<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 21, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-57883
SPINCYCLE, INC
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(Exact name of registrant as specified in its charter)
Delaware 41-1821793
(State of Incorporation) (I.R.S. Employer Identification No.)
15990 N. Greenway Hayden Loop, Suite #400, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 707-9999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of April 30, 1999, the Company had 303,165 shares of capital stock
outstanding, comprised of 27,763 shares of common stock, 76,974 shares of series
A convertible preferred stock, 125,498 shares of series B convertible preferred
stock, and 72,930 shares of series C convertible preferred stock.
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SPINCYCLE, INC.
INDEX PAGE
PART I - FINANCIAL INFORMATION.............................................. 3
Item 1. Financial Statements......................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 14
PART II - OTHER INFORMATION................................................ 15
Item 1. Legal Proceedings............................................ 15
Item 2. Changes in Securities and Use of Proceeds.................... 15
Item 3. Defaults Upon Senior Securities.............................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
Item 5. Other Information............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
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SPINCYCLE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 21, DECEMBER 27,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,161,248 $ 4,239,099
Landlord allowances 1,049,088 781,628
Prepaid expenses 245,195 582,006
Inventory 249,875 112,964
Land held for sale-leaseback 2,194,533 2,194,533
Other current assets 661,910 687,483
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Total current assets 7,561,849 8,597,713
Property and equipment, net 103,486,575 100,657,304
Goodwill, net 13,466,149 13,610,471
Other assets 5,246,049 5,390,972
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Total assets $ 129,760,622 $ 128,256,460
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,546,975 $ 4,986,996
Construction payables -- 389,393
Accrued utilities 883,328 1,003,766
Accrued expenses 1,752,876 2,626,384
Current portion of deferred rent 478,516 311,557
Current portion of long-term debt 281,804 210,275
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Total current liabilities 7,943,499 9,528,371
Long-term debt 112,207,406 103,221,752
Deferred rent 3,062,154 2,650,724
Other liabilities 131,731 192,308
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Total liabilities 123,344,790 115,593,155
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Shareholders' equity:
Series A, Series B and Series C convertible preferred stock,
$.01 par value, 370,000 shares authorized, 275,402
shares issued and outstanding at December 27, 1998 50,845,810 50,845,810
Common stock, $.01 par value, 630,000 shares authorized,
27,763 shares issued and outstanding 278 278
Common stock warrants 5,625,000 5,625,000
Additional paid-in capital - common stock 1,439,859 1,430,259
Accumulated deficit (51,495,115) (45,238,042)
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Total shareholders' equity 6,415,832 12,663,305
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Total liabilities and shareholders' equity $ 129,760,622 $ 128,256,460
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------
MARCH 21, MARCH 22,
1999 1998
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<S> <C> <C>
Revenues $ 11,605,515 $ 5,270,794
Cost of revenues -- store operating expenses, excluding
depreciation and amortization 8,711,615 4,235,014
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Gross operating profit 2,893,900 1,035,780
Preopening costs 113,372 90,765
Depreciation and amortization 3,151,607 1,274,070
Selling, general and administrative expenses 2,515,957 2,173,530
Loss on disposal of property & equipment 31,500 --
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Operating loss (2,918,536) (2,502,585)
Interest income 37,126 125,898
Interest expense, net of amount capitalized (3,375,663) (846,319)
------------ ------------
Net loss $ (6,257,073) $ (3,223,006)
Accretion of redeemable preferred stock -- (528,967)
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Net loss applicable to holders of common stock $ (6,257,073) $ (3,751,973)
============ ============
Net loss per common share (both basic and diluted):
Net loss applicable to holders of common stock $ (225.37) $ (111.82)
============ ============
Weighted average number of common shares outstanding 27,763 33,553
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------
MARCH 21, MARCH 22,
1999 1998
