<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 October 1, 2000
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.
(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 November 14, 2000, 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.
<PAGE> 2
SPINCYCLE, INC.
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<TABLE>
<CAPTION>
INDEX PAGE
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<S> <C>
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 .... 13
PART II - OTHER INFORMATION.............................................. 14
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities and Use of Proceeds....................... 14
Item 3. Defaults Upon Senior Securities................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
</TABLE>
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SPINCYCLE, INC.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 26,
2000 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,249,324 $ 4,125,919
Landlord allowances 77,250 176,340
Prepaid expenses 252,738 92,490
Inventory 300,920 298,477
Land held for sale-leaseback 1,919,209 1,919,209
Other current assets 926,319 685,508
------------- -------------
Total current assets 5,725,760 7,297,943
Property and equipment, net 86,014,350 95,241,610
Goodwill, net 12,033,140 12,634,520
Other assets 3,792,890 4,370,021
------------- -------------
Total assets $ 107,566,140 $ 119,544,094
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 709,923 $ 885,231
Accrued utilities 953,770 1,296,144
Accrued expenses 1,393,990 2,666,326
Current portion of deferred rent 493,335 493,335
Current portion of long-term debt 6,767,186 207,460
------------- -------------
Total current liabilities 10,318,204 5,548,496
Long-term debt 133,001,302 127,940,845
Deferred rent 2,665,962 3,407,741
Other liabilities 345,610 428,520
------------- -------------
Total liabilities 146,331,078 137,325,602
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Shareholders' equity (deficit):
Series A, Series B and Series C convertible preferred stock,
$.01 par value, 370,000 shares authorized, 275,402
shares issued and outstanding 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 1,430,259 1,430,259
Accumulated deficit (96,666,285) (75,682,855)
------------- -------------
Total shareholders' equity (deficit) (38,764,938) (17,781,508)
------------- -------------
Total liabilities and shareholders' equity $ 107,566,140 $ 119,544,094
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
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STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED YEAR-TO-DATE
------------------------------ ------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 15,840,532 $ 16,090,868 $ 41,647,256 $ 39,659,572
Cost of revenues -- store operating expenses 11,246,043 12,441,902 28,827,991 30,381,595
Preopening costs -- 2,586 -- 116,970
Depreciation and amortization 4,517,280 4,465,303 11,260,108 10,931,586
Selling, general and administrative expenses 3,376,010 2,909,680 8,346,306 7,915,512
Loss on disposal of property & equipment -- 391,246 -- 466,482
------------ ------------ ------------ ------------
Operating loss (3,298,801) (4,119,849) (6,787,149) (10,152,573)
Interest income 18,022 35,370 63,518 98,958
Interest expense, net of amount capitalized (5,924,157) (4,969,804) (14,259,799) (11,846,205)
------------ ------------ ------------ ------------
Net loss $ (9,204,936) $ (9,054,283) $(20,983,430) $(21,899,820)
------------ ------------ ------------ ------------
Net loss per common share $ (331.55) $ (326.13) $ (755.81) $ (788.81)
============ ============ ============ ============
Weighted average number of common shares outstanding 27,763 27,763 27,763 27,763
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
SPINCYCLE, INC.
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STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR-TO-DATE
------------------------------
OCTOBER 1, OCTOBER 3,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(20,983,430) $(21,899,820)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,260,108 10,931,586
Loss on disposal of property and equipment 1,000 466,482
Amortization of debt issuance costs 688,192 757,650
Amortization of discount on long-term debt 12,757,973 10,780,035
Changes in assets and liabilities:
Landlord allowances 99,091 550,595
Prepaid expenses (160,249) 374,950
Inventory (2,443) (174,611)
Other current assets (240,812) 64,126
Other assets (88,087) 18,860
Accounts payable (175,309) (2,779,167)
Construction payables -- (389,393)
Accrued utilities (342,374) (50,427)
Accrued expenses and other liabilities (1,355,245) (567,099)
Deferred rent (741,779) 180,660
------------ ------------
Net cash provided by (used in) operating activities 716,636 (1,735,573)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of fixed assets (1,277,856) (9,150,053)
Proceeds from sale of fixed assets -- 49,760
Net proceeds from sale-leaseback transactions 534,333
Capitalized interest (1,612) (156,902)
------------ ------------
Net cash provided by (used in) investing activities (1,279,468) (8,722,862)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments of debt (1,275,292) (266,597)
Debt issuance costs paid (153,726) (336,909)
Increase in debt 115,255 9,390,000
------------ ------------
Net cash provided by (used in) financing activities (1,313,763) 8,786,494
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,876,595) (1,671,941)
Cash and cash equivalents, beginning of period 4,125,919 4,239,099
------------ ------------
Cash and cash equivalents, end of period $ 2,249,324 $ 2,567,158
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment financed with long-term debt $ 22,247 $ 152,823
CASH FLOW DURING THE YEAR FOR THE FOLLOWING:
Interest paid $ 773,418 $ 353,043
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
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NOTES TO FINANCIAL STATEMENTS
1. UNAUDITED 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, therefore,
does not include all of the information and note disclosures required by
generally accepted accounting principles for financial statements.
