Common Stock on each June 1 to holders of record as of the preceding May 25 with respect to
the immediately preceding fiscal year, subject to certain limitations and exceptions with respect
to such dividends, if any, payable on March 1, 2005 and June 1, 2006. The payment of dividends by
CSC on its common stock is subject to the sole discretion of the Board of Directors of CSC, various
limitations imposed by the debt agreements of CSC and Coinmach, and applicable law. 9




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 1. Basis of Presentation (continued) Interest on the 11% senior secured notes accrues at the rate of 11% per annum and is payable
quarterly, in arrears, in cash on each March 1, June 1, September 1 and December 1, commencing on
March 1, 2005 (which payment will constitute interest accrued from November 24, 2004 through
December 31, 2004), to the holders of record at the close of business on the February 25, May 25,
August 25 and November 25, respectively, immediately preceding the applicable interest payment
date. Proceeds from the offerings and related transactions, after approximately $14.3 million in
underwriting discounts and commissions, were approximately $263.7 million. The net proceeds were,
in part, used to (i) redeem a portion of the 9% senior notes in an aggregate principal amount of
$125.5 million (plus approximately $4.5 million of accrued interest and approximately $11.3 million
of related redemption premium), which notes were redeemed on December 24, 2004, (ii) repay
approximately $15.5 million of outstanding term loans under Coinmachs senior secured credit
facility and (iii) redeem approximately $91.8 million of Coinmach Laundrys outstanding Class A
preferred stock (representing all of its outstanding Class A preferred stock) and approximately
$7.4 million of Coinmach Laundrys outstanding Class B preferred stock (representing a portion of
the then outstanding Class B preferred stock). As a result of the IDS transactions, the Company incurred approximately $23.6 million in
issuance costs including underwriting discounts and commissions, of which approximately $12.5
million was recorded as a reduction of the proceeds from the sale of the equity component of the
IDS equity and approximately $11.1 million related to the 11% senior secured notes was capitalized
as deferred financing costs to be amortized using the effective interest method through November
24, 2024. In addition to the issuance costs, the Company paid approximately $11.3 million of a
redemption premium on the portion of 9% senior notes redeemed and approximately $2.4 million to
amend the Senior Secured Credit Facility. The issuance costs were allocated between equity and
debt based on the ratio of the respective relative fair values of the components of the IDSs
issued. 10




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 2. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market and consist of the
following (in thousands): December 31,
    
    
    March 31,2004
    
    
    2004Laundry equipment
    
    $
    8,728
    
    
    $
    7,973Machine repair parts
    
    
    3,353
    
    
    
    3,535$
    12,081
    
    
    $
    11,508
 3. Goodwill and Contract Rights The Company accounts for goodwill in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142 (SFAS 142) Goodwill and Other Intangible Assets. SFAS
142 required an initial impairment assessment upon adoption on April 1, 2002, as well as an annual
assessment thereafter. Goodwill is further tested between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. SFAS 142 requires a two-step process in evaluating goodwill. In
performing the annual goodwill assessment, the first step requires comparing the fair value of the
reporting unit to its carrying value. To the extent that the carrying value of the reporting unit
exceeds the fair value, the Company would need to perform the second step in the impairment test to
measure the amount of goodwill write-off. The fair value of the reporting units for these tests is
based upon a discounted cash flow model. In step two, the fair value of the reporting unit is
allocated to the reporting units assets and liabilities (a hypothetical purchase price allocation
as if the reporting unit had been acquired on that date). The implied fair value of goodwill is
calculated by deducting the allocated fair value of all tangible and intangible net assets of the
reporting unit from the fair value of the reporting unit as determined in step one. The remaining
fair value, after assigning fair value to all of the reporting units assets and liabilities,
represents the implied fair value of goodwill for the reporting unit. If the implied fair value is
less than the carrying value of goodwill, an impairment loss equal to the difference would be
recognized. The Company has determined that its reporting units with goodwill consist of the route
business, AWA and Super Laundry. Goodwill attributed to the route business, AWA and Super Laundry
at December 31, 2004 is as follows (in thousands): Route
    
    $
    195,026Rental
    
    
    6,837Distribution
    
    
    2,917$
    204,780
 11




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 3. Goodwill and Contract Rights (continued) The Company performed its annual assessment of goodwill as of January 1, 2004 and determined
that no impairment existed. The annual impairment test for the 2005 fiscal year will be completed
by the Companys fiscal year end. There can be no assurances that future goodwill impairment tests
will not result in a charge to income. Contract rights represent the value of location contracts arising from the acquisition of
laundry machines on location. These amounts, which arose primarily from purchase price allocations
pursuant to acquisitions, are amortized using accelerated methods over periods ranging from 30-35
years. The Company does not record contract rights relating to new locations signed in the
ordinary course of business. Amortization expense for contract rights for each of the next five years is estimated to be as
follows (in millions of dollars): Years ending March 31,2005 (remainder of year)
    
    $
    3.52006
    
    
    13.52007
    
    
    13.22008
    
    
    12.92009
    
    
    12.6
 The Company assesses the recoverability of contract rights in accordance with the
provisions of SFAS No. 144 (SFAS 144) Accounting for the Impairment and Disposal of Long-Lived
Assets. The Company has twenty-eight geographic regions to which contract rights have been
allocated. Although the Company has contracts at every location/property, and we analyze revenue
and certain direct costs on a contract-by-contract basis, the Company does not allocate common
region costs and servicing costs to each contract. Accordingly, such regions represent the lowest
level of identifiable cash flows in grouping contract rights. The assessment includes evaluating
the financial results/cash flows and certain statistical performance measures for each region in
which the Company operates. Factors that generally impact cash flows include commission rates paid
to property owners, occupancy rates at properties, sensitivity to price increases, loss of existing
machine base, and the regions general economic conditions. If as a result of this evaluation there
are indicators of impairment that result in losses to the machine base, or an event occurs that
would indicate that the carrying amounts may not be recoverable, the Company reevaluates the
carrying value of contract rights based on future undiscounted cash flows attributed to that region
and records an impairment loss based on discounted cash flows if the carrying amount of the
contract rights are not recoverable from undiscounted cash flows. Based on present operations and
strategic plans, management believes that there have not been any indicators of impairment of
contract rights. 12




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 4. Long-Term Debt Long-term debt consists of the following (in thousands): December 31,
    
    
    March 31,2004
    
    
    20049% Senior Notes due 2010
    
    $
    324,500
    
    
    $
    450,000Credit facility indebtedness
    
    
    240,507
    
    
    
    260,337IDS 11% senior secured notes
    
    
    116,117
    
    
    
    Third party 11% senior secured notes
    
    
    20,000
    
    
    
    Obligations under capital leases
    
    
    7,283
    
    
    
    6,762Other long-term debt with varying terms and maturities
    
    
    691
    
    
    
    532709,098
    
    
    
    717,631Less current portion
    
    
    5,920
    
    
    
    9,149$
    703,178
    
    
    $
    708,482
 On January 25, 2002, Coinmach issued $450 million of 9% senior notes due 2010 (the 9%
senior notes) and entered into a $355 million senior secured credit facility (as amended, the
Senior Secured Credit Facility) comprised of: (i) $280 million in aggregate principal amount of
term loans and (ii) a revolving credit facility with a maximum borrowing limit of $75 million. The
revolving credit portion of the Senior Secured Credit Facility provides up to $10 million of letter
of credit financings and short term borrowings under a swing line facility of up to $7.5 million.
The Senior Secured Credit Facility is secured by a first priority security interest in all of the
Companys real and personal property and is guaranteed by each of Coinmachs domestic subsidiaries.
In addition, Coinmach Laundry and Coinmach pledged to the Collateral Agent under the Senior
Secured Credit Facility their interests in all of the issued and outstanding shares of capital
stock of their respective domestic subsidiaries. Transaction costs related to the IDS Transactions on the Condensed Consolidated Statements of
Operations for the three and nine months ended December 31, 2004 represent (1) the $11.3 million
redemption premium on the portion of 9% senior notes redeemed, (2) the write-off of the deferred
financing costs relating to the 9% senior notes redeemed and term loans repaid aggregating
approximately $3.5 million and (3) expenses relating to the Senior Secured Credit Facility
amendment aggregating approximately $2.4 million. As a condition to the consummation of the initial public offering, Coinmach entered into an
amendment to the Senior Secured Credit Facility on November 15, 2004 with the requisite lenders and
agents thereunder to permit consummation of the IDS Transactions. 13




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 4. Long-Term Debt (continued) At December 31, 2004, the Company had outstanding debt consisting of (a) approximately $324.5
million of 9% senior notes, (b) approximately $240.5 million of term loans with interest rates
ranging from 5.31% to 5.44%, (c) approximately $116.1 million of 11% senior secured notes
underlying IDSs and (d) $20.0 million of 11% senior secured notes not underlying IDSs. The term
loans under the Senior Secured Credit Facility are scheduled to be fully repaid by July 25, 2009.
The 11% senior secured notes are due on December 1, 2024. As of December 31, 2004, the Company had
no amounts outstanding under the revolver portion of the Senior Secured Credit Facility, which is
scheduled to expire on January 25, 2008. Letters of credit outstanding at December 31, 2004 were
approximately $6.4 million. The 11% senior secured notes are senior secured obligations of the Company and are redeemable,
at the Companys option, in whole or in part, at any time or from time to time, upon not less than
30 nor more than 60 days notice (i) prior to December 1, 2009, upon payment of a make-whole
premium and (ii) on or after December 1, 2009, at the redemption prices set forth in the indenture
governing the 11% senior secured notes plus accrued and unpaid interest thereon. The 11% senior
secured notes are secured by a first-priority perfected lien, subject to certain permitted liens,
on substantially all of the Companys existing and future assets, including the common stock of
AWA, the capital stock of Coinmach Laundry and the intercompany note and related guaranty. The 11%
senior secured notes are guaranteed on a senior secured basis by Coinmach Laundry. The indenture governing the 11% senior secured notes contains a number of restrictive
covenants and agreements applicable to us and the Companys restricted subsidiaries, including
covenants with respect to the following matters: (i) limitation on additional indebtedness; (ii)
limitation on certain payments (in the form of the declaration or payment of certain dividends or
distributions on the Companys capital stock, the purchase, redemption or other acquisition of any
of the Companys capital stock, the voluntary prepayment of subordinated indebtedness, and certain
investments); (iii) limitation on transactions with affiliates; (iv) limitation on liens; (v)
limitation on sales of assets; (vi) limitation on the issuance of preferred stock by non-guarantor
subsidiaries; (vii) limitation on conduct of business; (viii) limitation on dividends and other
payment restrictions affecting subsidiaries; (ix) limitations on exercising Class B Common Stock
redemption rights and consummating purchases of Class B Common Stock upon exercise of sales rights
by holders; and (x) limitation on consolidations, mergers and sales of substantially all of the
Companys assets. In addition to certain customary terms and provisions, including events of default and
customary representations, covenants and agreements, the Senior Secured Credit Facility contains
certain restrictive covenants including, but not limited to, a maximum leverage ratio, a minimum
consolidated earnings before interest, taxes, depreciation and amortization coverage ratio and
limitations on indebtedness, capital expenditures, advances, investments and loans, mergers and
acquisitions, dividends, stock issuances and transactions with affiliates. Also, the indenture
governing the 9% senior notes and the Senior Secured Credit Facility limit in certain 14




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) respects the ability of Coinmach to pay dividends. At December 31, 2004, the Company was in
compliance with the covenants under the indenture governing the 11% senior secured notes and with
the covenants under the indenture governing the 9% senior notes and the Senior Secured Credit
Facility. On September 23, 2002, Coinmach entered into three separate interest rate swap agreements
totaling $150 million in aggregate notional amount that effectively convert a portion of its
floating-rate term loans pursuant to the Senior Secured Credit Facility to a fixed rate basis thus
reducing the impact of interest rate changes on future interest expense. The three swap agreements
consist of: (i) a $50 million notional amount interest rate swap transaction with a financial
institution effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.91%
and expiring on February 1, 2006, (ii) a $50 million notional amount interest rate swap transaction
with a financial institution effectively fixing the three-month LIBOR interest rate (as determined
therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50 million notional amount
interest rate swap transaction with a financial institution effectively fixing the three-month
LIBOR interest rate (as determined therein) at 2.90% and expiring on February 1, 2006. These
interest rate swaps used to hedge the variability of forecasted cash flows attributable to interest
rate risk were designated as cash flow hedges. The Company recognized accumulated other
comprehensive income in the stockholders equity section included in the condensed consolidated
balance sheet at December 31, 2004 relating to the interest rate swaps that qualify as cash flow
hedges. 5. Guarantor Subsidiaries Coinmach Laundry has guaranteed the 11% senior secured notes referred to in Note 4. The
Company has not included separate financial statements of Coinmach Laundry because Coinmach Laundry
is wholly-owned by the Company, its guarantee is full and unconditional and no other subsidiary of
CSC guarantees the 11% senior secured notes. Accordingly, CSCs financial statements include, in a
footnote, condensed consolidating financial information for CSC, Coinmach Laundry and CSCs other
indirect subsidiaries. In addition, Coinmachs domestic subsidiaries have guaranteed Coinmachs 9%
senior notes and Senior Secured Credit Facility also referred to in Note 4. Condensed consolidating financial information for the Company and Coinmach Laundry is as
follows (in thousands): 15




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) Condensed Consolidating Balance Sheets December 31, 2004CoinmachCoinmach
    
    
    Coinmach
    
    
    Corporation
    
    
    AdjustmentsService
    
    
    Laundry
    
    
    and
    
    
    andCorp.
    
    
    Corporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets, consisting of cash,
receivables, inventory, assets held
for sale, prepaid expenses and other
current assets
    
    $
    1,895
    
    
    $
    
    
    
    $
    84,144
    
    
    $
    (905
    )
    
    $
    85,134Advance location payments
    
    
    
    
    
    
    
    
    
    
    72,219
    
    
    
    
    
    
    
    72,219Property, equipment and leasehold
improvements, net
    
    
    
    
    
    
    
    
    
    
    270,935
    
    
    
    
    
    
    
    270,935Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    517,887
    
    
    
    
    
    
    
    517,887Deferred income taxes
    
    
    1,274
    
    
    
    2,113
    
    
    
    
    
    
    
    (3,387
    )
    
    
    Intercompany loans and advances
    
    
    191,425
    
    
    
    49,580
    
    
    
    23,183
    
    
    
    (264,188
    )
    
    
    Investment in subsidiaries
    
    
    (32,243
    )
    
    
    101,154
    
    
    
    (26,608
    )
    
    
    (42,303
    )
    
    
    Investment in preferred stock
    
    
    
    
    
    
    
    
    
    
    18,004
    
    
    
    (18,004
    )
    
    
    Other assets
    
    
    92,746
    
    
    
    206
    
    
    
    9,296
    
    
    
    (81,876
    )
    
    
    20,372Total assets
    
    $
    255,097
    
    
    $
    153,053
    
    
    $
    969,060
    
    
    $
    (410,663
    )
    
    $
    966,547Liabilities and Stockholders Equity(Deficit)Current liabilities:Accounts payable and accrued expenses
    
    $
    3,062
    
    
    $
    
    
    
    $
    76,514
    
    
    $
    (1,111
    )
    
    $
    78,465Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    5,920
    
    
    
    
    
    
    
    5,920Total current liabilities
    
    
    3,062
    
    
    
    
    
    
    
    82,434
    
    
    
    (1,111
    )
    
    
    84,385Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    68,558
    
    
    
    (3,387
    )
    
    
    65,171Long-term debt, less current portion
    
    
    136,117
    
    
    
    
    
    
    
    590,244
    
    
    
    (23,183
    )
    
    
    703,178Loan Payable to Parent
    
    
    
    
    
    
    
    
    
    
    81,670
    
    
    
    (81,670
    )
    
    
    Due to parent/subsidiary
    
    
    
    
    
    
    184,936
    
    
    
    51,884
    
    
    
    (236,820
    )
    