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<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (6,257,073) $ (3,223,006)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,151,607 1,274,070
Loss on disposal of property and equipment 31,500 --
Amortization of debt issuance costs 256,514 --
Amortization of discount on long-term debt 3,123,966 --
Changes in assets and liabilities:
Landlord allowances (267,460) (249,425)
Prepaid expenses 336,811 29,213
Inventory (136,911) (12,196)
Other current assets 25,573 412,562
Other assets (36,177) (35,976)
Accounts payable (440,021) (3,152,454)
Construction payables (389,393) (708,746)
Accrued utilities (120,438) 103,181
Accrued expenses and other liabilities (934,085) 2,126,622
Deferred rent 578,389 860,795
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Net cash provided by (used in) operating activities $ (1,077,198) $ (2,575,360)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of fixed assets (5,613,837) (7,451,206)
Proceeds from sale of fixed assets 2,000 --
Net proceeds from sale-leaseback transactions -- 1,457,542
Acquisition of businesses, net of cash acquired -- (5,036,300)
Capitalized interest (79,186) (87,152)
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Net cash used in investing activities: $ (5,691,023) $(11,117,116)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments of debt (79,477) (93,344)
Debt issuance costs paid (129,753) (306,447)
Increase in debt 5,890,000 7,331,406
Proceeds from stock subscriptions 2,904,500
Stock issuance costs paid 9,600 --
------------ ------------
Net cash provided by financing activities $ 5,690,370 $ 9,836,115
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,077,851) (3,856,361)
Cash and cash equivalents, beginning of period 4,239,099 8,249,161
------------ ------------
Cash and cash equivalents, end of period $ 3,161,248 $ 4,392,800
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment financed with long-term debt $ 122,694 $ 1,327,876
Sale-leaseback financed with note receivable $ -- $ 4,930,381
Accretion of mandatorily redeemable preferred stock $ -- $ 528,967
CASH FLOW DURING THE YEAR FOR THE FOLLOWING:
Interest paid $ -- $ 620,838
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION - BASIS OF PRESENTATION
The unaudited financial information presented herein has been prepared in
accordance with the instructions to Form 10-Q and Regulation S-X and does
not include all of the information and note disclosures required by
generally accepted accounting principles. Therefore, this information should
be read in conjunction with the audited financial statements for the year
ended December 27, 1998 and notes thereto included in the Form 10-K of
SpinCycle, Inc. (the "Company") filed with the Securities and Exchange
Commission ("SEC") on March 29, 1999. This information reflects all
adjustments that are, in the opinion of management, necessary for a fair
statement of the Company's financial position, results of operations and
cash flows for the interim periods reported. These adjustments are of a
normal and recurring nature.
2. UNAUDITED INTERIM RESULTS OF OPERATIONS
The results of operations for the periods ended March 21, 1999 and March
22, 1998 are not necessarily indicative of the results to be expected for a
full fiscal year.
3. COMPANY EXPANSION
During the quarter ended March 21, 1999, the Company opened nine stores
in five cities, all of which were developed stores. As of March 21, 1999 the
Company had opened or acquired 172 stores in 25 markets throughout the
United States and had three stores under construction.
4. EARNINGS PER SHARE
Net loss per common share is computed using the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
which requires the presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic EPS is computed by dividing the net loss applicable to holders of
common stock by the weighted average number of common shares outstanding
during each period. Diluted EPS is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period
adjusted for dilutive stock options and warrants and dilutive common shares
assumed to be issued on conversion of preferred stock to common stock.
Diluted EPS has not been presented, as the computation is anti-dilutive due
to the Company's net loss in each period.
5. ACQUISITIONS
During the quarter ended March 21, 1999, the Company did not acquire any
existing coin laundry businesses. During the quarter ended March 22, 1998,
the Company acquired eight existing coin laundry businesses for a total cash
outlay of $5,036,300, all of which were financed, net of cash acquired.
These acquisitions were accounted for under the purchase method of
accounting. In connection with these acquisitions, the Company recorded
goodwill of $1,943,500 and did not assume any liabilities of the sellers.
Goodwill is amortized on a straight-line basis over 15 years.