Accordingly, this information should be read in conjunction with the audited
financial statements for the year ended December 26, 1999 and notes thereto
included in the Form 10-K of SpinCycle, Inc. (the "Company") filed with the
Securities and Exchange Commission ("SEC") on March 27, 2000. In the opinion
of management, this information reflects all adjustments of a normal
recurring nature and necessary for a fair statement of the Company's
financial position, results of operations and cash flows for the interim
periods reported.
The results of operations for the periods ended October 1, 2000 and
October 3, 1999 are not necessarily indicative of the results to be expected
for a full fiscal year.
2. LIQUIDITY
During the year-to-date period ended October 1, 2000, the Company
experienced a net loss of $20,983,430 and had an accumulated deficit of
$96,666,285. The Company's history of losses has been largely due to
depreciation and the accretion of interest on its senior discount notes, as
well as the large general and administrative infrastructure it put in place
to handle the rapid growth it has experienced. Year-to-date 2000, the Company
has maintained positive earnings before interest, taxes, depreciation and
amortization ("EBITDA") for all fiscal periods. Management believes that the
availability of funds from the LaSalle Bank National Association credit
facility and operating revenues from its 172 units opened as of fiscal
quarter ended October 1, 2000, will enable the Company to maintain
operations, excluding debt payments described below, for the foreseeable
future.
Beginning November 1, 2001, the Company will be required to make
semi-annual cash payments of approximately $9.24 million on its senior
discount notes. Additionally, on September 30, 2001, the Company will be
required to repay the principal balance owing on the LaSalle facility. The
principal balance outstanding on October 1, 2000 was approximately $6.5
million. These payments, which are substantially in excess of any historic
net cash flow the Company has generated, will be in addition to its selling,
general and administrative expenses and any other interest or other expenses
incurred at that time. If the Company is unable to modify these debt service
obligations, it is unlikely that the Company will be able to make these
required cash payments when due, which could have a material and adverse
effect on the Company. A special committee of the Company's Board of
Directors has been formed to investigate possible alternatives.
3. 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.
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<PAGE> 7
4. JOINT VENTURES
On January 7, 2000, the Company formed E-Wash, Inc., a Delaware
corporation, as a wholly owned subsidiary. The Company's board of directors
designated E-Wash, Inc. as an unrestricted subsidiary of the Company on
February 3, 2000. On February 28, 2000, E-Wash, Inc. formed E-Wash, LLC, a
Delaware single member limited liability company. These entities were
re-named CleanWave, Inc. and CleanWave, LLC, respectively, on March 6, 2000.
On May 30, 2000, these entities were renamed as Cleanwave, Inc. and
Cleanwave, LLC, respectively. All references herein are to the entities as
they were named as of the end of the Company's second quarter.
On May 1, 2000, SpinCycle, Inc., through its wholly owned subsidiary,
entered into an amended and restated limited liability company agreement for
Cleanwave, LLC, and a unit purchase agreement, among other transaction
documents, with Shell Chemical Company ("Shell"). Cleanwave, LLC now conducts
the pick up and delivery laundry business, which the Company had been testing
in its Miami, Florida market since August 1999. Pursuant to the unit purchase
agreement, Shell acquired units representing a 30% interest in Cleanwave,
LLC. The balance of Cleanwave, LLC units are owned by Cleanwave, Inc. (52.5%)
and seven members of the Company's senior management (17.5% in the
aggregate). The seven members of senior management of the Company own their
units pursuant to restricted unit agreements, which provide that one-third of
each individual's units vest as of the date of grant (February 28, 2000) and
vest an additional one-third on each of the first two anniversaries of the
grant date. As the remainder of these grants vest in the future, the Company
will determine their current value at the vesting dates in order to recognize
compensation expense. The Company's stockholders approved the grant of these
restricted units as of June 30, 2000.
Shell received one-third (10%) of its 30% interest in Cleanwave, LLC in
exchange for services rendered and expenses undertaken on behalf of the
venture prior to closing: these expenses related primarily to market
research. Shell purchased the remaining two-thirds (20%) of its interest for
$5.0 million in cash. The $5.0 million is expected to be used to operate the
Cleanwave business in the Miami market through year end 2000, and to pay
certain expenses incurred by the parties prior to closing, such as branding
and capital expenditures. Shell also has the opportunity to earn up to an
additional 11% ownership interest in Cleanwave, LLC if and when Cleanwave,
LLC enters into certain strategic relationships with specified third parties
and/or Shell provides certain services to Cleanwave, LLC.