    
    Preferred stock and dividends
payable- AWA
    
    
    
    
    
    
    
    
    
    
    18,004
    
    
    
    (18,004
    )
    
    
    Total stockholders equity (deficit)
    
    
    115,918
    
    
    
    (31,883
    )
    
    
    76,266
    
    
    
    (46,488
    )
    
    
    113,813Total liabilities and stockholders
equity (deficit)
    
    $
    255,097
    
    
    $
    153,053
    
    
    $
    969,060
    
    
    $
    (410,663
    )
    
    $
    966,547
 16




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 5. Guarantor Subsidiaries (continued) Condensed Consolidating Balance Sheets (continued) March 31, 2004CoinmachCoinmach
    
    
    Corporation
    
    
    AdjustmentsLaundry
    
    
    and
    
    
    andCorporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets, consisting of cash,
receivables, inventory, assets held
for sale, prepaid expenses and other
current assets
    
    $
    
    
    
    $
    58,966
    
    
    $
    
    
    
    $
    58,966Advance location payments
    
    
    
    
    
    
    73,253
    
    
    
    
    
    
    
    73,253Property, equipment and leasehold
improvements, net
    
    
    
    
    
    
    283,688
    
    
    
    
    
    
    
    283,688Deferred income taxes
    
    
    1,974
    
    
    
    
    
    
    
    (1,974
    )
    
    
    Intangible assets, net
    
    
    
    
    
    
    527,932
    
    
    
    
    
    
    
    527,932Intercompany loans and advances
    
    
    50,036
    
    
    
    21,822
    
    
    
    (71,858
    )
    
    
    Investment in subsidiaries
    
    
    43,757
    
    
    
    (27,460
    )
    
    
    (16,297
    )
    
    
    Investment in preferred stock
    
    
    
    
    
    
    16,777
    
    
    
    (16,777
    )
    
    
    Other assets
    
    
    528
    
    
    
    15,670
    
    
    
    (529
    )
    
    
    15,669Total assets
    
    $
    96,295
    
    
    $
    970,648
    
    
    $
    (107,435
    )
    
    $
    959,508Liabilities and Stockholders
(Deficit) EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    
    
    
    $
    72,336
    
    
    $
    (529
    )
    
    $
    71,807Current portion of long-term debt
    
    
    
    
    
    
    9,149
    
    
    
    
    
    
    
    9,149Total current liabilities
    
    
    
    
    
    
    81,485
    
    
    
    (529
    )
    
    
    80,956Deferred income taxes
    
    
    
    
    
    
    75,749
    
    
    
    (1,974
    )
    
    
    73,775Long-term debt, less current portion
    
    
    
    
    
    
    730,304
    
    
    
    (21,822
    )
    
    
    708,482Preferred stock and dividends
payable  Coinmach Laundry
    
    
    265,914
    
    
    
    
    
    
    
    
    
    
    
    265,914Due to Parent
    
    
    
    
    
    
    50,036
    
    
    
    (50,036
    )
    
    
    Preferred stock and dividends
payable  AWA
    
    
    
    
    
    
    16,777
    
    
    
    (16,777
    )
    
    
    Total stockholders (deficit) equity
    
    
    (169,619
    )
    
    
    16,297
    
    
    
    (16,297
    )
    
    
    (169,619
    )Total liabilities and stockholders
(deficit) equity
    
    $
    96,295
    
    
    $
    970,648
    
    
    $
    (107,435
    )
    
    $
    959,508
 17




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 5. Guarantor Subsidiaries (continued) Condensed Consolidating Statements of Operations Three Months Ended December 31, 2004CoinmachCoinmach
    
    
    Coinmach
    
    
    CorporationService
    
    
    Laundry
    
    
    andCorp.
    
    
    Corporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    
    
    
    $
    135,627
    
    
    $
    
    
    
    $
    135,627Costs and expenses
    
    
    111
    
    
    
    126
    
    
    
    122,072
    
    
    
    
    
    
    
    122,309Operating (loss) income
    
    
    (111
    )
    
    
    (126
    )
    
    
    13,555
    
    
    
    
    
    
    
    13,318Transaction costs
    
    
    
    
    
    
    
    
    
    
    17,135
    
    
    
    
    
    
    
    17,135Interest expense, net
    
    
    644
    
    
    
    4,862
    
    
    
    15,078
    
    
    
    
    
    
    
    20,584(755
    )
    
    
    (4,988
    )
    
    
    (18,658
    )
    
    
    
    
    
    
    (24,401
    )Income taxes
    
    
    (1,274
    )
    
    
    (185
    )
    
    
    (6,641
    )
    
    
    
    
    
    
    (8,100
    )519
    
    
    
    (4,803
    )
    
    
    (12,017
    )
    
    
    
    
    
    
    (16,301
    )Equity in loss
(income) of
subsidiaries
    
    
    16,820
    
    
    
    12,017
    
    
    
    (391
    )
    
    
    (28,446
    )
    
    
    (16,301
    )
    
    
    (16,820
    )
    
    
    (11,626
    )
    
    
    28,446
    
    
    
    (16,301
    )Dividend income
    
    
    
    
    
    
    
    
    
    
    (411
    )
    
    
    411
    
    
    
    Net loss
    
    $
    (16,301
    )
    
    $
    (16,820
    )
    
    $
    (11,215
    )
    
    $
    28,035
    
    
    $
    (16,301
    )
 Three Months Ended December 31, 2003CoinmachCoinmach
    
    
    CorporationLaundry
    
    
    andCorporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    135,740
    
    
    $
    
    
    
    $
    135,740Costs and expenses
    
    
    193
    
    
    
    122,836
    
    
    
    
    
    
    
    123,029Operating (loss) income
    
    
    (193
    )
    
    
    12,904
    
    
    
    
    
    
    
    12,711Interest expense, net
    
    
    6,292
    
    
    
    14,424
    
    
    
    
    
    
    
    20,716(6,485
    )
    
    
    (1,520
    )
    
    
    
    
    
    
    (8,005
    )Income taxes
    
    
    (62
    )
    
    
    (583
    )
    
    
    
    
    
    
    (645
    )(6,423
    )
    
    
    (937
    )
    
    
    
    
    
    
    (7,360
    )Equity in loss of subsidiaries
    
    
    937
    
    
    
    995
    
    
    
    (1,932
    )
    
    
    (7,360
    )
    
    
    (1,932
    )
    
    
    1,932
    
    
    
    (7,360
    )Dividend income
    
    
    
    
    
    
    (364
    )
    
    
    364
    
    
    
    Net loss
    
    $
    (7,360
    )
    
    $
    (1,568
    )
    
    $
    1,568
    
    
    $
    (7,360
    )
 18




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 5. Guarantor Subsidiaries (continued) Condensed Consolidating Statements of Operations (continued) Nine Months Ended December 31, 2004CoinmachCoinmach
    
    
    Coinmach
    
    
    CorporationService
    
    
    Laundry
    
    
    andCorp.
    
    
    Corporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    
    
    
    $
    402,076
    
    
    $
    
    
    
    $
    402,076Costs and expenses
    
    
    111
    
    
    
    376
    
    
    
    364,851
    
    
    
    
    
    
    
    365,338Operating (loss) income
    
    
    (111
    )
    
    
    (376
    )
    
    
    37,225
    
    
    
    
    
    
    
    36,738Transaction costs
    
    
    
    
    
    
    
    
    
    
    17,135
    
    
    
    
    
    
    
    17,135Interest expense, net
    
    
    644
    
    
    
    18,230
    
    
    
    43,703
    
    
    
    
    
    
    
    62,577(755
    )
    
    
    (18,606
    )
    
    
    (23,613
    )
    
    
    
    
    
    
    (42,974
    )Income taxes
    
    
    (1,274
    )
    
    
    (175
    )
    
    
    (8,572
    )
    
    
    
    
    
    
    (10,021
    )519
    
    
    
    (18,431
    )
    
    
    (15,041
    )
    
    
    
    
    
    
    (32,953
    )Equity in loss of subsidiaries
    
    
    33,472
    
    
    
    15,041
    
    
    
    (851
    )
    
    
    (47,662
    )
    
    
    (32,953
    )
    
    
    (33,472
    )
    
    
    (14,190
    )
    
    
    47,662
    
    
    
    (32,953
    )Dividend income
    
    
    
    
    
    
    
    
    
    
    (1,227
    )
    
    
    1,227
    
    
    
    Net loss income
    
    $
    (32,953
    )
    
    $
    (33,472
    )
    
    $
    (12,963
    )
    
    $
    46,435
    
    
    $
    (32,953
    )
 Nine Months Ended December 31, 2003CoinmachCoinmach
    
    
    CorporationLaundry
    
    
    andCorporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    398,208
    
    
    $
    
    
    
    $
    398,208Costs and expenses
    
    
    704
    
    
    
    361,394
    
    
    
    
    
    
    
    362,098Operating (loss) income
    
    
    (704
    )
    
    
    36,814
    
    
    
    
    
    
    
    36,110Interest expense, net
    
    
    18,324
    
    
    
    43,132
    
    
    
    
    
    
    
    61,456(19,028
    )
    
    
    (6,318
    )
    
    
    
    
    
    
    (25,346
    )Income taxes
    
    
    (213
    )
    
    
    (1,857
    )
    
    
    
    
    
    
    (2,070
    )(18,815
    )
    
    
    (4,461
    )
    
    
    
    
    
    
    (23,276
    )Equity in loss of subsidiaries
    
    
    4,461
    
    
    
    1,020
    
    
    
    (5,481
    )
    
    
    (23,276
    )
    
    
    (5,481
    )
    
    
    5,481
    
    
    
    (23,276
    )Dividend income
    
    
    
    
    
    
    (1,236
    )
    
    
    1,236
    
    
    
    Net loss
    
    $
    (23,276
    )
    
    $
    (4,245
    )
    
    $
    4,245
    
    
    $
    (23,276
    )
 19




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 5. Guarantor Subsidiaries (continued) Condensed Consolidating Statements of Cash Flows Nine Months Ended December 31, 2004CoinmachCoinmach
    
    
    Coinmach
    
    
    CorporationService
    
    
    Laundry
    
    
    andCorp.
    
    
    Corporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating ActivitiesNet income (loss) income
    
    $
    519
    
    
    $
    (18,431
    )
    
    $
    (12,963
    )
    
    $
    (2,078
    )
    
    $
    (32,953
    )Noncash adjustments
    
    
    (1,221
    )
    
    
    18,147
    
    
    
    89,944
    
    
    
    
    
    
    
    106,870Change in operating assets and
liabilities
    
    
    2,473
    
    
    
    (8
    )
    
    
    6,733
    
    
    
    
    
    
    
    9,198Net cash (used in) provided by
operating activities
    
    
    1,771
    
    
    
    (292
    )
    
    
    83,714
    
    
    
    (2,078
    )
    
    
    83,115Investing ActivitiesInvestment in and advances to
subsidiaries
    
    
    
    
    
    
    
    
    
    
    (2,078
    )
    
    
    2,078
    
    
    
    Capital expenditures
    
    
    
    
    
    
    
    
    
    
    (54,269
    )
    
    
    
    
    
    
    (54,269
    )Acquisition of assets
    
    
    
    
    
    
    
    
    
    
    (613
    )
    
    
    
    
    
    
    (613
    )Proceeds from sale of investment
    
    
    
    
    
    
    
    
    
    
    277
    
    
    
    
    
    
    
    277Proceeds from sale of property and
equipment
    
    
    
    
    
    
    
    
    
    
    653
    
    
    
    
    
    
    
    653Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (56,030
    )
    
    
    2,078
    
    
    
    (53,952
    )Financing ActivitiesRepayment of debt
    
    
    
    
    
    
    
    
    
    
    (145,330
    )
    
    
    
    
    
    
    (145,330
    )Other financing items
    
    
    (753
    )
    
    
    292
    
    
    
    59,583
    
    
    
    81,670
    
    
    
    140,792Loan from parent
    
    
    
    
    
    
    
    
    
    
    81,670
    
    
    
    (81,670
    )
    
    
    Net cash (used in) provided by
financing activities
    
    
    (753
    )
    
    
    292
    
    
    
    (4,077
    )
    
    
    
    
    
    
    (4,538
    )Net increase in cash and cash
equivalents
    
    
    1,018
    
    
    
    
    
    
    
    23,607
    
    
    
    
    
    
    
    24,625Cash and cash equivalents, beginning
of period
    
    
    
    
    
    
    
    
    
    
    31,620
    
    
    
    
    
    
    
    31,620Cash and cash equivalents, end of
period
    
    $
    1,018
    
    
    $
    
    
    
    $
    55,227
    
    
    $
    
    
    
    $
    56,245
 20




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 5. Guarantor Subsidiaries (continued) Condensed Consolidating Statements of Cash Flows (continued) Nine Months Ended December 31, 2003CoinmachCoinmach
    
    
    CorporationLaundry
    
    
    andCorporation
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating ActivitiesNet loss
    
    $
    (18,815
    )
    
    $
    (4,245
    )
    
    $
    (216
    )
    
    $
    (23,276
    )Noncash adjustments
    
    
    17,491
    
    
    
    79,507
    
    
    
    
    
    
    
    96,998Change in operating assets and liabilities
    
    
    927
    
    
    
    6,578
    
    
    
    
    
    
    
    7,505Net cash (used in) provided by operating
activities
    
    
    (397
    )
    
    
    81,840
    
    
    
    (216
    )
    
    
    81,227Investing ActivitiesInvestment in and advances to subsidiaries
    
    
    
    
    
    
    (216
    )
    
    
    216
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (66,534
    )
    
    
    
    
    
    
    (66,534
    )Acquisition of assets
    
    
    
    
    
    
    (3,423
    )
    
    
    
    
    
    
    (3,423
    )Proceeds from sale of investment
    
    
    
    
    
    
    1,022
    
    
    
    
    
    
    
    1,022Proceeds from sale of property and
equipment
    
    
    
    
    
    
    334
    
    
    
    
    
    
    
    334Net cash used in investing activities
    
    
    
    
    
    
    (68,817
    )
    
    
    216
    
    
    
    (68,601
    )Financing ActivitiesOther financing items
    
    
    397
    
    
    
    (2,940
    )
    
    
    
    
    
    
    (2,543
    )Net cash provided by (used in) financing
activities
    
    
    397
    
    
    
    (2,940
    )
    
    
    
    
    
    
    (2,543
    )Net increase in cash and cash equivalents
    
    
    
    
    
    
    10,083
    
    
    
    
    
    
    
    10,083Cash and cash equivalents, beginning of
period
    
    
    
    
    
    
    27,428
    
    
    
    
    
    
    
    27,428Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    37,511
    
    
    $
    
    
    
    $
    37,511
 21




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 6. Segment Information The Company reports segment information for the route segment, its only reportable operating
segment, and provides information for its two other operating segments reported as All other.
The route segment, which comprises the Companys core business, involves leasing laundry rooms from
building owners and property management companies typically on a long-term, renewal basis,
installing and servicing the laundry equipment, collecting revenues generated from laundry
machines, and operating retail laundromats. The other business operations reported in All other
include the aggregation of the rental, distribution and franchise businesses. The rental business
involves the leasing of laundry machines and other household appliances to property owners,
managers of multi-family housing properties and to a lesser extent, individuals and corporate
relocation entities through the Companys jointly-owned subsidiary, AWA. The distribution business
involves constructing complete turnkey retail laundromats, retrofitting existing retail
laundromats, distributing exclusive lines of coin and non-coin machines and parts, selling service
contracts and building and developing laundromat facilities for sale as franchise locations through
the Companys indirect subsidiary, Super Laundry. The Company evaluates performance and allocates
resources based on EBITDA (earnings from continuing operations before interest, taxes and
depreciation and amortization), cash flow and growth opportunity. The accounting policies of the
segment are the same as those described in the audited consolidated financial statements included
in the Companys registration statement (the Registration Statement) on Form S-1 (No.
333-114421), including the Prospectus contained therein, dated November 19, 2004. 22