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6. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Company's interest expense, net of amount capitalized, consists of the
following:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------
MARCH 21, 1999 MARCH 22, 1998
-------------- --------------
<S> <C> <C>
Accretion of Senior Discount Notes $ 3,123,966 $ --
Interest expense on Raytheon
and LaSalle debt -- 932,365
Amortization of debt issue costs 256,515 --
Interest expense on Heller Facility 61,918 --
Other interest expense 12,450 1,106
Capitalized interest (79,186) (87,152)
----------- -----------
Interest expense, net $ 3,375,663 $ 846,319
=========== ===========
</TABLE>
7. LONG-TERM DEBT
At March 21, 1999 and December 27, 1998, long-term debt included the
following:
<TABLE>
<CAPTION>
MARCH 21, DECEMBER 27,
1999 1998
------------- -------------
<S> <C> <C>
12.75% Senior Discount Notes Due 2005 ($144,990,000
principle amount), net of unamortized discount $ 106,084,495 $ 102,960,529
Heller Credit Facility; interest at LIBOR plus 2.75% or
prime plus 0.50%, matures April 28, 2002 5,800,000 --
Other notes payable; interest at 11% due in various
installments through September 2001 604,715 471,498
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112,489,210 103,432,027
Less current portion (6,081,804) (210,275)
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$ 106,407,406 $ 103,221,752
============= =============
</TABLE>
8. REDUCTION IN FORCE
On February 8, 1999, eight general and administrative employees were
released from their employment with the Company as part of a reduction in
force. This reduction in force was primarily focused on our growth-related
personnel, including regional directors of development and acquisitions and
corporate and field level construction managers. In connection with this
reduction in force, the Company paid approximately $55,000 in severance and
approximately $11,000 in accrued vacation benefits to these eight
employees. These expenses were recorded in the first quarter of 1999.
9. SUBSEQUENT EVENTS
Subsequent to the end of the first quarter of 1999, the following events
occurred:
A. On April 23, 1999, 20 general and administrative employees, including
the Company's Chief Information Officer Mr. Patrick Boyer, were
released from their employment with the Company as part of a reduction
in force. In connection with this reduction in force, the Company will
pay approximately $72,000 in severance and approximately $20,000 in
accrued vacation benefits to these 20 employees. These expenses will
be
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recorded in the second quarter of 1999. Management believes this
reduction in force was necessary to further reduce the Company's
general and administrative expenses in accordance with the Company's
slowed growth in acquisitions and development.
Negotiations between the Company and Mr. Boyer are currently taking
place, however, no agreement has yet been reached concerning
appropriate severance arrangements. The Company does not expect that
any severance payments to Mr. Boyer will have a material effect on its
financial position or results of operations.
B. As a result of the Company's slowed expansion and development and
public equity offering prospects, the Company's Chief Financial
Officer, Mr. James Puckett, has elected to leave the Company effective
May 6, 1999. In the Company's current state of slowed growth, the day
to day financial responsibilities will be assumed by Mr. Peter Ax, the
Company's Chairman and Chief Executive Officer.
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SPINCYCLE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
SpinCycle is a specialty retailing company engaged in the coin laundry
business. Our Company was founded in October 1995 to develop and implement
SpinCycle's unique concept of a national chain of branded coin-operated
laundromats and to serve as a platform for a nationwide consolidation in the
coin-operated laundromat industry. Our Company was formed with the goal of
becoming the leading operator of high quality coin-operated laundromats in the
United States by establishing SpinCycle as a national brand, providing a
superior level of customer service and by exercising disciplined management
control in our expansion and business plan.
To date, our primary use of capital has been for the development and
acquisition of laundromats and for general corporate purposes. Our store count
has grown rapidly since our first store was opened in April 1996, and at year
end 1996, 1997 and 1998 we had opened a total of 14, 71 and 163 stores,
respectively. As of March 21, 1999, we had opened nine additional stores
bringing our total store count to 172, and had three others under construction.
We also have seven signed leases for stores that we intend to develop and open
by year-end 1999. No further commitments for acquisitions or new store
developments have been made. We closed one store during 1998, following a lease
buyout by our landlord at that location.
Our rapid development and acquisition of laundromats has required
significant capital resources. To date, we have not been profitable and have
generated net operating losses and negative cash flow from operations. As such,
our expansion has been facilitated through private equity investments, proceeds
from the issuance of our senior discount notes, borrowings from our credit
facilities and revenue generated from our stores. We had expected to access the
public equity markets in late 1998 or early 1999 to provide additional growth
capital for our planned expansion, but have found that SpinCycle's valuation
under current market conditions would provide an unfavorable return to our
investors. Until such time as we can access the public equity markets, or other
sources of capital, we have elected to proceed cautiously with our planned
expansion, slowing such expansion through development or acquisition to
judiciously utilize available sources of growth capital.