Cleanwave, LLC and Shell, and certain related parties of each,
concurrently entered into an intellectual property transfer and license
agreement regarding the ownership and licensing of existing intellectual
property owned by the Company and/or contributed to Cleanwave, LLC and future
intellectual property created by and/or on behalf of the Company, Cleanwave,
LLC or Shell. Cleanwave and Shell also entered into an interim services and
products agreement pursuant to which Cleanwave agrees to grant Shell a right
of first refusal to provide certain products and services to Cleanwave.
The Company is providing the laundry processing services (personnel and
facilities) to Cleanwave, LLC for a one-year period, subject to extension and
termination as agreed by the parties. All personnel previously hired to drive
vans and staff the call center have become Cleanwave employees. SpinCycle is
being compensated for providing laundry processing services on a price per
pound basis as well as with fees to offset training and field management
services and to offset occupancy costs. The Company has also agreed to
provide certain administrative services, such as payroll processing, human
resources, executive staffing and information systems, to Cleanwave, LLC for
a term of one year, subject to extension by the parties. For these services
the Company will receive 5% of Cleanwave, LLC's annual gross revenues,
subject to a minimum annual amount of $250,000. Intercompany expenses between
Cleanwave, LLC and the Company were immaterial for the fiscal quarter ended
October 1, 2000.
Currently, Cleanwave, LLC's only officers are Peter Ax and Christopher
Lombardi, who are also officers of the Company. Cleanwave, LLC has a board of
directors, currently comprised of Peter Ax, Christopher Lombardi, John H.
Muehlstein, Daniel K. Carlson and R. Krug Fenz. Messrs. Carlson and Fenz are
Shell's representatives on the board.
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<PAGE> 8
The Company was required to and did obtain a waiver from its lenders,
LaSalle Bank National Association and Alliance Laundry Systems LLC, in
connection with this transaction.
Based on the substantive participation rights granted to Shell under the
amended and restated limited liability company agreement, the Company is not
deemed to have effective control of Cleanwave, LLC, therefore the equity
method of accounting is being applied. Additionally, the Company does not
have a cash investment nor has it loaned any funds to Cleanwave, LLC
constituting a basis in its interest in Cleanwave, LLC. As a consequence, the
Company has not recorded any of Cleanwave, LLC's losses to date under the
equity method or eliminated its portion of any intercompany transactions. The
Company will continue this accounting treatment until such time as Cleanwave,
LLC becomes profitable, which is not expected to occur in the foreseeable
future.
5. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Company's interest expense, net of amount capitalized, consists of the
following:
<TABLE>
<CAPTION>
QUARTERS ENDED YEAR-TO-DATE
-------------------------- ------------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Accretion of Senior Discount Notes $5,351,807 $ 4,428,643 $ 12,757,973 $ 10,780,035
Interest expense on Alliance and LaSalle debt 278,980 -- 741,022 --
Interest expense on Heller -- 230,028 -- 422,842
Amortization of debt issue costs 281,382 316,351 688,192 757,650
Other interest expense 11,988 16,738 74,224 42,580
Capitalized interest -- (21,956) (1,612) (156,902)
---------- ----------- ------------ ------------
Interest expense, net $5,924,157 $ 4,969,804 $ 14,259,799 $ 11,846,205
========== =========== ============ ============
</TABLE>
6. LONG-TERM DEBT
At October 1, 2000 and December 26, 1999, long-term debt included the
following:
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 26,
2000 1999
------------- -------------
<S> <C> <C>
12.75% Senior Discount Notes Due 2005 ($144,990,000
principal amount), net of unamortized discount $ 129,962,343 $ 117,204,370
Alliance Laundry Systems LLC Credit Facility; interest
at prime plus 1.0%; due in installments through 2006 3,000,000 3,000,000
LaSalle Bank National Association Credit Facility;
interest at either prime plus 1.0% or LIBOR plus 3.0%;
due September 30, 2001 6,494,051 7,494,051
Other notes payable; interest at 11% due in various
installments through September 2001 312,094 449,884
------------- -------------
139,768,488 128,148,305
Less current portion (6,767,186) (207,460)
------------- -------------
$ 133,001,502 $ 127,940,845
============= =============
</TABLE>
Effective September 30, 2000, the Company and LaSalle Bank National Association
executed an amendment to the LaSalle Facility that modified the minimum tangible
net worth and capitalized expenditure covenants. Additionally, effective
September 30, 2000, the Company and Alliance Laundry Systems LLC executed an
amendment to the Alliance Facility that modified the minimum tangible net worth
covenant and capitalized expenditure covenant. The minimum tangible net worth
covenant was the covenant for which the Company received waivers in its previous
three quarters.