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 6. Segment Information (continued) The table below presents information about the Companys segments (in thousands): Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenue:Route
    
    $
    119,489
    
    
    $
    119,173
    
    
    $
    353,727
    
    
    $
    351,529All other:Rental
    
    
    8,617
    
    
    
    8,133
    
    
    
    25,497
    
    
    
    24,025Distribution
    
    
    7,521
    
    
    
    8,434
    
    
    
    22,852
    
    
    
    22,654Subtotal
    
    
    16,138
    
    
    
    16,567
    
    
    
    48,349
    
    
    
    46,679Total revenue
    
    $
    135,627
    
    
    $
    135,740
    
    
    $
    402,076
    
    
    $
    398,208EBITDA(1):Route
    
    $
    39,459
    
    
    $
    39,249
    
    
    $
    116,188
    
    
    $
    115,900All other:Rental
    
    
    3,742
    
    
    
    2,961
    
    
    
    10,388
    
    
    
    9,213Distribution
    
    
    156
    
    
    
    (82
    )
    
    
    598
    
    
    
    (1,087
    )Subtotal
    
    
    3,898
    
    
    
    2,879
    
    
    
    10,986
    
    
    
    8,126Other items, net
    
    
    
    
    
    
    (96
    )
    
    
    (500
    )
    
    
    (96
    )Transaction costs(2)
    
    
    (17,135
    )
    
    
    
    
    
    
    (17,135
    )
    
    
    Corporate expenses
    
    
    (2,502
    )
    
    
    (2,362
    )
    
    
    (7,229
    )
    
    
    (6,950
    )Total EBITDA
    
    
    23,720
    
    
    
    39,670
    
    
    
    102,310
    
    
    
    116,980Reconciling items:Depreciation and amortization
expense, amortization of advance
location payments and amortization
of intangibles:Route
    
    
    (24,608
    )
    
    
    (24,221
    )
    
    
    (73,986
    )
    
    
    (73,046
    )All other
    
    
    (2,216
    )
    
    
    (2,108
    )
    
    
    (6,487
    )
    
    
    (6,078
    )Corporate
    
    
    (713
    )
    
    
    (630
    )
    
    
    (2,234
    )
    
    
    (1,746
    )Total depreciation
    
    
    (27,537
    )
    
    
    (26,959
    )
    
    
    (82,707
    )
    
    
    (80,870
    )Interest expense
    
    
    (14,781
    )
    
    
    (14,424
    )
    
    
    (43,406
    )
    
    
    (43,132
    )Interest expense  Preferred Stock
    
    
    (4,862
    )
    
    
    (6,292
    )
    
    
    (18,230
    )
    
    
    (18,324
    )Interest expense  escrow Interest
    
    
    (941
    )
    
    
    
    
    
    
    (941
    )
    
    
    Consolidated loss before income taxes
    
    $
    (24,401
    )
    
    $
    (8,005
    )
    
    $
    (42,974
    )
    
    $
    (25,346
    )
   (1)
    
    See description of Non-GAAP Financial Measures immediately following this table for more
information regarding EBITDA and a reconciliation of net loss to EBITDA for the periods
indicated above.(2)
    
    Amounts have not been added back to EBITDA relating to (1) the $11.3 million redemption
premium on the portion of 9% senior notes redeemed, and (2) the write-off of the deferred
financing costs relating to the 9% senior notes redeemed and term loans repaid aggregating
approximately $3.5 million. 23




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 6. Segment Information (continued) Non-GAAP Financial Measures EBITDA represents earnings from continuing operations before deductions for interest, income
taxes and depreciation and amortization. Management believes that EBITDA is useful as a means to
evaluate the Companys ability to service existing debt, to sustain potential future increases in
debt and to satisfy capital requirements. EBITDA is also used by management as a measure of
evaluating the performance of the Companys three operating segments. Management further believes
that EBITDA is useful to investors as a measure of comparative operating performance as it is less
susceptible to variances in actual performance resulting from depreciation, amortization and other
non-cash charges and more reflective of changes in pricing decisions, cost controls and other
factors that affect operating performance. Management uses EBITDA to develop compensation plans,
to measure sales force performance and to allocate capital assets. Additionally, because the
Company has historically provided EBITDA to investors, management believes that presenting this
non-GAAP financial measure provides consistency in financial reporting. Managements use of
EBITDA, however, is not intended to represent cash flows for the period, nor has it been presented
as an alternative to either (a) operating income (as determined by GAAP) as an indicator of
operating performance or (b) cash flows from operating, investing and financing activities (as
determined by GAAP) as a measure of liquidity. Given that EBITDA is not a measurement determined
in accordance with GAAP and is thus susceptible to varying calculations, EBITDA may not be
comparable to other similarly titled measures of other companies. The following table reconciles
the Companys net loss to EBITDA for each period presented (in millions): Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net loss
    
    $
    (16.3
    )
    
    $
    (7.4
    )
    
    $
    (32.9
    )
    
    $
    (23.3
    )Benefit for income taxes
    
    
    (8.1
    )
    
    
    (0.6
    )
    
    
    (10.0
    )
    
    
    (2.0
    )Interest expense
    
    
    14.8
    
    
    
    14.4
    
    
    
    43.4
    
    
    
    43.1Interest expense  preferred stock
    
    
    4.9
    
    
    
    6.3
    
    
    
    18.2
    
    
    
    18.3Interest expense  escrow interest
    
    
    0.9
    
    
    
    
    
    
    
    0.9
    
    
    
    Depreciation and amortization
    
    
    27.5
    
    
    
    27.0
    
    
    
    82.7
    
    
    
    80.9EBITDA*
    
    $
    23.7
    
    
    $
    39.7
    
    
    $
    102.3
    
    
    $
    117.0
   *No amounts have been added back to EBITDA related to the transactions costs consisting of (1)
approximately $11.3 million redemption premium on the portion of the 9% senior notes redeemed, and
(2) the write-off of deferred financing costs relating to the 9% senior notes redeemed and term
loans repaid aggregating approximately $3.5 million. 24




---



##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 7. Loss per Common Share Basic loss per share for the two classes of common stock is calculated by dividing net loss
by the weighted average number of shares of Class A Common Stock and Class B Common Stock
outstanding. Diluted loss per share is computed using the weighted average number of shares of
Class A Common Stock and Class B Common Stock plus the potentially dilutive effect of common stock
equivalents. Diluted loss per share for the Companys two classes of common stock will be the same
as basic loss per share because the Company does not have any potentially dilutive securities
outstanding. Net loss available to common stockholders is allocated to the Companys two classes of common
stock based on the weighted average number of shares outstanding since both classes have the same
participation rights. Under the two class method, loss per share for each class of common stock is
presented (dollars in thousands, except share and per share data): Three Months Ended
    
    
    Nine Months EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2004
    
    
    December 31, 2003Net loss
    
    $
    (16,301
    )
    
    $
    (7,360
    )
    
    $
    (32,953
    )
    
    $
    (23,276
    )Weighted average common stock
outstandingClass A Common Stock
    
    
    18,911,532
    
    
    
    18,911,532
    
    
    
    18,911,532
    
    
    
    18,911,532Class B Common Stock
    
    
    24,980,445
    
    
    
    24,980,445
    
    
    
    24,980,445
    
    
    
    24,980,445Total
    
    
    43,891,977
    
    
    
    43,891,977
    
    
    
    43,891,977
    
    
    
    43,891,977Basic and diluted loss per share:Class A Common Stock per share
    
    $
    (0.37
    )
    
    $
    (0.17
    )
    
    $
    (0.75
    )
    
    $
    (0.53
    )Class B Common Stock per share
    
    $
    (0.37
    )
    
    $
    (0.17
    )
    
    $
    (0.75
    )
    
    $
    (0.53
    )
 The net loss available to common stock holders will be reduced by dividends declared
and/or paid in the future. The basic and diluted loss per share would be calculated by dividing
the net loss, adjusted for dividends, by the weighted average number of shares outstanding. 25




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 8. Income Taxes The components of the Companys deferred tax liabilities and assets are as follows (in
thousands): December 31, 2004
    
    
    March 31, 2004Deferred tax liabilities:Accelerated tax depreciation and contract rights
    
    $
    109,445
    
    
    $
    111,103Interest rate swap
    
    
    16
    
    
    
    Other
    
    
    1,505
    
    
    
    1,246110,966
    
    
    
    112,349Deferred tax assets:Interest rate swap
    
    
    
    
    
    
    1,591Net operating loss carryforwards
    
    
    42,744
    
    
    
    34,272Covenant not to compete
    
    
    1,158
    
    
    
    1,202Other
    
    
    1,893
    
    
    
    1,50945,795
    
    
    
    38,574Net deferred tax liability
    
    $
    65,171
    
    
    $
    73,775
 The net operating loss carryforwards of approximately $105 million expire between fiscal
years 2005 through 2024. The majority of the Companys net operating loss carryforwards begin to
expire after four years. In addition, the net operating losses are subject to annual limitations
imposed under the provisions of the Internal Revenue Code regarding changes in ownership. The benefit for income taxes consists of (in thousands): Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Federal
    
    $
    (6,440
    )
    
    $
    (577
    )
    
    $
    (7,965
    )
    
    $
    (1,806
    )State
    
    
    (1,660
    )
    
    
    (68
    )
    
    
    (2,056
    )
    
    
    (264
    )$
    (8,100
    )
    
    $
    (645
    )
    
    $
    (10,021
    )
    
    $
    (2,070
    )
 26




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 8. Income Taxes (continued) The effective income tax rate differs from the amount computed by applying the U.S. federal
statutory rate to loss before taxes as a result of state taxes and permanent book/tax differences
as follows (in thousands): Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Expected tax benefit
    
    $
    (8,644
    )
    
    $
    (2,802
    )
    
    $
    (15,145
    )
    
    $
    (8,871
    )NOL Valuation Allowance
    
    
    
    
    
    
    433
    
    
    
    
    
    
    
    433State tax benefit, net of federal taxes
    
    
    (1,078
    )
    
    
    (52
    )
    
    
    (1,336
    )
    
    
    (180
    )Non deductible interest -Preferred Stock
    
    
    1,702
    
    
    
    2,202
    
    
    
    6,381
    
    
    
    6,413Permanent book/tax differences
    
    
    (80
    )
    
    
    (426
    )
    
    
    79
    
    
    
    135Tax benefit
    
    $
    (8,100
    )
    
    $
    (645
    )
    
    $
    (10,021
    )
    
    $
    (2,070
    )
 9. Redeemable Preferred Stock and Stockholders Deficit Pursuant to a merger transaction in July 2000, all of the issued and outstanding capital stock
of Coinmach Laundry was cancelled, and Coinmach Laundry issued (i) 20.77 shares of Class A
preferred stock accruing cash dividends on a quarterly basis at an annual rate of 12.5% (which
increased to 14% on November 15, 2002) on the sum of the liquidation value thereof plus accumulated
and unpaid dividends thereon (the Class A Preferred Stock), (ii) 53.84 shares of Class B
preferred stock accruing cash dividends on a quarterly basis at an annual rate of 8% on the sum of
the liquidation value thereof plus accumulated and unpaid dividends thereon (the Class B Preferred
Stock and, together with the Class A Preferred Stock, (the Preferred Stock) and (iii) 59,823.30
shares of common stock, par value $25 per share (the Common Stock). The Preferred Stock did not
have voting rights, had a liquidation value of $2.5 million per share and was mandatorily
redeemable on July 5, 2010. 27




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 9. Redeemable Preferred Stock and Stockholders Deficit (continued) Under Coinmach Laundrys equity participation plan (the Equity Participation Plan), in July
2000, loans were extended by Coinmach Laundry (the EPP Loans) to certain employees for the
purchase of Common Stock at a fixed price per share equal to the fair market value of such Common
Stock at the time of issuance as determined by the board of directors of Coinmach Laundry.
Additionally, certain members of senior management of the Company also acquired Class B Preferred
Stock at such time. Pursuant to the terms of the Equity Participation Plan, the Preferred Stock
was fully vested at the time of purchase, and the Common Stock vests over a specified period,
typically over four years. The EPP Loans are payable in installments over ten years and accrue interest at a rate of 7%
per annum. There are no shares reserved for future issuance. The Equity Participation Plan
contains certain restrictions on the transfer of such Common Stock and Class B Preferred Stock. The installments on the EPP Loans have to date been forgiven by the Company on or prior to
their respective due dates. As a result, such loans are considered non-recourse and therefore
treated as an award of stock requiring the recognition of compensation expense. Such expense is
measured at fair value as of the time the stock award vests and is subsequently remeasured for
changes in fair value until such time as the measurement date is established (upon forgiveness or
repayment of the entire loan). The Company has recorded compensation expense of approximately
$56,000 and $133,000 for the nine months ended December 31, 2004 and 2003, respectively. In March 2003, through a series of transactions, all of the outstanding capital stock of
Coinmach Laundry was contributed to Holdings in exchange for substantially equivalent equity
interests (in the form of common and preferred membership units) in Holdings. Accordingly,
Coinmach Laundry became a wholly owned subsidiary of Holdings. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equities. This standard requires, among other things,
that any of various financial instruments that are issued in the form of shares that are
mandatorily redeemable on a fixed or determinable date be classified as liabilities, any dividends
paid on the underlying shares be treated as interest expense, and issuance costs should be deferred
and amortized using the interest method. SFAS No. 150 is effective for all financial instruments
created or modified after May 31, 2003, and otherwise effective at the beginning of the first
interim period beginning after June 15, 2003 (July 1, 2003 for Coinmach Laundry). As required by
SFAS No. 150, accrued and unpaid dividends prior to adoption of SFAS No. 150 were not reclassified
to interest expense. Effective April 1, 2003, dividends on the Preferred Stock have been
classified as interest expense. For the nine months ended December 31, 2004 and 2003, the Company
has recorded approximately $18.2 million and $18.3 million, respectively, of Preferred Stock
dividends as interest expense. The Preferred Stock was carried at the amount of cash that would be
paid under their terms if the shares were repurchased or redeemed at the reporting date. 28




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) (continued) 9. Redeemable Preferred Stock and Stockholders Deficit (continued) A portion of the net proceeds from the offering were used to redeem approximately $91.8
million of Coinmach Laundrys Class A Preferred Stock (representing all of Coinmach Laundry
outstanding Class A Preferred Stock) and approximately $7.4 million of Class B Preferred Stock.
All unredeemed preferred stock of Coinmach Laundry was exchanged for additional shares of Class B
Common Stock. 10. Subsequent Event On February 8, 2005, the Board of Directors of CSC approved a quarterly cash dividend of
$0.08704 per share of Class A Common Stock (or approximately $1.6 million in the aggregate). The
dividend will be paid on March 1, 2005 to holders of record as of the close of business on February
25, 2005. The dividend payment covers the period from November 24, 2004 (the closing date of CSCs
initial public offering of IDSs) through December 31, 2004. The Board of Directors of CSC has also declared a dividend of $0.04226 per share of Class B
Common Stock (or approximately $1.1 million in the aggregate) payable on March 1, 2005 to holders
of record as of the close of business on February 25, 2005. Subject to certain limitations imposed
by CSCs charter, holders of Class B Common Stock are not entitled to receive another payment of
cash dividends on their Class B Common Stock until June 1, 2006.   29