Because of our constrained sources of growth capital, as of March 21, 1999,
we have obligations to develop only ten additional stores in 1999, three of
which are under construction. We intend to develop these stores in 1999 with
proceeds from our credit facility or from cash generated from our stores. We
continue to maintain a significant backlog of potential acquisition and
development sites, but will not sign additional commitments to purchase or
develop stores prior to procuring additional growth capital or generating
sufficient cash flow from operations.
During the first quarter of 1999, we achieved positive EBITDA for the first
time in our history. We ended the first quarter of 1999 with approximately
$265,000 of EBITDA. For the remainder of 1999, we continue to focus on
strategies to improve unit level economics and reduce general and administrative
expenses.
During the fourth quarter of 1998 and the first quarter of 1999 we slowed
our growth through acquisitions and development of new stores dramatically as a
result of our inability to access additional growth capital through the equity
capital markets. We had previously expected to be able to access the equity
capital markets during the fourth quarter of 1998 or the first quarter of 1999.
In response to our slowdown, we have initiated two reductions in force during
1999. In February 1999 and again in April 1999 we reduced general and
administrative personnel in response to our slowed growth. These reductions in
force were primarily focused on our growth-related personnel, including regional
directors of development and acquisitions, corporate and field level
construction managers, management information personnel and corporate level
support personnel related to these areas. Once all severance payments have been
made, we believe that we have reduced our general and
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administrative expenses by approximately 20% in salary, benefit and travel
related expenses through these reductions in force.
For the reduction in force that we effected on April 23, 1999, several of
our general and administrative employees, including our Chief Information
Officer Mr. Patrick Boyer, were released from their employment with us. We felt
that this reduction in force was necessary to further reduce our general and
administrative expenses to conform to our restricted growth via development and
acquisitions. We are currently in severance negotiations with Mr. Boyer,
however, we have yet to reach an agreement with Mr. Boyer concerning appropriate
severance arrangements. We do not expect that any severance payments to Mr.
Boyer will have a material effect on our financial position or results of
operations.
As a result of our slowed expansion and development and public equity
offering prospects, our Chief Financial Officer, Mr. James Puckett, has elected
to leave us effective May 6, 1999. In our current state of slowed growth, our
day to day financial responsibilities will be assumed by Mr. Peter Ax, the
Company's Chairman and Chief Executive Officer.
RESULTS OF OPERATIONS
Our first, second and third quarters consisted of three periods (12 weeks)
in 1998, while the fourth quarter contained four periods (16 weeks). In 1999 and
thereafter, our first, second and fourth quarters will contain three periods,
and our third quarter will contain four periods.
EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely accepted
financial indicator of an entity's ability to incur and service debt. While
EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles ("GAAP") and should not be considered
as an indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to provide
additional information with respect to our ability to meet our future debt
service, capital expenditures and working capital requirements. EBITDA for the
quarter ended March 21, 1999 excludes the loss on disposal of property and
equipment of $31,500.
Store EBITDA is defined as EBITDA before allocation of any selling, general
and administrative expenses. While Store EBITDA is not intended to represent
operating income or loss as defined by GAAP, (as GAAP operating income or loss
includes such allocation of selling, general and administrative expenses) and
should not be considered as an indicator of operating performance as measured by
GAAP, it is included herein to provide additional information with respect to
store-level cash operating margins.
First Quarter 1999 Compared to First Quarter 1998
Revenues. Our revenues were approximately $11.6 million for the first
quarter 1999, an increase of approximately $6.3 million from approximately $5.3
million in the corresponding period in 1998. Our growth in revenue was primarily
attributable to the addition of 77 stores since the end of the first quarter of
1998. The continued maturation of our developed and acquired stores during
fiscal 1998 also contributed substantial incremental revenue to the first
quarter of 1999.
Store Operating Expenses, excluding depreciation and amortization. Our store
operating expenses, excluding depreciation and amortization ("store operating
expenses") were approximately $8.7 million in the first quarter 1999, an
increase of approximately $4.5 million from approximately $4.2 million in the
corresponding period in 1998. Our increase in store operating expenses was
primarily attributable to the addition of 77 stores since the end of the first
quarter of 1998. Operating expenses as a percentage of revenues were
approximately 80% during our first quarter of 1998. In the first quarter 1999,
this ratio decreased to approximately 75%, which is a result of the maturation
of
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<PAGE> 11
certain of our stores' revenue and our implementation of initiatives designed to
reduce store operating expenses, particularly labor expenses.