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General Except for the historical information contained herein, certain matters discussed in this
document are forward-looking statements based on the beliefs of our management and are subject to
certain risks and uncertainties, including the risks and uncertainties discussed below, as well as
other risks set forth in the Companys audited consolidated financial statements included in CSCs
registration statement (the Registration Statement) on Form S-1 (No. 333-114421), including the
Prospectus contained therein, dated November 19, 2004, relating to our initial public offering of
Income Deposit Securities (IDSs) and concurrent offering of 11% senior secured notes due 2024
sold separate and apart from the IDSs. Each IDS consists of one share of Class A common stock, par
value $0.01 per share (the Class A Common Stock), and an 11% senior secured note due 2024 in a
principal amount of $6.14 and a contemporaneous offering of 11% senior secured notes due 2024
separate and apart from the IDSs (together with the 11% senior secured notes underlying IDSs, the
11% senior secured notes). Should any of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, our future performance and actual results of operations may
differ materially from those expected or intended. See Special
Note Regarding Forward Looking Statements below. Our primary financial objective is to increase our cash flow from operations. Cash flow from
operations represents a source of funds available to service indebtedness, pay dividends and for
investment in both organic growth and growth through acquisitions. We have experienced net losses
during the past three fiscal years. Such net losses were attributable in part to significant
non-cash charges associated with our acquisitions and the related amortization of contract rights
(for all three fiscal years) and goodwill (for the 2002 fiscal year) accounted for under the
purchase method of accounting. We incur significant depreciation and amortization expense relating
to annual capital expenditures, which also reduces our net income. The continued incurrence of
significant depreciation and amortization expenses may cause us to continue to incur losses. Overview We are principally engaged in the business of supplying laundry equipment services to
multi-family housing properties. Our most significant revenue source is our route business, which
over the last three fiscal years has accounted for approximately 88% of our revenue. Through our
route operations, we provide laundry equipment services to locations by leasing laundry rooms from
building owners and property management companies, typically on a long-term, renewable basis. In
return for the exclusive right to provide these services, most of our contracts provide for
commission payments to the location owners. Commission expense (also referred to as rent expense),
our single largest expense item, is included in laundry operating expenses and represents payments
to location owners. Commissions may be fixed amounts or percentages of revenues and are generally
paid monthly. In addition to commission payments, many of our leases require us to make advance
location payments to location owners, which are
capitalized and amortized over the life of the applicable leases. Advance location payments
to location owners are paid, as required by the applicable lease, at the inception or renewal of a 30




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 lease for the right to operate applicable laundry rooms during the contract period, which generally
ranges from 5 to 10 years. The amount of advance location payments varies depending on the size of
the location and the term of the lease. The Company also provides collection services for other
route based companies, including payphone operators. At December 31, 2004, we owned and operated
through our route business approximately 673,000 washers and dryers in approximately 70,000
locations throughout North America, including 162 retail laundromats located in Texas and Arizona. The operation of retail laundromats involves leasing store locations in desirable geographic
areas, maintaining an appropriate mix of washers and dryers at each store location and servicing
the washers and dryers at such locations. We also operate an equipment rental business through Appliance Warehouse of America, Inc.
(AWA), a Delaware corporation that is jointly-owned by us and Coinmach Holdings, LLC
(Holdings), a Delaware limited liability company. AWA leases laundry equipment and other
household appliances and electronic items to property owners, managers of multi-family housing
properties, and to a lesser extent, individuals and corporate relocation entities. At December 31,
2004, approximately 202,000 washers and dryers were installed with our rental customers through
AWA. We also operate an equipment distribution business through Super Laundry Equipment Corp.
(Super Laundry), our indirect wholly-owned subsidiary. Super Laundrys business consists of
constructing and designing complete turnkey retail laundromats, retrofitting existing retail
laundromats, distributing exclusive lines of commercial coin and non-coin operated machines and
parts, and selling service contracts. In addition, Super Laundry, through its wholly-owned
subsidiary, American Laundry Franchising Corp. (ALFC), builds and develops laundromat facilities
for sale as franchise locations. For each franchise laundromat facility, ALFC enters into a
purchase agreement and a license agreement with the buyer whereby the buyer may use certain systems
created by ALFC to operate such facility. ALFC receives revenue primarily from the sale price of
the laundromat facility and, to a lesser extent, from an initial franchise fee and certain other
fees based on the sales from such facility. Laundry operating expenses include, in addition to commission payments, (i) the cost of
machine maintenance and revenue collection in the route and retail laundromat business, including
payroll, parts, insurance and other related expenses, (ii) costs and expenses incurred in
maintaining our retail laundromats, including utilities and related expenses, (iii) the cost of
sales associated with the equipment distribution business and (iv) certain expenses related to the
operation of our rental business. Accounting Policies Involving Significant Estimates Our financial statements are based on the selection and application of significant accounting
policies, which require management to make significant estimates and assumptions.
We believe that the following are some of the more critical judgment areas in the application
of our accounting policies that currently affect our financial condition and results of operations. 31




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Revenue and cash and cash equivalents include an estimate of cash and coin not yet collected
at the end of a reporting period, which remain at laundry room locations. We calculate the
estimated amount of cash and coin not yet collected at the end of a reporting period, which remain
at laundry room locations by multiplying the average daily collection amount applicable to the
location with the number of days since coin and cash were last collected at that location. We
analytically review the estimated amount of cash and coin not yet collected at the end of a
reporting period by comparing such amount with collections subsequent to the reporting period. We are required to estimate the collectibility of our receivables. A considerable amount of
judgment is required in assessing the ultimate realization of these receivables, including the
current credit-worthiness of each customer. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required. Allowance for doubtful accounts at December 31, 2004 was approximately $3.8
million. We currently have significant deferred tax assets, which are subject to periodic
recoverability assessments. Realization of our deferred tax assets is principally dependent upon
our achievement of projected future taxable income. Managements judgments regarding future
profitability may change due to future market conditions and other factors. These changes, if any,
may require possible material adjustments to these deferred tax asset balances. We have significant costs in excess of net assets acquired (goodwill), contract rights and
long-lived assets. Goodwill is tested for impairment on an annual basis. Additionally, goodwill
is tested between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. We have determined
that our reporting units with goodwill consist of our route business, AWA and Super Laundry.
Goodwill attributed to the route business, AWA and Super Laundry at December 31, 2004 and March 31,
2004 was approximately $195.0 million, $6.8 million and $2.9 million, respectively. In performing
the annual goodwill assessment, we compare the fair value of the reporting unit to its net
asset-carrying amount, including goodwill. If the fair value exceeds the carrying amount, then it
is determined that goodwill is not impaired. Should the carrying amount exceed the fair value, we
would then need to perform the second step in the impairment test to determine the amount of
goodwill write-off. The fair value for these tests is based upon a discounted cash flow model.
Factors that generally impact cash flows include commission rates paid to property owners,
occupancy rates at properties, sensitivity to price increases, loss of existing machine base and
the prevailing general economic and market conditions. We performed our annual assessment of
goodwill as of January 1, 2004 and determined that no impairment existed. Contract rights represent amounts expended for location contracts arising from the acquisition
of laundry machines on location. These amounts arose solely from purchase price allocations
pursuant to acquisitions made by us over a number of years based on an analysis of future cash
flows. We do not record contract rights relating to new locations signed in the
ordinary course of business. We estimate that 90% of our contracts are long-term whereby the
average term is approximately 8 years with staggered maturities. Of the remaining locations not
subject to long-term agreements, we believe that we have retained a majority of such customers 32




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 through long-standing relationships and continue to service such customers. Although the contracts
have a legal life, there are other factors such as renewals, customer relationships and extensions
that contribute to a value greater than the initial contract term. Over 90% of our contracts renew
automatically and we have a right of first refusal upon termination in over 60% of our contracts.
The automatic renewal clause typically provides that, if the property owner fails to take any
action prior to the end of the lease term or any renewal term, the lease will automatically renew
on substantially similar terms. In addition, over 80% of our contracts allow for unilateral price
increases. Historically, we have demonstrated an ability to renew contracts, retain our customers
and build upon those relationships. Since April 1997, we have posted net machine gains, exclusive
of acquisitions, and our losses have averaged approximately 3% annually. Therefore, we believe
that the cash flows from these contracts continue to be generated beyond the initial legal contract
term and subsequent renewal periods. As a result, we believe that the useful lives of contract
rights are related to the expected cash flows that are associated with those rights and the
amortization periods for contract rights should generally reflect those useful lives and, by
extension, the cash flow streams associated with them. As a result, upon adoption of SFAS 142, we
reassessed the useful lives being used to amortize contract rights and determined that the contract
rights have an estimated useful life of approximately 30 to 35 years. We have twenty-eight geographic regions to which contract rights have been allocated, which
regions represent the lowest level of identifiable cash flows in grouping contract rights. Each
region consists of approximately 1,000 to 8,000 contracts for the various locations/properties that
comprise that region. We do not analyze impairment of contract rights on a contract-by-contract
basis. Although we have contracts at every location/property and analyze revenue and certain
direct costs on a contract-by-contract basis, we do not allocate common region costs and servicing
costs to each contract. We assess the recoverability of location contract rights and long-lived assets on a
region-by-region basis. We evaluate the financial performance/cash flows for each region. This
evaluation includes analytically comparing the financial results/cash flows and certain statistical
performance measures for each region to prior period/year actuals and budgeted amounts. Factors
that generally impact cash flows include commission rates paid to property owners, occupancy rates
at properties, sensitivity to price increases and the regions general economic conditions. In
addition, each year we lose a certain amount of our existing machine base, which essentially
equates to loss of contract rights. Such loss has historically averaged approximately 3% annually.
The accelerated amortization of contract rights is designed to capture and expense this shrinking
machine base. An increase in the historical loss rate would also be a strong indicator of possible
impairment of location contract rights and long-lived assets. If based on our initial evaluation
there are indicators of impairment that result in losses to the machine base, or an event occurs
that would indicate that the carrying amounts may not be recoverable, we reevaluate the carrying
value of contract rights and long-lived assets based on future
undiscounted cash flows attributed to that region and record an impairment loss based on
discounted cash flows if the carrying amount of the contract rights are not recoverable from 33




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 undiscounted cash flows. Based on present operations and strategic plans, we believe that there
have not been any indicators of impairment of location contract rights or long-lived assets. Accounting Treatment for IDSs A portion of the aggregate IDSs outstanding represents notes recorded as long-term debt. We
have concluded that it is appropriate to annually deduct interest expense on the notes from taxable
income for U.S. federal and state and local income tax purposes. There can be no assurances that
the IRS will not seek to challenge the treatment of these notes as debt or the amount of interest
expense deducted, although to date we have not been notified that the notes should be treated as
equity rather than debt for U.S. federal and state and local income tax purposes. If the notes
would be required to be treated as equity for income tax purposes, the cumulative interest expense
totaling approximately $1.5 million, as of December 31, 2004, would not be deductible from taxable
income, and we would be required to recognize additional tax expense and establish a related income
tax liability. The additional tax due to federal, state and local authorities would be based on
our taxable income or loss for each of the respective years that we take the interest expense
deduction. We do not currently intend to record a liability for a potential disallowance of this
interest expense deduction. Based on U.S. generally accepted accounting principles, the proceeds of the IDS offering and
the offering of the separate 11% senior secured notes were allocated to the shares of Class A
Common Stock and the underlying 11% senior secured notes based on their respective relative fair
values. The price paid for the IDSs was equivalent to the fair value of $7.50 per Class A Common
Stock and $6.14 in a principal amount of a 11% senior secured note due 2024 underlying the IDS and
the fair value of the separate notes was equivalent to their face value. In addition, we have concluded that there are no embedded derivative features in the IDSs or
within the Class B common stock, par value $0.01 per share, of CSC (the Class B Common Stock)
which requires separate accounting. The make-whole redemption provision allows us to redeem all or
a portion of the notes prior to the date that is 60 months after November 24, 2004, the closing
date of the initial public offering, at a redemption price that could result in a premium,
therefore resulting in an embedded derivative requiring bifurcation. However, the terms of the
embedded derivative permit us to redeem the notes at an amount that will always exceed the fair
value of the notes. As a result, this option will always be out of the money, and, therefore, the
value ascribed to the embedded derivative would be minimal. Accordingly, we initially recorded it
at a value of zero. The optional redemption provision at scheduled prices allows us to redeem all
or part of the notes at scheduled premium prices. Although the notes are redeemable at a premium,
further analysis under SFAS 133 has led us to conclude that the option is clearly and closely
related to the economic characteristics of the notes and should not be bifurcated. The tax
redemption provision allows us to redeem all of the notes at par if the interest on the notes is
not tax deductible. As a result of the redemption price being at par and the notes initially
recorded without a substantial premium or discount, we have concluded that this option is clearly
and closely related to the economic characteristics of the
notes and should not be bifurcated. The change of control put option allows the note holders
to put the notes to us at a price equal to 101% of par. Although the notes are callable at a
premium, 34




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 further analysis under SFAS 133 has led us to conclude that the option is clearly and
closely related to the economic characteristics of the notes and should not be bifurcated,
principally because such premium does not cause the investor to double the initial contractual rate
of return. The entire proceeds of the offerings were allocated to the Class A Common Stock and the notes
and the allocation of the IDS proceeds to the Class A Common Stock and the notes did not result in
a substantial premium or discount. Upon subsequent issuances of notes or IDSs, we will evaluate
whether there is a substantial discount or premium. We expect that if there is a substantial
discount or premium upon a subsequent issuance of notes, certain redemption features of the notes
may be considered not clearly and closely related, and we would separately account for these
features as embedded derivates. If the embedded derivates are required to be bifurcated, we will
(a) value the derivative, (b) record such value as a reduction of the notes (discount) with a
corresponding derivative liability, (c) accrete the discount on the notes up to their par value
using the effective interest method with a corresponding charge to interest expense, and (d)
revalue the derivative liability quarterly with the difference (increase or decrease) recorded to
interest expense. The Class A Common Stock portion of each IDS and the Class B Common Stock are included in
stockholders equity, net of related transaction costs, and dividends paid on the Class A Common
Stock and the Class B Common Stock will be recorded as a decrease to stockholders equity when
declared. The notes portion of each IDS are presented as long-term obligations, and the related
transaction costs were capitalized as deferred financing fees and amortized to interest expense
over the term of the notes. Interest on the notes is charged to interest expense as it is accrued. Results of Operations The following discussion should be read in conjunction with the attached unaudited condensed
consolidated financial statements and notes thereto and with the audited consolidated financial
statements and notes thereto included in our audited consolidated financial statements included in
CSCs registration statement (the Registration Statement) on Form S-1 (No. 333-114421), including
the Prospectus contained therein, dated November 19, 2004. 35




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Comparison of the three- and nine-month periods ended December 31, 2004 and December 31,
2003. The following table sets forth our revenues for the periods indicated (in millions of
dollars): Three months ended December 31,
    
    
    Nine months ended December 312004
    
    
    2003
    
    
    Change
    
    
    2004
    
    
    2003
    
    
    ChangeRoute
    
    $
    119.5
    
    
    $
    119.2
    
    
    $
    0.3
    
    
    $
    353.7
    
    
    $
    351.5
    
    
    $
    2.2Rental
    
    
    8.6
    
    
    
    8.1
    
    
    
    0.5
    
    
    
    25.5
    
    
    
    24.0
    
    
    
    1.5Distribution
    
    
    7.5
    
    
    
    8.4
    
    
    
    (0.9
    )
    
    
    22.9
    
    
    
    22.7
    
    
    
    0.2$
    135.6
    
    
    $
    135.7
    
    
    $
    (0.1
    )
    
    $
    402.1
    
    
    $
    398.2
    
    
    $
    3.9
 Revenue decreased by approximately $0.1 million or less than 1% for the three-month
period ended December 31, 2004, as compared to the prior years corresponding period. Revenue
increased by approximately $3.9 million or 1% for the nine-month period ended December 31, 2004, as
compared to the prior years corresponding period. Route revenue for the three months ended December 31, 2004 increased by approximately $0.3
million over the prior years corresponding period. Route revenue for the nine months ended
December 31, 2004 increased by approximately $2.2 million over the prior years corresponding
period. We believe that the increase was due to the net result of an increase in third party
service income and price increases, offset by decreased revenue primarily in the Southwest and
Midwest operations caused by higher vacancy rates in these regions. Rental revenue for the three months ended December 31, 2004 increased by approximately $0.5
million or 6% over the prior years corresponding period. Rental revenue for the nine months ended
December 31, 2004 increased by approximately $1.5 million or 6% over the prior years corresponding
period. This increase was primarily the result of internal growth of the machine base in existing
areas of operations. Distribution revenue for the three months ended December 31, 2004 decreased by approximately
$0.9 million or 11% from the prior years corresponding period. Distribution revenue for the nine
months ended December 31, 2004 increased by approximately $0.2 million or less than 1% from the
prior years corresponding period. Sales from the distribution business unit are sensitive to
general market conditions and economic conditions. The decrease in the three-month period was
primarily due to decreased revenue resulting from the closing of operations in California. The
increase in the nine-month period was primarily due to increased sales from the Northeast and
Midwest operations offset by decreased revenue resulting from the closing of operations in
California. Distribution revenue from our California operations was approximately $0.4 million and
$1.1 million for the three-month periods ended December 31, 2004 and December 31, 2003,
respectively. Distribution revenue from our California operations was approximately $1.4 million
and $2.9 million for the nine-month periods ended December 31, 2004 and December 31, 2003,
respectively. 36




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Laundry operating expenses, exclusive of depreciation and amortization, decreased by
approximately $1.3 million or 1% for the three-month period ended December 31, 2004, as compared to
the prior years corresponding period. Laundry operating expenses, exclusive of depreciation and
amortization, increased by approximately $0.7 million or less than 1% for the nine months ended
December 31, 2004, as compared to the prior years corresponding period. As a percentage of
revenues, laundry operating expenses were 68% for the three- and nine-month periods ended December
31, 2004, as compared to 69% for the three- and nine-month periods ended December 31, 2003. The decrease in laundry operating expenses for the three-month period was due primarily to (i)
a reduction in operating expenses as a result of the closing of California operations in the
distribution business of approximately $0.9 million, (ii) a decrease in insurance costs related to
general business insurance coverage of approximately $0.4 million and, (iii) a reduction in
commission expense of approximately $0.4 million. These decreases in laundry operating expenses
were offset by an increase in fuel cost of approximately $0.3 million primarily due to increased
fuel prices. The increase in laundry operating expenses for the nine-month period was due primarily to (i)
increased cost of sales of approximately $1.4 million due to increased sales in the Northeast and
Midwest operations in the distribution business, (ii) an increase in salary expense of
approximately $1.2 million in the route business associated with collection services and, (iii) an
increase in fuel cost of approximately $0.8 million primarily due to increased fuel prices. These
increases in laundry operating expenses were offset by a reduction in operating expenses as a
result of the closing of California operations in the distribution business of approximately $2.7
million. General and administrative expenses increased by approximately $0.1 million for the
three-month period ended December 31, 2004, as compared to the prior years corresponding period.
General and administrative expenses increased by approximately $0.3 million for the nine-month
period ended December 31, 2004, as compared to the prior years corresponding period. The
increases in general and administrative expenses were primarily due to stock based compensation
expense and other public company incremental administrative fees and expenses including but not
limited to incremental director and officer liability insurance, additional directors fees,
investor and public relations expenses, and other miscellaneous costs and expenses relating to
compliance with applicable securities laws. As a percentage of revenues, general and
administrative expenses were approximately 1.8% for the three- and nine-month periods ended
December 31, 2004, as compared to approximately 1.7% for the three and nine-month periods ended
December 31, 2003. Depreciation and amortization expense increased by approximately $0.8 million or 5% for the
three-month period ended December 31, 2004 and increased by approximately $2.8 million or 5% for
the nine-month period ended December 31, 2004, as compared to the prior years corresponding
periods. The increase in depreciation and amortization expense was primarily due to depreciation
expense relating to capital expenditures required by historical increases in our installed base of
machines. 37




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Amortization of advance location payments decreased slightly for the three-month period ended
December 31, 2004 and decreased by approximately $0.5 million or 3% for the nine-month period ended
December 31, 2004, as compared to the prior years corresponding periods. The decrease was
primarily due to advance location payments incurred in the prior years becoming fully amortized. Amortization of intangibles decreased by approximately $0.2 million or 6% for the three-month
period ended December 31, 2004 and decreased by approximately $0.5 million or 4% for the nine-month
period ended December 31, 2004, as compared to the prior years corresponding periods. The
decrease was primarily the result of intangibles related to acquisitions becoming fully amortized. Other items for the nine-month period ended December 31, 2004 relates to additional expenses
associated with the closing of California operations in the distribution business. Operating income margins were approximately 9.6% for the three-month period ended December 31,
2004, as compared to approximately 9.4% for the prior years corresponding period. Operating
income margins were approximately 9.1% for the nine-month period ended December 31, 2004, as
compared to approximately 9.1% for the prior years corresponding period. The slight increase in
operating income margin was primarily due to a reduction in operating expenses as a result of the
closing of California operations in the distribution business. Transaction costs for the three and nine months ended December 31, 2004 represent (i)
approximately $11.3 million redemption premium on the portion of 9% senior notes redeemed, (2) the
write-off of the deferred financing costs relating to the 9% senior notes redeemed and term loans
repaid aggregating approximately $3.5 million, and (3) expenses relating to the amendment of the
Senior Secured Credit Facility aggregating approximately $2.4 million. Interest expense increased by approximately $0.4 million or 2% for the three-month period
ended December 31, 2004 as compared to the prior years corresponding period. Interest expense
increased by approximately $0.3 million or less than 1% for the nine-month period ended December
31, 2004, as compared to the prior years corresponding period. Following consummation of our
initial public offering in November 2004, a portion of the net proceeds thereof was used to redeem
$125.5 million of 9% senior notes and approximately $15.5 million of outstanding term loans under
the Senior Secured Credit Facility. As a consequence of the initial public offering and related
offering of 11% senior secured notes, CSC issued approximately $116.1 million of 11% senior secured
notes underlying IDSs and $20.0 million of additional 11% senior secured notes not underlying IDSs. The benefit for income taxes for the nine-month period ended December 31, 2004 was
approximately $10.0 million as compared to a benefit for income taxes of approximately $2.1 million
for the prior years corresponding period. The change for the nine-month period is primarily due
to an increased loss before income taxes with a tax effect of approximately $6.7 million, a tax
benefit of approximately $6.0 million arising from transaction costs related to the initial public
offering, a state tax benefit net of Federal taxes of approximately $1.2 million and a 38




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 valuation allowance of approximately $0.4 million offset by non-deductible interest on
preferred stock of approximately $6.4 million. The effective tax rate for the nine-month period
ended December 31, 2004 was 23% as compared to 8% for the prior years corresponding period. The
effective tax rate for the nine-month period ended December 31, 2004 reflects changes in the amount
of net operating loss carryforwards that the Company expects to utilize. Net loss was approximately $33.3 million for the nine-month period ended December 31, 2004, as
compared to net loss of approximately $23.3 million for the prior years corresponding period. The following table sets forth an analysis of EBITDA (as defined below) for each of the
Companys route, rental and distribution segments for the periods indicated (in millions of
dollars): Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    Change
    
    
    2004
    
    
    2003
    
    
    ChangeRoute
    
    $
    39.5
    
    
    $
    39.3
    
    
    $
    0.2
    
    
    $
    116.2
    
    
    $
    115.9
    
    
    $
    0.3Rental
    
    
    3.7
    
    
    
    3.0
    
    
    
    0.7
    
    
    
    10.4
    
    
    
    9.2
    
    
    
    1.2Distribution
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    0.3
    
    
    
    0.6
    
    
    
    (1.1
    )
    
    
    1.7Other items, net
    
    
    
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.4
    )Corporate expenses
    
    
    (2.5
    )
    
    
    (2.4
    )
    
    
    (0.1
    )
    
    
    (7.2
    )
    
    
    (6.9
    )
    
    
    (0.3
    )Transaction costs(1)
    
    
    (17.2
    )
    
    
    
    
    
    
    (17.2
    )
    
    
    (17.2
    )
    
    
    
    
    
    
    (17.2
    )Total EBITDA
    
    $
    23.7
    
    
    $
    39.7
    
    
    $
    (16.0
    )
    
    $
    102.3
    
    
    $
    117.0
    
    
    $
    (14.7
    )
   (1)
    
    No amounts have been added back to EBITDA relating to certain transaction costs consisting
of (1) the $11.3 million redemption premium on the portion of 9% senior notes redeemed; and
(2) the write-off of the deferred financing costs relating to the 9% senior notes redeemed and
term loans repaid aggregating approximately $3.5 million. EBITDA represents earnings from continuing operations before deductions for interest,
income taxes and depreciation and amortization. Management believes that EBITDA is useful as a
means to evaluate our ability to service existing debt, to sustain potential future increases in
debt and to satisfy capital requirements. EBITDA is also used by management as a measure of
evaluating the performance of our three operating segments. Management further believes that
EBITDA is useful to investors as a measure of comparative operating performance as it is less
susceptible to variances in actual performance resulting from depreciation, amortization and other
non-cash charges and more reflective of changes in pricing decisions, cost controls and other
factors that affect operating performance. Management uses EBITDA to develop compensation plans,
to measure sales force performance and to allocate capital assets. Additionally, because we have
historically provided EBITDA to investors, we believe that presenting this non-GAAP financial
measure provides consistency in its financial reporting. Managements use of EBITDA, however, is
not intended to represent cash flows for the period, nor has it been presented as an alternative to
either (a) operating income (as determined by GAAP) as an indicator of operating performance or
(b) cash flows from operating, investing and 39




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 financing activities (as determined by GAAP) as a measure of liquidity. Given that EBITDA is
not a measurement determined in accordance with GAAP and is thus susceptible to varying
calculations, EBITDA may not be comparable to other similarly titled measures of other companies.
See Note 6 to the Condensed Consolidated Financial Statements (Unaudited) for a reconciliation of
net loss to EBITDA for the periods indicated in the table immediately above. EBITDA was approximately $23.7 million for the three months ended December 31, 2004, as
compared to approximately $39.7 million for the three months ended December 31, 2003. EBITDA
margin was approximately 17.5% for the three months ended December 31, 2004, as compared to 29.3%
for the prior years corresponding period. EBITDA was approximately $102.3 million for the nine
months ended December 31, 2004, as compared to approximately $117.0 million for the prior years
corresponding period. EBITDA margin was approximately 25.4% for the nine months ended December 31,
2004, as compared to 29.4% for the prior years corresponding period. Liquidity and Capital Resources CSC is a holding company with no material assets other than the capital stock of its
subsidiaries, the intercompany note of Coinmach and the guarantee of such intercompany note by
certain subsidiaries of Coinmach. Our operating income is generated by our subsidiaries. Under a
dividend policy adopted by our board of directors, cash generated by us in excess of operating
needs, interest and principal payments on indebtedness, and capital expenditures sufficient to
maintain our properties and other assets would, subject to the discretion of our board of
directors, generally be distributed as regular quarterly cash dividends to the holders of Class A
Common Stock and as regular annual cash dividends to the holders of Class B Common Stock, in each
case subject to compliance with the terms of our indebtedness and our organizational documents.
Dividend payments are not mandatory or guaranteed and holders of our common stock do not have any
legal right to receive, or require us to pay, dividends. Furthermore, our board of directors may,
in its sole discretion, amend or repeal our dividend policy at any time, including decreasing the
level of dividends or discontinuing entirely the payment of dividends. Our liquidity requirements will primarily consist of interest payments on our 11% senior
secured notes and dividend payments, if any, on our common stock. Our ability to make such
payments will depend on the earnings and cash flows of our subsidiaries and the ability of our
subsidiaries to distribute amounts to us, including by way of payments on the intercompany note. We and our subsidiaries have substantial indebtedness and debt service requirements. At
December 31, 2004, on a consolidated basis, we had outstanding total debt of approximately $709.1
million, which included (i) approximately $324.5 million aggregate principal amount of Coinmachs
9% senior notes, (ii) approximately $240.5 million of borrowings under the Senior Secured Credit
Facility and (iii) approximately $136.1 million aggregate principal amount of our 11% senior
secured notes. Letters of credit under the Senior Secured Credit Facility outstanding at December
31, 2004 were approximately $6.4 million. The 11% senior secured notes are scheduled to mature on
December 1, 2024 and the 9% senior notes are scheduled to mature on February 1, 2010. The term
loans under the Senior Secured Credit Facility are scheduled to be 40




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 fully repaid by July 25, 2009. As of December 31, 2004, there were no amounts outstanding
under the revolver portion of the Senior Secured Credit Facility, which is scheduled to expire on
January 25, 2008. Our stockholders equity was approximately $113.8 million as of December 31, 2004. The primary liquidity needs of our operating subsidiaries, on a consolidated basis, are to
fund capital expenditures, service indebtedness and support working capital requirements. We have
met these requirements for the past three fiscal years. Our principal sources of liquidity are
cash flows from operating activities and selected borrowings available under the Senior Secured
Credit Facility. As of December 31, 2004, we had cash and cash equivalents of approximately $56.2
million and available borrowings under the Senior Secured Credit Facility of approximately $68.6
million. As we have focused on increasing our cash flow from operating activities, we have made
significant capital investments, primarily consisting of capital expenditures related to
acquisitions, renewals and growth. We anticipate that we will continue to utilize cash flows from
operations to finance our capital expenditures and working capital needs, including interest and
principal payments on our outstanding indebtedness, and to pay dividends on our common stock. Financing Activities We have from time to time used external financings to meet cash needs for operating expenses,
the payment of interest, retirement of debt and acquisitions and capital expenditures. We may use
external financings in the future to refinance or fund the retirement of our and our subsidiaries
existing indebtedness. The timing and amount of external financings depend primarily upon economic
and financial market conditions, our consolidated cash needs and our future capital structure
objectives, as well as contractual limitations on additional financings. Additionally, the
availability and cost of external financings will depend upon the financial condition of the
entities seeking those funds. The Initial Public Offering On November 24, 2004, we completed our initial public offering of 18,333,333 IDSs at a public
offering-price of $13.64 per IDS and $20 million aggregate principal amount of 11% senior secured
notes. On December 21, 2004, the underwriters of the initial public offering purchased an
additional 578,199 IDSs pursuant to an overallotment exercise. Proceeds from these transactions, after approximately $14.3 million in underwriting discounts
and commissions, were approximately $263.7 million. The net proceeds were used to (i) redeem a
portion of the 9% senior notes in an aggregate principal amount of $125.5 million (plus
approximately $4.5 million of accrued interest and approximately $11.3 million of related
redemption premium), (ii) repay approximately $15.5 million of outstanding term loans under the
Senior Secured Credit Facility, (iii) redeem approximately $91.8 million of Coinmach 41




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Laundrys outstanding Class A preferred stock and approximately $7.4 million of Coinmach
Laundrys outstanding Class B preferred stock, and (iv) pay related fees and expenses. 11% Senior Secured Notes At December 31, 2004, there was approximately $136.1 million aggregate principal amount of 11%
senior secured notes outstanding. The 11% senior secured notes, which are scheduled to mature on
December 1, 2024, are our senior secured obligations and are redeemable, at our option, in whole or
in part, at any time or from time to time, upon not less than 30 nor more than 60 days notice (i)
prior to December 1, 2009, upon payment of a make-whole premium and (ii) on or after December 1,
2009, at the redemption prices set forth in the indenture governing the 11% senior secured notes
plus accrued and unpaid interest thereon. The 11% senior secured notes are secured by a
first-priority perfected lien, subject to certain permitted liens, on substantially all of our
existing and future assets, including the common stock of AWA, the capital stock of Coinmach
Laundry and the intercompany note and related guaranty. The 11% senior secured notes are
guaranteed on a senior secured basis by Coinmach Laundry. The indenture governing the 11% senior secured notes contains a number of restrictive
covenants and agreements applicable to us and our restricted subsidiaries, including covenants with
respect to the following matters: (i) limitation on additional indebtedness; (ii) limitation on
certain payments (in the form of the declaration or payment of certain dividends or distributions
on our capital stock, the purchase, redemption or other acquisition of any of our capital stock,
the voluntary prepayment of subordinated indebtedness, and certain investments); (iii) limitation
on transactions with affiliates; (iv) limitation on liens; (v) limitation on sales of assets; (vi)
limitation on the issuance of preferred stock by non-guarantor subsidiaries; (vii) limitation on
conduct of business; (viii) limitation on dividends and other payment restrictions affecting
subsidiaries; (ix) limitations on exercising Class B Common Stock redemption rights and
consummating purchases of Class B Common Stock upon exercise of sales rights by holders; and (x)
limitation on consolidations, mergers and sales of substantially all of our assets. At December
31, 2004, we were in compliance with the covenants under the indenture governing the 11% senior
secured notes. Senior Secured Credit Facility On January 25, 2002, Coinmach entered into the Senior Credit Secured Facility, which was
comprised of: (i) $280 million in aggregate principal amount of term loans and (ii) a revolving
credit facility with a maximum borrowing limit of $75 million. The Senior Secured Credit Facility
also provides for up to $10 million of letter of credit financings and short-term borrowings under
a swing line facility of up to $7.5 million. The Senior Secured Credit Facility is secured by a
first priority security interest in all of Coinmachs real and personal property and is guaranteed
by each of Coinmachs domestic subsidiaries. On November 15, 2004, Coinmach entered into an
amendment to the Senior Secured Credit Facility in order to permit the IDS Transactions. 42