Gross Operating Profit (Loss). Our gross operating profit was approximately
$2.9 million in the first quarter of 1999, an increase of approximately $1.9
million from approximately $1.0 million in the corresponding period in 1998. The
increase was primarily attributable to our aforementioned increase in revenues
during the period and our initiatives to reduce store operating expenses,
particularly labor expense.
Preopening Costs. Our preopening costs were approximately $113,000 in the
first quarter of 1999, an increase of approximately $22,000 from approximately
$91,000 in the corresponding period in 1998. We expense preopening costs as
incurred. During the first quarter of 1998 we opened 24 stores and had 17 stores
under development. During the first quarter of 1999 we opened 9 stores and had 3
stores under construction. During the first quarter of 1999, we spent
approximately $60,000 on stores that we had expected to open, but elected not to
pursue these openings due to our slowed expansion rate. We have delayed the
opening of approximately ten stores until later in fiscal 1999.
Store EBITDA. Our store EBITDA was approximately $2.8 million in the first
quarter of 1999, an increase of approximately $1.8 million from approximately
$945,000 for the corresponding period in 1998. The increase was primarily
attributable to increased revenue from the maturation of our stores and a
reduction in our store operating expenses.
Depreciation and Amortization. Our depreciation and amortization expense was
approximately $3.2 million in the first quarter of 1999, compared to
approximately $1.3 million for the corresponding period in 1998. The increase of
approximately $1.9 million was principally due to property and equipment
acquired in connection with our expansion.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were approximately $2.5 million in the first quarter of
1999, an increase of approximately $300,000 from approximately $2.2 million in
the corresponding period of 1998. Our increase is primarily attributable to the
building of our corporate infrastructure in order to manage our nationwide
expansion from 95 stores at the end of the first quarter of 1998 to 172 stores
at the end of the first quarter of 1999. First quarter 1999 selling, general and
administrative expenses decreased as a percentage of revenues from 41% to 22%
due to the maturation of our stores opened in 1998 and our implementation of
certain initiatives to reduce these expenses, including our February reduction
in force.
Our EBITDA in the first quarter of 1999 was approximately $265,000, an
improvement of $1.5 million from our loss of approximately $1.2 million for the
corresponding period in 1998. Our increase was primarily attributable to
increased revenue from the maturation of our stores, partially offset by the
increase in selling, general and administrative expenses to accommodate our 1998
expansion as discussed above.
Interest Income and Interest Expense, net. Our interest income decreased to
approximately $37,000 in the first quarter of 1999 a decrease of $89,000 from
approximately $126,000 in the first quarter of 1998. Our decrease in interest
income was primarily attributable to a lower cash balance during the first
quarter of 1999 compared to the first quarter of 1998. Our interest expense, net
of capitalized interest was approximately $3.4 million in the first quarter of
1999, an increase of approximately $2.5 million from approximately $846,000 in
the corresponding period in 1998. Our increase in interest expense, net was
primarily attributable to the accretion of interest expense related to our April
1998 offering of senior discount notes and warrants and interest expense accrued
for borrowings on our Heller facility. Our outstanding borrowings under the
Heller facility increased from $0 at the end of fiscal year 1998 to
approximately $5.8 million at the end of the first quarter of 1999.
Net Loss. Our net loss recorded in the first quarter of 1999 was $6.3
million, an increase of approximately $3.1 million from our $3.2 million net
loss recorded in the corresponding period of 1998. Our increased loss was
primarily attributable to the depreciation and amortization associated with the
77 new stores that we both acquired and developed since the end of the first
quarter of 1998, the interest expense related to our April 1998 offering of
senior discount notes and warrants and the increase in selling, general and
administrative expenses discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
At March 21, 1999, we had total assets of approximately $130.0 million,
including current assets of approximately $7.6 million. Cash and cash
equivalents were approximately $3.2 million.