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Coinmach used a portion of the proceeds from our initial public offering to repay
approximately $15.5 million of outstanding term loans. As of December 31, 2004 the aggregate
principal amount outstanding under the term loans was approximately $240.5 million. The term loans
are scheduled to be fully repaid by July 25, 2009. As of December 31, 2004, there were no amounts
outstanding under the revolver portion of the Senior Secured Credit Facility, which is scheduled to
expire on January 25, 2008. Letters of credit outstanding under the Senior Secured Credit Facility
at December 31, 2004 were approximately $6.4 million. On September 23, 2002, Coinmach entered into three separate interest rate swap agreements
totaling $150 million in aggregate notional amount that effectively convert a portion of the
floating-rate term loans pursuant to the Senior Secured Credit Facility to a fixed rate basis,
thereby reducing the impact of interest rate changes on future interest expense. The three swap
agreements consist of: (i) a $50 million notional amount interest rate swap transaction with a
financial institution effectively fixing the three-month LIBOR interest rate (as determined
therein) at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional amount interest
rate swap transaction with a financial institution effectively fixing the three-month LIBOR
interest rate (as determined therein) at 2.91% and expiring on February 1, 2006 and (iii) a $50
million notional amount interest rate swap transaction with a financial institution effectively
fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and expiring on
February 1, 2006. These interest rate swaps used to hedge the variability of forecasted cash flows
attributable to interest rate risk were designated as cash flow hedges. We recognized accumulated
other comprehensive income in the stockholders equity section included in the condensed
consolidated balance sheet at December 31, 2004 of approximately $0.1 million, net of tax, relating
to the interest rate swaps that qualify as cash flow hedges. At December 31, 2004, Coinmach was in compliance with the covenants under the Senior Secured
Credit Facility. 9% Senior Notes On January 25, 2002, Coinmach issued $450 million of its 9% senior notes. The 9% senior
notes, which mature on February 1, 2010, are unsecured senior obligations of Coinmach and are
redeemable, at Coinmachs option, in whole or in part, at any time or from time to time, on or
after February 1, 2006, upon not less than 30 nor more than 60 days notice, at the redemption
prices set forth in the indenture governing the 9% senior notes plus accrued and unpaid interest
thereon, if any, to the date of redemption. The 9% senior notes are guaranteed on a senior
unsecured basis by Coinmachs domestic restricted subsidiaries. On December 24, 2004, Coinmach used a portion of the proceeds from our initial public offering
to redeem 9% senior notes in an aggregate principal amount of $125.5 million (plus approximately
$4.5 million of accrued interest and approximately $11.3 million of related redemption premium).
At December 31, 2004, there was approximately $324.5 million aggregate principal amount of 9%
senior notes outstanding. 43




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 The indenture governing the 9% senior notes contains a number of restrictive covenants and
agreements applicable to Coinmach and its restricted subsidiaries, including covenants with respect
to the following matters: (i) limitation on additional indebtedness; (ii) limitation on certain
payments (in the form of the declaration or payment of certain dividends or distributions on the
capital stock of Coinmach, the purchase, redemption or other acquisition of any capital stock of
Coinmach, the voluntary prepayment of subordinated indebtedness, and certain investments); (iii)
limitation on transactions with affiliates; (iv) limitation on liens; (v) limitation on sales of
assets; (iv) limitation on the issuance of preferred stock by non-guarantor subsidiaries; (vii)
limitation on conduct of business; (viii) limitation on dividends and other payment restrictions
affecting subsidiaries; and (ix) limitation on consolidations, mergers and sales of substantially
all of the assets of Coinmach. At December 31, 2004, Coinmach was in compliance with the covenants
under the indenture governing the 9% notes. Operating and Investing Activities We use cash from operating activities to maintain and expand our business. As we have focused
on increasing our cash flow from operating activities, we have made significant capital
investments, primarily consisting of capital expenditures related to acquisitions, renewals and
growth. We anticipate that we will continue to utilize cash flows from operations to finance our
capital expenditures and working capital needs. Capital expenditures for the three-month period ended December 31, 2004 were approximately
$17.3 million (excluding payments of approximately $1.0 million relating to capital lease
obligations). Capital expenditures for the nine-month period ended December 31, 2004 were
approximately $54.3 million (excluding approximately $3.2 million relating to capital lease
payments and excluding approximately $0.6 million relating to acquisition capital expenditures).
The primary components of our capital expenditures are (i) machine expenditures, (ii) advance
location payments, and (iii) laundry room improvements. Additionally, capital expenditures for the
nine-month period ended December 31, 2004 included approximately $1.8 million attributable to
technology upgrades. The full impact on revenues and cash flow generated from capital expended on
the net increase in the installed base of machines is not expected to be reflected in our financial
results until subsequent reporting periods, depending on certain factors, including the timing of
the capital expended. While we estimate that we will generate sufficient cash flows from
operations to finance anticipated capital expenditures, there can be no assurances that we will be
able to do so. The following table sets forth our capital expenditures (excluding payments for capital lease
obligations and business acquisitions) for the periods indicated (in millions of dollars): Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    Change
    
    
    2004
    
    
    2003
    
    
    ChangeRoute
    
    $
    16.1
    
    
    $
    15.5
    
    
    $
    0.6
    
    
    $
    48.6
    
    
    $
    57.6
    
    
    $
    (9.0
    )Rental
    
    
    0.7
    
    
    
    1.6
    
    
    
    (0.9
    )
    
    
    3.6
    
    
    
    6.6
    
    
    
    (3.0
    )Distribution
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    (0.2
    )Corporate
    
    
    0.4
    
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    1.8
    
    
    
    1.8
    
    
    
    $
    17.3
    
    
    $
    17.7
    
    
    $
    (0.4
    )
    
    $
    54.3
    
    
    $
    66.5
    
    
    $
    (12.2
    )
 44




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Management of our working capital, including timing of collections and payments and
levels of inventory, affect operating results indirectly. However, our working capital
requirements are, and are expected to continue to be, minimal since a significant portion of our
operating expenses are commission payments based on a percentage of collections, and are not paid
until after cash is collected from the installed machines. The Intercompany Note Pursuant to the IDS Transactions, we made an intercompany loan of approximately $81.7 million
to Coinmach, which loan is evidenced by an intercompany note. Interest under the intercompany note
accrues at an annual rate of 10.95% and is payable quarterly on March 1, June 1, September 1 and
December 1 of each year and is due and payable in full on December 1, 2024. The intercompany note
is a senior unsecured obligation of Coinmach, ranks equally in right of payment with all existing
and future senior indebtedness of Coinmach and ranks senior in right of payment to all existing and
future subordinated indebtedness of Coinmach. Certain of Coinmachs domestic restricted
subsidiaries guarantee the intercompany note on a senior unsecured basis. The intercompany note
contains covenants (other than a covenant providing for the delivery of reports to holders) that
are substantially the same as those provided in the terms of the 9% senior notes (as such covenants
may be modified in the future pursuant to the terms of the indenture governing the 9% senior notes)
provided, however, that on the redemption or repayment in full of the 9% senior notes, the
covenants contained in the intercompany note will become substantially the same as those provided
in the terms of such other indebtedness that refinances or replaces the 9% senior notes or, in the
absence thereof, the terms of the 11% senior secured notes. The intercompany note and the
intercompany note guaranty were pledged by us to secure the repayment of the 11% senior secured
notes. If an event of default under the intercompany note occurs and is continuing, we will have the
right to declare all obligations under the intercompany note immediately due and payable; provided
that if Coinmach shall become the subject of an insolvency, bankruptcy or cross-acceleration event
of default, all of the obligations under the intercompany note and the guarantees in respect
thereof shall become immediately and automatically due and payable without any action or notice.
Any waiver of a default or an event of default under the indenture governing the 11% senior secured
notes that causes a default or an event of default under the intercompany note shall also be a
waiver of such default or event of default under the intercompany note without further action or
notice. Summary of Contractual Obligations The following table sets forth information with regard to disclosures about our contractual
obligations and commitments: 45




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Payments Due in Fiscal YearTotal
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    AfterLong-Term Debt Obligations
    
    $
    701.8
    
    
    $
    0.1
    
    
    $
    2.7
    
    
    $
    2.6
    
    
    $
    12.4
    
    
    $
    12.4
    
    
    $
    671.6Capital Lease Obligations
    
    
    7.3
    
    
    
    0.9
    
    
    
    3.0
    
    
    
    2.1
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    Operating Lease Obligations
    
    
    27.9
    
    
    
    2.3
    
    
    
    7.8
    
    
    
    6.1
    
    
    
    4.1
    
    
    
    3.0
    
    
    
    4.6$
    737.0
    
    
    $
    3.3
    
    
    $
    13.5
    
    
    $
    10.8
    
    
    $
    17.6
    
    
    $
    15.6
    
    
    $
    676.2
 Future Capital Needs and Resources Our near-term cash requirements are primarily related to payment of interest on existing
consolidated indebtedness, capital expenditures, working capital and dividend payments on our common stock.
Substantially all of our consolidated long-term debt is scheduled to mature on or after July 25, 2009, the date
on which the remaining balances under the Senior Secured Credit Facilitys term loans become due.
However, our consolidated level of indebtedness will have several important effects on our future operations
including, but not limited to, the following: (i) a significant portion of our cash flow from
operations will be required to pay interest on our indebtedness and the indebtedness of our
subsidiaries, (ii) the financial covenants contained in certain of the agreements governing such
indebtedness will require us and/or our subsidiaries to meet certain financial tests and may limit
our respective abilities to borrow additional funds, (iii) our ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions or general
corporate purposes may be impaired and (iv) our ability to adapt to changes in the laundry
equipment services industry could be limited. The most significant factors affecting our near-term cash flow requirements are our ability to
generate cash from operations, which is dependent on our ability to attract new and retain existing
customers, and our ability to satisfy our debt service and capital expenditure requirements.
Considering our anticipated level of capital expenditures, our
scheduled interest payments on our consolidated indebtedness, existing contractual obligations, our anticipated dividend payments on our capital stock and
subject to the factors described below, we estimate that over the next twelve months cash flow from
operations, along with available cash and cash equivalents and borrowings under the Senior Secured
Credit Facility, will be sufficient to fund operating needs, to service outstanding
consolidated indebtedness, and to pay dividends anticipated to be declared by our board of directors. Other factors, including but not limited to any significant acquisition transactions, the
pursuit of any significant new business opportunities, potential material increases in the cost of
compliance with regulatory mandates (including state laws imposing heightened energy and water
efficiency standards on clothes washers), tax treatment of our debt, unforeseen reductions in
occupancy levels, changes in our competitive environment, or unexpected costs associated with lease
renewals, may affect our ability to fund our liquidity needs in the future. In addition, subject
to certain limitations contained in the indenture governing the 11% senior secured notes, at any
time after the six month anniversary of our initial public offering, we may redeem all or part of
the then outstanding Class B Common Stock on a pro ratabasis. Any exercise by us of such
redemption rights will further reduce cash available to fund our liquidity needs. California, Connecticut, and Maryland have adopted state laws imposing heightened energy and
water efficiency standards on commercial clothes washers, and other states are 46




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 considering similar laws. While such laws are not scheduled to go in effect until 2007 or
2008, implementing machines compliant with such laws could result in increased capital costs
(including material and equipment costs), labor and installation costs, and in some cases,
operation and maintenance costs. Other states in which we operate may adopt similar laws, which
would increase our costs associated with compliance. We continuously monitor our debt position and coordinate our capital expenditure program with
expected cash flows and projected interest and dividend payments. However, our actual cash
requirements may exceed our current expectations. In the event cash flow is lower than
anticipated, we expect to either: (i) reduce capital expenditures, (ii) supplement cash flow from
operations with borrowings under the Senior Secured Credit Facility, or (iii) evaluate other
cost-effective funding alternatives. We expect that substantially all of the cash generated by our
business in excess of operating needs, debt service obligations and reserves will be distributed to
the holders of our common stock. As a result, we may not retain a sufficient amount of cash to
finance growth opportunities or unanticipated capital expenditure needs or to fund our operations
in the event of a significant business downturn. In addition, we may have to forego growth
opportunities or capital expenditures that would otherwise be necessary or desirable if we do not
find alternative sources of financing. If sources of liquidity are not available or if we cannot
generate sufficient cash flow from operations, we might also be required to reduce or eliminate
dividends to the extent previously paid or obtain additional sources of funds through capital
market transactions, reducing or delaying capital expenditures, refinancing or restructuring our
indebtedness, asset sales or financing from third parties, or a combination thereof. Additional
sources of funds may not be available or allowed under the terms of our outstanding indebtedness or
that of our subsidiaries or, if available, may not have commercially reasonable terms. Certain Accounting Treatment Our depreciation and amortization expense, amortization of advance location payments and
amortization of intangibles, which aggregated approximately $82.7 million for the nine months ended
December 31, 2004 and approximately $27.5 million for the three months ended December 31, 2004
reduces our net income, but not our cash flow from operations. In accordance with GAAP, a
significant amount of the purchase price representing the value of location contracts arising from
businesses acquired by us is allocated to contract rights. Management evaluates the
realizability of contract rights balances (if there are indicators of impairment) based upon our
forecasted undiscounted cash flows and operating income. Based upon present operations and
strategic plans, we believe that no impairment of contract rights has occurred. Inflation and Seasonality In general, our laundry operating expenses and general and administrative expenses are
affected by inflation and the effects of inflation may be experienced by us in future periods. We
believe that such effects will not be material. Our business generally is not seasonal. 47




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
 Special Note Concerning Forward Looking Statements This report includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. We intend such forward looking statements, including, without limitation, the statements
under Managements Discussion and Analysis of Financial Condition and Results of Operations, to
be covered by the safe harbor provisions for forward-looking statements in these provisions. These
forward-looking statements include, without limitation, statements about our future financial
position, adequacy of available cash resources, common stock dividend policy and anticipated
payments, business strategy, competition, budgets, projected costs and plans and objectives of
management for future operations. These forward-looking statements are usually accompanied by
words such as may, will, expect, intend, project, estimate, anticipate, believe,
continue and similar expressions. The forward looking information is based on various factors
and was derived using numerous assumptions. Forward-looking statements necessarily involve risks and uncertainties, and our actual results
could differ materially from those anticipated in the forward-looking statements due to a number of
factors, including those set forth below and in this report. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we can give no assurance
that such expectations will prove to have been correct. We caution readers not to place undue
reliance on such statements and undertake no obligation to update publicly and forward-looking
statements for any reason, even if new information becomes available or other events occur in the
future. All subsequent written and oral forward-looking statements attributable to us, or persons
acting on our behalf, are expressly qualified in their entirety by the cautionary statements
contained in this report. Certain factors, including but not limited to those listed below, may cause actual results to
differ materially from current expectations, estimates, projections, forecasts and from past
results:  
    the restrictive debt covenants and other requirements related to our outstanding debt
and that of our subsidiaries that could restrict our operating flexibility;
    our ability to continue to renew our lease contracts with property owners and management
companies;
    extended periods of reduced occupancy which could result in reduced revenues and cash
flow from operations in certain areas;
    our ability to compete effectively in a highly competitive and capital intensive
industry which is fragmented nationally, with many small, private and family-owned
businesses operating throughout all major metropolitan areas;
    compliance obligations and liabilities under regulatory, judicial and environmental laws
and regulations, including, but not limited to, governmental action imposing heightened
energy and water efficiency standards or other requirements with respect to commercial
clothes washers;   48




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
    
    our ability to maintain borrowing flexibility and to meet our projected and future cash
needs, including capital expenditure requirements with respect to maintaining our machine
base, given our substantial level of indebtedness, history of net losses and reduced
liquidity should we elect to declare cash dividends on our common stock;
    risks associated with expansion of our business through tuck-ins and other
acquisitions and integration of acquired operations into our existing business;
    as a holding company, our dependence on cash flow from our operating subsidiaries to
make payments under our 11% senior secured notes;
    the risk of adverse tax consequences should our 11% senior secured notes that underlie
our income deposit securities not be respected as debt for U.S. federal income tax
purposes;
    risks associated with changes in accounting standards promulgated by the Financial
Accounting Standards Board, the SEC or the American Institute of Certified Public
Accountants; and
    other factors discussed elsewhere in this report and in our public filings with the SEC. Several important factors, in addition to the specific factors discussed in connection with
each forward-looking statement individually, could affect our future results or expectations and
could cause those results and expectations to differ materially from those expressed in the
forward-looking statements contained in this report. These additional factors include, among other
things, future economic, industry, social, competitive and regulatory conditions, demographic
trends, financial market conditions, future business decisions and actions of our competitors,
suppliers, customers and stockholders and legislative, judicial and other governmental authorities,
all of which are difficult or impossible to predict accurately and many of which are beyond our
control. These factors, in some cases, have affected, and in the future, together with other
factors, could affect, our ability to implement our business strategy and may cause our future
performance and actual results of operations to vary significantly from those contemplated by the
statements expressed in this report.   49




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Our principal exposure to market risk relates to changes in interest rates on our long-term
borrowings. Our operating results and cash flow would be adversely affected by an increase in
interest rates. As of December 31, 2004, we had approximately $90.5 million outstanding relating
to our variable rate debt portfolio. Our future earnings, cash flow and fair values relevant to financial instruments are dependent
upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices
and interest rates. If market rates of interest on our variable interest rate debt increased by
2.0% (or 200 basis points), our annual interest expense on such variable interest rate debt would
increase by approximately $1.8 million, assuming the total amount of variable interest rate debt
outstanding was $90.5 million, the balance as of December 31, 2004. We enter into interest rate swap agreements from time to time to mitigate our exposure to
adverse interest rate fluctuations. On September 23, 2002, Coinmach entered into three separate
interest rate swap agreements totaling $150 million in aggregate notional amount that effectively
convert a portion of its floating-rate term loans pursuant to the Senior Secured Credit Facility to
a fixed rate basis, thereby reducing the impact of interest rate changes on future interest
expense. The three swap agreements consist of: (i) a $50 million notional amount interest rate
swap transaction with a financial institution effectively fixing the three-month LIBOR interest
rate (as determined therein) at 2.91% and expiring on February 1, 2006, (ii) a $50 million notional
amount interest rate swap transaction with a financial institution effectively fixing the
three-month LIBOR interest rate (as determined therein) at 2.91% and expiring on February 1, 2006
and (iii) a $50 million notional amount interest rate swap transaction with a financial institution
effectively fixing the three-month LIBOR interest rate (as determined therein) at 2.90% and
expiring on February 1, 2006. These interest rate swaps used to hedge the variability of
forecasted cash flows attributable to interest rate risk were designated as cash flow hedges. Our fixed debt instruments are not generally affected by a change in the market rates of
interest, and therefore, such instruments generally do not have an impact on future earnings.
However, as fixed rate debt matures, future earnings and cash flows may be impacted by changes in
interest rates related to debt acquired to fund repayments under maturing facilities. We do not use derivative financial instruments for trading purposes and are not exposed to
foreign currency exchange risk. 50




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COINMACH SERVICE CORP. AND SUBSIDIARIES ITEM 4.
    
    CONTROLS AND PROCEDURES
 Our
management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
as of the end of the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were effective in enabling
us to record, process, summarize, and report information
required to be included in our periodic Securities and Exchange Commission filings within the required time period. There
were no changes in our internal controls over financial reporting (as such
term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during
the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. 51




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COINMACH SERVICE CORP. AND SUBSIDIARIES PART II.
    
    OTHER INFORMATION
 ITEM 1.
    
    Legal Proceedings
 We
are party to various legal proceedings arising in the ordinary course of business.
Although the ultimate disposition of such proceedings is not presently determinable, management
does not believe that adverse determinations in any or all such proceedings would have a material
adverse effect upon our financial condition, results of operations or cash flows. ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 On November 24, 2004, CSC issued 17,767,204 shares of its Class B common stock, par value
$0.01 per share (the Class B Common Stock), to Coinmach Holdings, LLC, a Delaware limited
liability company (Holdings) in exchange for all of the shares of capital stock of Coinmach
Laundry then held by Holdings. Such Class B Common Stock issuance and exchange was completed
pursuant to a purchase agreement entered into by and between CSC and Holdings, dated November 19,
2004 (the Purchase Agreement). On November 24, 2004 and on December 21, 2004, Coinmach Laundry redeemed for cash a portion of
certain Coinmach Laundry capital stock held by certain members of the Companys management and
certain equity investors of Holdings. Pursuant to the Purchase Agreement, on January 3, 2005, all of the outstanding Coinmach
Laundry capital stock that had not been previously redeemed by Coinmach Laundry and held by certain
members of the Companys management and certain equity investors of Holdings, was contributed to
Holdings in exchange for certain equity interests in Holdings. Holdings in turn transferred such
Coinmach Laundry capital stock to CSC in exchange for 7,213,241 additional shares of Class B Common
Stock of Coinmach Laundry issued in reliance on the exemption from the registration requirements of
the Securities Act of 1933 (the Act), as amended, set forth in Section 4(2) of the Act. On November 24, 2004, we completed initial public offerings of 18,333,333 IDSs (each IDS
consisting of one share of our Class A Common Stock and $6.14 principal amount of 11% senior
secured notes) and $20,000,000 11% senior secured notes sold separate and apart from the IDSs.
On December 21, 2004, in connection with the partial exercise of the underwriters over-allotment
option, we sold an additional 578,199 IDSs. The offerings were effected through a registration
statement on form S-1 (File No. 333-114421) (the Registration Statement) that was declared
effective by the Securities and Exchange Commission on November 19, 2004. A total of 18,911,532 of our IDSs were registered and sold at an initial public offering price
of $13.64 per IDS, for an aggregate public offering price of $257,953,296. In addition, we
registered $20,000,000 11% senior secured notes sold separate and apart from the IDSs that were
issued in a concurrent offering at 100.0% of their principal amount. Merrill Lynch, Pierce, Fenner
& Smith Incorporated acted as lead representative of the underwriting syndicate for the
IDSs and separate 11% senior secured notes offerings. Total expenses incurred in connection
with the offerings were $23,596,735 (which includes approximately $700,000 in estimated expenses). 52




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COINMACH SERVICE CORP. AND SUBSIDIARIES (in millions)Gross Proceeds
    
    $
    277,953,296Underwriters discount
    
    
    14,277,198Other costs of issuance
    
    
    9,319,537
    (1)Total expenses
    
    $
    23,596,735Net proceeds to us
    
    $
    254,356,561
   (1)
    
    Includes a transaction bonus payment of $500,000 to a director. The net proceeds of our initial public offerings after deducting the total expenses
above were approximately $254.4 million. These proceeds, together with approximately $1.6 million
of cash on hand, were used as indicated below. Intended
    
    
    ActualExpenditures(1)
    
    
    Expenditures(in millions)
    
    
    (in millions)Redeem Coinmach Laundry Class A
Preferred Stock
    
    $
    90.0
    (2)
    
    $
    91.8
    (3)Redeem Coinmach Laundry Class B
Preferred Stock
    
    
    
    (4)
    
    
    7.4
    (3)(5)Redeem Coinmach Corporation 9% Senior
Notes due 2010
    
    
    125.5
    (6)
    
    
    125.5Redemption premium
    
    
    11.3
    
    
    
    11.3Accrued interest
    
    
    2.8
    (7)
    
    
    4.5
    (8)Repay Tranche A term loans under
Senior Secured Credit Facility
    
    
    15.5
    (6)
    
    
    15.5
   (1)
    
    As set forth in the Registration Statement.(2)
    
    The Registration Statement reflected the redemption values of the Coinmach Laundry preferred
stock as of September 30, 2004.(3)
    
    At the time of the redemption of the Coinmach Laundry Class A preferred stock on November 24,
2004 and Class B preferred stock on December 21, 2004, the officers, directors and certain holders
of 5% or more of the membership units of Coinmach Holdings, LLC, our controlling stockholder, owned
substantially all of the Coinmach Laundry preferred stock to be redeemed, and therefore received
substantially all of the proceeds used for the redemption. The payments in connection with the
redemption of the preferred stock aggregate $99,137,805 paid to: Stephen R Kerrigan (a)
    
    $
    691,538Mitchell Blatt
    
    
    504,089Robert M. Doyle
    
    
    340,612Michael E. Stanky
    
    
    119,454Ramon Norniella
    
    
    3,237James N. Chapman
    
    
    5,847GTCR-CLC, LLC
    
    
    4,737,373Filbert Investment Pte Ltd
    
    
    61,823,758TCW
    
    
    30,911,897
 53




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES   (a)
    Preferred shares were beneficially owned by MCS Capital, Inc., a corporation controlled
by Mr. Kerrigan. (4)
    
    The table in the Use of Proceeds section of the Registration Statement did not give effect to
any exercise of the overallotment option.(5)
    
    The redemption of the Coinmach Laundry Class B preferred stock was affected with proceeds from
the exercise of the underwriters overallotment option.(6)
    
    The Registration Statement reflected our indebtedness as of September 30, 2004.(7)
    
    The Registration Statement reflected accrued interest from August 1, 2004 through October 31,
2004 on the portion of the 9% senior notes to be redeemed.(8)
    
    Reflects accrued interest from August 1, 2004 through December 24, 2004 on the portion of the
9% senior notes actually redeemed. ITEM 3.
    
    Defaults Upon Senior SecuritiesNot applicable.ITEM 4.
    
    Submission of Matters to a Vote of Security HoldersNone.ITEM 5.
    
    Other InformationNone.ITEM 6.
    
    Exhibits
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Coinmach Service Corp. (referred to as
CSC)3.2
    
    Amended and Restated Bylaws of CSC4.1
    
    Indenture by and between CSC, the subsidiary guarantors named therein and the Bank of New
York, as Trustee4.2
    
    Security Agreement between CSC and Coinmach Laundry Corporation (referred to as Laundry
Corp.) in favor of the Bank of New York, as Collateral Agent4.3
    
    Pledge Agreement between CSC and Laundry Corp. in favor of the Bank of New York, as
Collateral Agent4.4
    
    Intercompany Note of Coinmach Corporation (referred to as Coinmach Corp.), issued to CSC4.5
    
    Intercompany Note Guaranty4.6
    
    Guarantee relating to the Senior Secured notes due 2024 of CSC4.7
    
    CSC Senior Secured Note
 54




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES 4.8
    
    IDS Certificate4.9
    
    Indenture, dated as of January 25, 2002, by and among Coinmach Corp., the subsidiary
guarantors named therein and U.S. Bank, N.A., as trustee (incorporated by reference from
exhibit number 4.9 to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number
333-114421)4.10
    
    Registration Rights Agreement dated as of January 25, 2002, by and among Coinmach Corp., the
subsidiary guarantors named therein and the Initial Purchasers named therein (incorporated by
reference from exhibit number 4.10 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)4.11
    
    Form of 9% senior note of Coinmach Corp. (included as an exhibit to Exhibit 4.9 hereto)
(incorporated by reference from exhibit number 4.11 to Amendment No. 5 to CSCs Form S-1 filed
on November 3, 2004, file number 333-114421)10.1
    
    Credit Agreement dated January 25, 2002, among Coinmach Corp., Laundry Corp., the Subsidiary
Guarantors name therein, the lending institutions named therein, Deutsche Bank Trust Company
Americas (formerly known as Bankers Trust and referred to as DB Trust), Deutsche Banc Alex.
Brown Inc., J.P. Morgan Securities Inc., First Union Securities, Inc. and Credit Lyonnais New
York Branch (incorporated by reference from exhibit number 10.1 to Amendment No. 6 to CSCs
Form S-1 filed on November 17, 2004, file number 333-114421)10.2
    
    Limited Waiver and Amendment No. 1 and Agreement to Credit Agreement among Coinmach Corp.,
Laundry Corp., the subsidiary guarantors named therein and the lenders named therein10.3
    
    Amended and Restated Securityholders Agreement among CSC, Coinmach Holdings LLC (referred to
as Holdings) and its unitholders10.4
    
    Intercreditor Agreement by and among Laundry Corp., the collateral agent under the Credit
Agreement and the collateral agent named therein10.5
    
    Purchase Agreement by and between Holdings and CSC10.6
    
    Indemnity Agreements by and between CSC and each director and executive officer10.7
    
    Senior Management Agreement, dated March 6, 2003, by and among Coinmach Corp., Holdings and
Mitchell Blatt (incorporated by reference from exhibit number 10.8 to Amendment No. 5 to CSCs
Form S-1 filed on November 3, 2004, file number 333-114421)10.8
    
    Employment Agreement, dated as of July 1, 1995, by and between Solon (as
predecessor-in-interest to Coinmach Corp.), Michael E. Stanky and GTCR (incorporated by
reference from exhibit number 10.10 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)10.9
    
    Promissory Note, dated February 11, 1997, of Stephen R. Kerrigan in favor of Coinmach Corp.
(incorporated by reference from exhibit number 10.11 to Amendment No. 5 to CSCs Form S-1
filed on November 3, 2004, file number 333-114421)10.10
    
    Holdings Pledge Agreement, dated January 25, 2002, made by Coinmach Corp. and each of the
Guarantors party thereto to DB Trust (incorporated by reference from exhibit number 10.12 to
Amendment No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.11
    
    Credit Party Pledge Agreement, dated January 25, 2002, made by Coinmach Corp. and each of
the Guarantors party thereto to DB Trust (incorporated by reference from
 55




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##### 



COINMACH SERVICE CORP. AND SUBSIDIARIES exhibit number 10.13
to Amendment No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.12
    
    Security Agreement, dated January 25, 2002, among Coinmach Corp., each of the Guarantors
party thereto and DB Trust (incorporated by reference from
exhibit number 10.14 to Amendment
No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.13
    
    Collateral Assignment of Leases, dated January 25, 2002, by Coinmach Corp. in favor of DB
Trust (incorporated by reference from exhibit number 10.15 to Amendment No. 6 to CSCs Form
S-1 filed on November 17, 2004, file number 333-114421)10.14
    
    Collateral Assignment of Location Leases, dated January 25, 2002, by Coinmach Corp., in
favor of DB Trust (incorporated by reference from exhibit number 10.16 to Amendment No. 6 to
CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.15
    
    Purchase Agreement, dated as of January 17, 2002, by and among Coinmach Corp., as Issuer,
the Guarantors named therein, and the Initial Purchasers named therein (incorporated by
reference from exhibit number 10.17 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)10.16
    
    Registration Rights Agreement, dated as of March 6, 2003, by and among Holdings, GTCR-CLC,
LLC, MCS, Stephen R. Kerrigan, Mitchell Blatt, Robert M. Doyle, Michael E. Stanky, James N.
Chapman, and the investors named therein (incorporated by reference from exhibit number 10.18
to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.17
    