Our cash used in operations during the first quarter of 1999 was
approximately $1.1 million, a $1.5 million decrease from our cash used in
operations during the corresponding period in 1998 of approximately $2.6
million. Our use of cash in each period was primarily attributable to the use of
working capital for the Company's store rollout, as well as the payment of
corporate expenses. Our reduced spending in the first quarter of 1999 is due to
our slow down of expansion activities.
Our cash used in investing activities was approximately $5.7 million, a $5.4
million decrease from our cash used in investing activities of approximately
$11.1 million for the corresponding period in 1998. Our reduced spending on
investing activities in the first quarter of 1999 is again due to our slow down
of expansion activities. We expect to aggregate approximately $14.0 million in
capital expenditures for fiscal 1999 to fund our planned 1999 store rollout.
Our cash provided by financing activities was approximately $5.7 million
during the first quarter of 1999 compared to approximately $9.8 million provided
by financing activities during the corresponding period in 1998. Our borrowings
were acquired primarily to cover our capital expenditures related to our 1999
store rollout plan and were obtained primarily from our Heller facility.
We generated approximately $265,000 of positive EBITDA during our first
quarter of fiscal 1999. We expect to generate positive EBITDA in all 13 periods
of 1999. As of March 21, 1999 we had drawn $5.8 million from our Heller
facility, and had approximately $4.5 million of additional borrowing capacity on
this credit facility. Because of our current development commitments, we expect
to borrow the entire amount available from Heller by July 31, 1999. Thereafter
we expect to meet our obligations with cash flows from our store operations and
payment arrangements with our vendors. However, we are currently in negotiations
with Heller to extend our existing line of credit and are negotiating with other
financial institutions the opportunity for additional lines of credit to satisfy
our short term capital requirements. We believe that our cash flow from
operations along with the existing borrowing availability under Heller and the
potential additional borrowing capacity provided by Heller and other financial
institutions will provide us with sufficient capital resources through April of
2000. Significant variances in budgeted store revenue or Store EBITDA,
unforeseen capital requirements, or our inability to acquire additional lines of
credit could result in insufficient capital resources.
Beginning November 1, 2001, we will be required to make semi-annual cash
payments of approximately $9.24 million on our senior discount notes. These
payments, which are substantially in excess of any historic net cash flow we
have generated, will be in addition to our selling, general and administrative
expense and any other interest or other expenses we may have at that time.
POTENTIAL LOSS OF NET OPERATING LOSSES
As of March 21, 1999, we had net operating losses ("NOLs") of approximately
$35.3 million for U.S. federal income tax purposes. These NOLs, if not utilized
to offset taxable income in future periods, will begin to expire in 2011.
Section 382 of the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder, impose limitations on the ability of corporations to use
NOLs if the corporation experiences a more than 50% change in ownership during
any three-year period. It is probable that we have experienced one or more
ownership changes in 1996, 1997 and 1998 as a result of raising various rounds
of private equity or that such an ownership change may have occurred or be
deemed to have occurred due to events beyond our control (such as transfers of
common stock by certain stockholders or the exercise or treatment of our issued
and outstanding warrants, conversion rights or stock options). Further, there
can be no assurance that we will not take additional actions, such as the
issuance of additional stock, that would cause an ownership change to occur. In
addition, the NOLs are subject to examination by the Internal Revenue Service
("IRS"), and are thus subject to adjustment or disallowance resulting from any
such IRS examination.
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<PAGE> 13
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS; YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of many management information systems
("MIS") using two digits (rather than four) to define the applicable year. Thus,
time-sensitive MIS may recognize a date ending in "00" as the Year 1900 rather
than the Year 2000. This could result in a system failure or miscalculations
causing disruptions in a company's operations. As a result, in less than a year,
MIS used by many organizations may need to be upgraded to comply with Year 2000
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with the failure to become Year 2000 compliant.
We depend on MIS to monitor daily revenues and machine utilization in each
of our stores, exercise centralized cash and management controls and compile and
analyze critical marketing and operations data. Any disruption in the operation
of our MIS, the loss of employees knowledgeable about such systems or our
failure to continue to effectively modify such systems as we expand could have a
material adverse effect on our business, financial condition and results of
operations.