    Management Contribution Agreement, dated as of March 5, 2003, by and among Holdings, MCS,
Stephen R. Kerrigan and Laundry Corp. (incorporated by reference from exhibit number 10.19 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.18
    
    Management Contribution Agreement, dated as of March 5, 2003, by and between Holdings and
Mitchell Blatt (incorporated by reference from exhibit number 10.20 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.19
    
    Management Contribution Agreement, dated as of March 5, 2003, by and between Holdings and
Robert M. Doyle (incorporated by reference from exhibit number 10.21 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.20
    
    Management Contribution Agreement, dated as of March 5, 2003,by and between Holdings and
Michael E. Stanky (incorporated by reference from exhibit number 10.22 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.21
    
    Management Contribution Agreement, dated as of March 5, 2003, by and between Holdings and
James N. Chapman (incorporated by reference from exhibit number 10.23
to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.22
    
    Amended and Restated Promissory Note, by and between MCS, as borrower and Laundry Corp.,
dated March 6, 2003 (incorporated by reference from exhibit number 10.24 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)
 56




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COINMACH SERVICE CORP. AND SUBSIDIARIES 10.23
    
    Amended and Restated Promissory Note, by and between Mitchell Blatt, as borrower, and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.25 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.24
    
    Amended and Restated Promissory Note, by and between Robert M. Doyle, as borrower, and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.26 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.25
    
    Amended and Restated Promissory Note, by and between Michael E. Stanky, as borrower and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.27 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.26
    
    Replacement Promissory Note, by and between Mitchell Blatt, as borrower, and Coinmach Corp.
dated March 15, 2002 and amendment dated March 6, 2003 (incorporated by reference from exhibit
number 10.28 to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number
333-114421)10.27
    
    Senior Management Employment Agreement, by and between Coinmach Corp. and Ramon Norniella,
dated as of December 17, 2000 (incorporated by reference from exhibit number 10.29 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.28
    
    Promissory Note, by and between MCS, as borrower and Laundry Corp., dated as of July 26,
1995 (incorporated by reference from exhibit number 10.30 to Amendment No. 5 to CSCs Form S-1
filed on November 3, 2004, file number 333-114421)10.29
    
    Promissory Note, by and between Mitchell Blatt, as borrower and Laundry Corp., dated as of
July 26, 1995 (incorporated by reference from exhibit number 10.31 to Amendment No. 5 to CSCs
Form S-1 filed on November 3, 2004, file number 333-114421)10.30
    
    Promissory Note, by and between MCS, as borrower and Laundry Corp., dated as of May 10, 1996
(incorporated by reference from exhibit number 10.32 to Amendment No. 5 to CSCs Form S-1
filed on November 3, 2004, file number 333-114421)10.31
    
    Promissory Note, by and between Mitchell Blatt, as borrower and Laundry Corp., dated as of
May 10, 1996 (incorporated by reference from exhibit number 10.33 to Amendment No. 5 to CSCs
Form S-1 filed on November 3, 2004, file number 333-114421)10.32
    
    Amended and Restated Promissory Note, by and between Ramon Norniella, as borrower and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.34 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.33
    
    Limited Liability Company Agreement of Holdings dated March 6, 2003 (incorporated by
reference from exhibit number 10.35 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)10.34
    
    Amendment No. 1 to the Limited Liability Company Agreement of Holdings (incorporated by
reference from exhibit number 10.36 to Amendment No. 7 to CSCs Form S-1 filed on November 18,
2004, file number 333-114421)10.35
    
    CSC 2004 Long Term Incentive Plan
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COINMACH SERVICE CORP. AND SUBSIDIARIES 10.36
    
    CSC 2004 Unit Incentive Sub-Plan (incorporated by reference from exhibit number 10.38 to
Amendment No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.37
    
    Promissory Note, by and between Robert M. Doyle, as borrower, and Laundry Corp., dated July
26, 1995 (incorporated by reference from exhibit number 10.39 to Amendment No. 5 to CSCs Form
S-1 filed on November 3, 2004, file number 333-114421)10.38
    
    Promissory Note, by and between Robert M. Doyle, as borrower, and Laundry Corp., dated May
10, 1996 (incorporated by reference from exhibit number 10.40 to Amendment No. 5 to CSCs Form
S-1 filed on November 3, 2004, file number 333-114421)10.39
    
    Promissory Note, by and between Michael E. Stanky, as borrower, and Laundry Corp. dated July
26, 1995 (incorporated by reference from exhibit number 10.41 to Amendment No. 5 to CSCs Form
S-1 filed on November 3, 2004, file number 333-114421)10.40
    
    Amendment No. 1 to Holding Pledge Agreement made by Laundry Corp. to DB Trust31.1
    
    Certificate of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as
enacted by Section 302 of the Sarbanes-Oxley Act of 20031.2
    
    Certificate of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as
enacted by Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of Chief Executive Officer pursuant to 18 United States Code, Section 1350, as
enacted by Section 302 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to 18 United States Code, Section 1350, as
enacted by Section 302 of the Sarbanes-Oxley Act of 2002
 58




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COINMACH SERVICE CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COINMACH SERVICE CORP.Date:  February 15, 2005
    /s/ Robert M. DoyleRobert M. DoyleSenior Vice President and Chief Financial
Officer (On behalf of registrant and as
Principal Financial Officer)




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COINMACH SERVICE CORP. AND SUBSIDIARIES INDEX TO EXHIBITS ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Coinmach Service Corp. (referred to as
CSC)3.2
    
    Amended and Restated Bylaws of CSC4.1
    
    Indenture by and between CSC, the subsidiary guarantors named therein and the Bank of New
York, as Trustee4.2
    
    Security Agreement between CSC and Coinmach Laundry Corporation (referred to as Laundry
Corp.) in favor of the Bank of New York, as Collateral Agent4.3
    
    Pledge Agreement between CSC and Laundry Corp. in favor of the Bank of New York, as
Collateral Agent4.4
    
    Promissory Note of Coinmach Corporation (referred to as Coinmach Corp.) issued to CSC4.5
    
    Intercompany Note Guaranty4.6
    
    Guarantee relating to the Senior Secured notes due 2024 of CSC4.7
    
    CSC Senior Secured Note4.8
    
    IDS Certificate4.9
    
    Indenture, dated as of January 25, 2002, by and among Coinmach Corp., the subsidiary
guarantors named therein and U.S. Bank, N.A., as trustee (incorporated by reference from
exhibit number 4.9 to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number
333-114421)4.10
    
    Registration Rights Agreement dated as of January 25, 2002, by and among Coinmach Corp., the
subsidiary guarantors named therein and the Initial Purchasers named therein (incorporated by
reference from exhibit number 4.10 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)4.11
    
    Form of 9% senior note of Coinmach Corp. (included as an exhibit to Exhibit 4.9 hereto)
(incorporated by reference from exhibit number 4.11 to Amendment No. 5 to CSCs Form S-1 filed
on November 3, 2004, file number 333-114421)10.1
    
    Credit Agreement dated January 25, 2002, among Coinmach Corp., Laundry Corp., the Subsidiary
Guarantors name therein, the lending institutions named therein, Deutsche Bank Trust Company
Americas (formerly known as Bankers Trust and referred to as DB Trust), Deutsche Banc Alex.
Brown Inc., J.P. Morgan Securities Inc., First Union Securities, Inc. and Credit Lyonnais New
York Branch (incorporated by reference from exhibit number 10.1 to Amendment No. 6 to CSCs
Form S-1 filed on November 17, 2004, file number 333-114421)10.2
    
    Limited Waiver and Amendment No. 1 and Agreement to Credit Agreement among Coinmach Corp.,
Laundry Corp., the subsidiary guarantors named therein and the lenders named therein10.3
    
    Amended and Restated Securityholders Agreement among CSC, Coinmach Holdings LLC (referred to
as Holdings) and its unitholders10.4
    
    Intercreditor Agreement by and among Laundry Corp., the collateral agent under the Credit
Agreement and the collateral agent named therein10.5
    
    Purchase Agreement by and between Holdings and CSC




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COINMACH SERVICE CORP. AND SUBSIDIARIES 10.6
    
    Indemnity Agreements by and between CSC and each director and executive officer10.7
    
    Senior Management Agreement, dated March 6, 2003, by and among Coinmach Corp., Holdings and
Mitchell Blatt (incorporated by reference from exhibit number 10.8 to Amendment No. 5 to CSCs
Form S-1 filed on November 3, 2004, file number 333-114421)10.8
    
    Employment Agreement, dated as of July 1, 1995, by and between Solon (as
predecessor-in-interest to Coinmach Corp.), Michael E. Stanky and GTCR (incorporated by
reference from exhibit number 10.10 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)10.9
    
    Promissory Note, dated February 11, 1997, of Stephen R. Kerrigan in favor of Coinmach Corp.
(incorporated by reference from exhibit number 10.11 to Amendment No. 5 to CSCs Form S-1
filed on November 3, 2004, file number 333-114421)10.10
    
    Holdings Pledge Agreement, dated January 25, 2002, made by Coinmach Corp. and each of the
Guarantors party thereto to DB Trust (incorporated by reference from exhibit number 10.12 to
Amendment No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.11
    
    Credit Party Pledge Agreement, dated January 25, 2002, made by Coinmach Corp. and each of
the Guarantors party thereto to DB Trust (incorporated by reference from exhibit number 10.13
to Amendment No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.12
    
    Security Agreement, dated January 25, 2002, among Coinmach Corp., each of the Guarantors
party thereto and DB Trust (incorporated by reference from exhibit number 10.14 to Amendment
No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.13
    
    Collateral Assignment of Leases, dated January 25, 2002, by Coinmach Corp. in favor of DB
Trust (incorporated by reference from exhibit number 10.15 to Amendment No. 6 to CSCs Form
S-1 filed on November 17, 2004, file number 333-114421)10.14
    
    Collateral Assignment of Location Leases, dated January 25, 2002, by Coinmach Corp., in
favor of DB Trust (incorporated by reference from exhibit number 10.16 to Amendment No. 6 to
CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.15
    
    Purchase Agreement, dated as of January 17, 2002, by and among Coinmach Corp., as Issuer,
the Guarantors named therein, and the Initial Purchasers named therein (incorporated by
reference from exhibit number 10.17 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)10.16
    
    Registration Rights Agreement, dated as of March 6, 2003, by and among Holdings, GTCR-CLC,
LLC, MCS, Stephen R. Kerrigan, Mitchell Blatt, Robert M. Doyle, Michael E. Stanky, James N.
Chapman, and the investors named therein (incorporated by reference from exhibit number 10.18
to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.17
    
    Management Contribution Agreement, dated as of March 5, 2003, by and among Holdings, MCS,
Stephen R. Kerrigan and Laundry Corp. (incorporated by reference from exhibit number 10.19 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.18
    
    Management Contribution Agreement, dated as of March 5, 2003, by and between Holdings and
Mitchell Blatt (incorporated by reference from exhibit number 10.20 to
 61




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COINMACH SERVICE CORP. AND SUBSIDIARIES Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.19
    
    Management Contribution Agreement, dated as of March 5, 2003, by and between Holdings and
Robert M. Doyle (incorporated by reference from exhibit number 10.21 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.20
    
    Management Contribution Agreement, dated as of March 5, 2003,by and between Holdings and
Michael E. Stanky (incorporated by reference from exhibit number 10.22 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.21
    
    Management Contribution Agreement, dated as of March 5, 2003, by and between Holdings and
James N. Chapman (incorporated by reference from exhibit number 10.23 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.22
    
    Amended and Restated Promissory Note, by and between MCS, as borrower and Laundry Corp.,
dated March 6, 2003 (incorporated by reference from exhibit number 10.24 to Amendment No. 5 to
CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.23
    
    Amended and Restated Promissory Note, by and between Mitchell Blatt, as borrower, and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.25 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.24
    
    Amended and Restated Promissory Note, by and between Robert M. Doyle, as borrower, and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.26 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.25
    
    Amended and Restated Promissory Note, by and between Michael E. Stanky, as borrower and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.27 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.26
    
    Replacement Promissory Note, by and between Mitchell Blatt, as borrower, and Coinmach Corp.
dated March 15, 2002 and amendment dated March 6, 2003 (incorporated by reference from exhibit
number 10.28 to Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number
333-114421)10.27
    
    Senior Management Employment Agreement, by and between Coinmach Corp. and Ramon Norniella,
dated as of December 17, 2000 (incorporated by reference from exhibit number 10.29 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.28
    
    Promissory Note, by and between MCS, as borrower and Laundry Corp., dated as of July 26,
1995 (incorporated by reference from exhibit number 10.30 to Amendment No. 5 to CSCs Form S-1
filed on November 3, 2004, file number 333-114421)10.29
    
    Promissory Note, by and between Mitchell Blatt, as borrower and Laundry Corp., dated as of
July 26, 1995 (incorporated by reference from exhibit number 10.31 to Amendment No. 5 to CSCs
Form S-1 filed on November 3, 2004, file number 333-114421)
 62




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COINMACH SERVICE CORP. AND SUBSIDIARIES 10.30
    
    Promissory Note, by and between MCS, as borrower and Laundry Corp., dated as of May 10, 1996
(incorporated by reference from exhibit number 10.32 to Amendment No. 5 to CSCs Form S-1
filed on November 3, 2004, file number 333-114421)10.31
    
    Promissory Note, by and between Mitchell Blatt, as borrower and Laundry Corp., dated as of
May 10, 1996 (incorporated by reference from exhibit number 10.33 to Amendment No. 5 to CSCs
Form S-1 filed on November 3, 2004, file number 333-114421)10.32
    
    Amended and Restated Promissory Note, by and between Ramon Norniella, as borrower and
Laundry Corp., dated March 6, 2003 (incorporated by reference from exhibit number 10.34 to
Amendment No. 5 to CSCs Form S-1 filed on November 3, 2004, file number 333-114421)10.33
    
    Limited Liability Company Agreement of Holdings dated March 6, 2003 (incorporated by
reference from exhibit number 10.35 to Amendment No. 5 to CSCs Form S-1 filed on November 3,
2004, file number 333-114421)10.34
    
    Amendment No. 1 to the Limited Liability Company Agreement of Holdings (incorporated by
reference from exhibit number 10.36 to Amendment No. 7 to CSCs Form S-1 filed on November 18,
2004, file number 333-114421)10.35
    
    CSC 2004 Long Term Incentive Plan10.36
    
    CSC 2004 Unit Incentive Sub-Plan (incorporated by reference from exhibit number 10.38 to
Amendment No. 6 to CSCs Form S-1 filed on November 17, 2004, file number 333-114421)10.37
    
    Promissory Note, by and between Robert M. Doyle, as borrower, and Laundry Corp., dated July
26, 1995 (incorporated by reference from exhibit number 10.39 to Amendment No. 5 to CSCs Form
S-1 filed on November 3, 2004, file number 333-114421)10.38
    
    Promissory Note, by and between Robert M. Doyle, as borrower, and Laundry Corp., dated May
10, 1996 (incorporated by reference from exhibit number 10.40 to Amendment No. 5 to CSCs Form
S-1 filed on November 3, 2004, file number 333-114421)10.39
    
    Promissory Note, by and between Michael E. Stanky, as borrower, and Laundry Corp. dated July
26, 1995 (incorporated by reference from exhibit number 10.41 to Amendment No. 5 to CSCs Form
S-1 filed on November 3, 2004, file number 333-114421)10.40
    
    Amendment No. 1 to Holding Pledge Agreement made by Laundry Corp. to DB Trust31.1
    
    Certificate of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as
enacted by Section 302 of the Sarbanes-Oxley Act of 20031.2
    
    Certificate of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as
enacted by Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of Chief Executive Officer pursuant to 18 United States Code, Section 1350, as
enacted by Section 302 of the Sarbanes-Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to 18 United States Code, Section 1350, as
enacted by Section 302 of the Sarbanes-Oxley Act of 2002
 63