SpinCycle's Readiness. Based on our initial tests and certifications
received from MIS providers, we believe that both our critical software systems
and store hardware systems are currently Year 2000 compliant. Our assessment of
exposure to Year 2000 problems began in March 1998 with a test of all MIS for
Year 2000 readiness. Since that time, management has obtained certifications
from providers of our accounting, revenue control and other critical software
systems that such MIS are Year 2000 compliant. We are completing final test
procedures for Year 2000 compliance and believe that our MIS are 100% Year 2000
compliant. However, if our final testing is not completed on a timely basis or
does not resolve all Year 2000 issues, such issues could have a material adverse
effect on our operations.
Readiness of Third Parties. We have taken reasonable precautions to verify
the Year 2000 readiness of any third party that could cause a material impact on
our operations. Alliance, the major supplier of our laundry machines, has
represented that the electronic controls embedded in their machines will not
experience problems as a result of the Year 2000. Alliance further represented
that the electronic controls embedded in their machines have been tested without
incident by simulating the Year 2000 date change. In addition, SpinCycle's
providers of essential software systems have certified that such systems are
Year 2000 compliant.
Historical and Estimated Costs. We have not established a separate Year 2000
compliance budget and do not expect to do so in the immediate future. To date,
the only costs for Year 2000 compliance have been the expenditure of
approximately $50,000 to replace certain personal computers in our stores.
Although no assurances can be given, we do not expect future costs related to
Year 2000 compliance to have a material adverse effect on results of operations
or financial condition. Costs are based on current estimates and actual results
may vary significantly from such estimates.
Most Reasonably Likely Worst Case Scenario. The most reasonably likely worst
case Year 2000 scenario facing us would be our inability to implement variable
pricing in our laundry machines in an effort to boost off-peak customer traffic,
revenues and profitability. Variable pricing may temporarily malfunction on
January 2, 2000, since the machines recognize each day of the week based upon
the calendar date contained in their embedded computer chips and the price
programmed for a certain day of the week may in fact appear on a different day.
Although we do not currently have a definitive contingency plan in place to deal
with this issue, it is expected that each store's personnel will be able to
adjust the programming in each laundry machine so that the date contained in its
embedded chip once again correlates with the correct day of the week. In the
unlikely event that the dates in the embedded chips can not be reset, store
personnel will be able to manually set the laundry machines to charge a fixed
price until such time as we resolve defects in our variable pricing system.
SEASONALITY
Coin-operated laundromat industry data, as well as data generated from our
mature and maturing stores, indicates that the coin operated laundry business
experiences seasonal variations in operating performance during the later spring
and summer seasons. We believe this seasonality is a result of the reduced
volume of heavier clothing worn during the spring and summer months, which
results in lower laundry machine usage. We observed the effect of such
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<PAGE> 14
seasonality in the 70 stores opened for the entire 1998 fiscal year. During the
first nine periods ending September 6, 1998, revenues in these stores fluctuated
approximately 11.5%, from a peak during the third period to a low in the ninth
period. These 70 stores experienced a significant increase in revenues in the
final quarter of the year, completing the seasonal cycle. As we now have a
significant base of data regarding seasonality, we have adjusted our 1999
budgets to account for the seasonal patterns experienced in 1998.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about our
confidence in our prospects, strategies and expectations about expansion into
new markets, growth in existing markets, comparable store sales and ability to
attract new sources of financing, are forward-looking statements that involve
risks and uncertainties. These risks and uncertainties include, but are not
limited to, (1) our historical and anticipated losses and negative cash flow;
(2) debt service requirements, restrictions and covenants related to our
substantially leveraged financial position; (3) considerable competition from
local and regional operators in all of our markets; (4) our ability to hire,
train, retain and assimilate competent management and store-level employees; (5)
our ability to identify new markets in which to successfully compete; (6) our
ability to locate suitable sites for building or acquisition; (7) our ability to
negotiate acceptable lease terms; (7) our ability to adopt purchasing systems
and MIS to accommodate expanded operations; (8) our dependence on timely
fulfillment by landlords and others of their contractual obligations; and (9)
our maintenance of construction schedules and the speed with which local zoning
and construction permits can be obtained. No assurance can be given that new
stores will achieve sales and profitability comparable to the existing stores or
to our strategic plan. There can be no assurance that an adequate revenue base
will be established or that we will generate positive cash flow from operations.
Any investor or potential investor in SpinCycle must consider these risks and
others that are detailed in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates, commodity
prices and equity prices. Borrowings under our Heller Facility bear interest,
which contains either a LIBOR or a Prime Lending Rate component. Any adverse
changes to the LIBOR or the Prime Lending Rate could materially affect interest
due on outstanding borrowings under the Heller Facility. As of March 21, 1999,
we had $5.8 million of borrowings outstanding under this facility, all of which
were subject to a LIBOR interest component. Our senior discount notes bear
interest at a fixed rate of 12.75%. Refer to footnote 8 in the Financial
Statements for long term debt principal amounts and related interest rates due
in the near term.
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<PAGE> 15
SPINCYCLE, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported in our Annual Report on Form 10-K, we settled our
litigation with our former Chief Operating Officer, Mr. Bruce Mosby during the
first quarter of 1999. Following Mr. Mosby's termination on July 7, 1998, a
dispute arose concerning his termination. After initial negotiations and
mediation failed to resolve the dispute, Mr. Mosby filed suit against SpinCycle
and affiliated individuals on December 28, 1998; however, settlement
negotiations continued. On February 12, 1999, we executed a confidential
settlement agreement with Mr. Mosby fully and finally resolving the matter.
Under that agreement, Mr. Mosby, among other things, released us from all claims
relating to his employment and agreed to the entry of an order dismissing the
litigation with prejudice. In return, in addition to other non-monetary
obligations, we agreed to make a settlement payment to Mr. Mosby. A majority of
this payment has been reimbursed to us by our insurance company pursuant to our
employment practices liability policy. One of our directors, Mr. Peer Pedersen,
also agreed to purchase Mr. Mosby's 800 shares of our common stock in connection
with the settlement. The resolution reached in this matter has not had a
material adverse effect on our financial condition or results of our operations.
In addition to the proceedings discussed above, we are involved in various
legal proceedings of a character normally incident to businesses of our nature.
We do not believe that the outcome of these proceedings will have a material
adverse effect on the financial condition or results of operations of SpinCycle.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On April 23, 1998, as part of a reduction in force, we agreed with Mr.
Patrick Boyer, our Chief Information Officer, that Mr. Boyer would leave
our employ. Mr. Boyer's daily duties will be taken over by other personnel
in our Information Systems department.
As a result of the Company's slowed expansion and development and
public equity offering prospects, our Chief Financial Officer, Mr. James
Puckett, has elected to leave the Company effective May 6, 1999. In our
Company's current state of slowed growth, our day to day financial
responsibilities will be assumed by Mr. Peter Ax, the Company's Chairman
and Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a). None
(b). Current Report on Form 8-K dated February 8, 1999 Item 5
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<PAGE> 16
The Company has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
SPINCYCLE, INC.
Date: May 5, 1999 By________________________________
James R. Puckett
Chief Financial Officer
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<PAGE> 17
The Company has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
SPINCYCLE, INC.
Date: May 5, 1999 By /s/ James R. Puckett
--------------------------------
James R. Puckett
Chief Financial Officer
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED MARCH 21, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> MAR-21-1999
<CASH> 3,161
<SECURITIES> 0<F1>
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 250
<CURRENT-ASSETS> 7,562
<PP&E> 118,220
<DEPRECIATION> 14,733
<TOTAL-ASSETS> 129,761
<CURRENT-LIABILITIES> 7,943
<BONDS> 112,207
0<F1>
50,846
<COMMON> 0<F1>
<OTHER-SE> (44,430)
<TOTAL-LIABILITY-AND-EQUITY> 129,761
<SALES> 11,606
<TOTAL-REVENUES> 11,606
<CGS> 0<F1>
<TOTAL-COSTS> 8,712
<OTHER-EXPENSES> 5,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,339
<INCOME-PRETAX> (6,257)
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> (6,257)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (6,257)
<EPS-PRIMARY> (225.37)
<EPS-DILUTED> 0
<FN>
<F1>AMOUNTS INAPPLICABLE OR NOT DISCLOSED AS A SEPARATE LINE ON THE BALANCE SHEET
OR STATEMENT OF OPERATIONS ARE REPORTED AS 0 HEREIN.
</FN>
</TABLE>