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SPINCYCLE, INC.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SpinCycle, Inc. ("SpinCycle") is a specialty retailing company engaged in the
coin laundry business. We were 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. We were 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.
During 1999, we began to explore the demand for and viability of a pick-up
and delivery service for home laundry. We began offering this service in the
greater Miami, Florida area in August of 1999. As of May 1, 2000, Cleanwave, LLC
of which SpinCycle owns 52.5%, offers this service. Miami area consumers can
currently order this service by calling a toll free number or accessing the
Cleanwave web site at www.cleanwave.com. Cleanwave's objective is to pick-up,
wash, dry, fold, package and return each customer's laundry within 24 hours. The
laundry is currently being processed by our employees at three of our Miami
locations during the hours these stores are closed to retail customers, thus
allowing us to leverage our assets. Cleanwave's demand to date have been
promising and we expect to expand this service to the entire Miami market and
expand to other SpinCycle markets as demand dictates and resources permit.
To date, our primary use of capital has been for the development and
acquisition of laundromats and for general corporate purposes. Our store count
grew rapidly in our first three years, from our first store opening in April
1996, through year end 1996, 1997 and 1998 when we had a total of 14, 71 and 163
stores, respectively. By year-end 1999 SpinCycle operated 172 stores. As of
October 1, 2000, we had not opened any additional stores, we had no other stores
under construction and were party to three leases for stores that we do not
currently plan to develop. We continue to maintain a significant backlog of
potential acquisition and development sites, but do not expect to enter into any
commitments to purchase or develop stores prior to procuring additional growth
capital or generating sufficient cash flow from operations.
To date we have closed four stores: one during 1998, following a lease buyout
by our landlord at that location and three additional stores during 1999 due to
poor performance. In connection with these store closures, we recognized
approximately $1.0 million in losses on impairment and disposal of long-lived
assets during fiscal 1999. We do not presently foresee closing any additional
stores. We are actively pursuing the sale or alternative use of two of the
locations that we closed during 1999.
Our rapid development and acquisition of laundromats has required significant
capital resources. 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. From inception
to date, we have not been profitable and have generated net operating losses and
negative cash flow from operations. 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 found that SpinCycle's valuation then and 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 not to add stores, and expect to continue to proceed
cautiously with our planned expansion to judiciously utilize available sources
of growth capital.
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<PAGE> 10
RESULTS OF OPERATIONS
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.
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.
Third Quarter and Year-To-Date 2000 Compared to Third Quarter and Year-To-Date
1999
Revenues. Our revenues were approximately $15.8 million for the third quarter
of 2000, a decrease of approximately $250,000 from approximately $16.1 million
in the corresponding period in 1999. Our decrease in revenues for the quarter
was primarily attributable to a larger adverse seasonal impact during 2000.
Revenues were approximately $41.6 million for year-to-date 2000, an increase of
approximately $1.9 million from approximately $39.7 million for the
corresponding period in 1999. Our year-to-date growth in revenue was primarily
attributable to the continued maturation of our developed and acquired stores.
Store operating expenses, excluding depreciation and amortization. Our store
operating expenses, excluding depreciation and amortization were approximately
$11.2 million in the third quarter of 2000, a decrease of approximately $1.2
million from approximately $12.4 million in the corresponding period in 1999.
Store operating expenses were approximately $28.8 million for year-to-date 2000,
a decrease of approximately $1.6 million from approximately $30.4 million for
the corresponding period in 1999. The decreases in our store operating expenses,
excluding depreciation and amortization were primarily attributable to our
measures to reduce store operating expenses, specifically repair and
maintenance, labor, and telecom, partially offset by our increase in utility
expenses due to our increased customer volume. Operating expenses as a
percentage of revenues were approximately 76% for the third quarter 1999 and
approximately 77% for year-to-date 1999. Operating expenses as a percentage of
revenues decreased to approximately 71% for the third quarter of 2000 and
approximately 69% for year-to-date 2000, which is a result of the continued
maturation of our stores' revenue and our implementation of initiatives designed
to reduce store operating expenses.
Preopening costs. We had no preopening costs in the third quarter of 2000, a
decrease of approximately $3,000 from approximately $3,000 in the corresponding
period in 1999. We had no preopening costs for year-to-date 2000, a decrease of
approximately $117,000 from approximately $117,000 for the corresponding period
in 1999. We expense preopening costs as incurred. During the third quarter of
1999 we opened three stores. For the year-to-date period ended October 3, 1999
we had opened 12 stores. During the third quarter and year-to-date 2000 we did
not open any stores or have any stores under construction. We have delayed
indefinitely the opening of three stores that we have under lease.
Store EBITDA. Our store EBITDA was approximately $4.6 million in the third
quarter of 2000, an increase of approximately $1.0 million from approximately
$3.6 million for the corresponding period in 1999. Store EBITDA was
approximately $12.8 million for year-to-date 2000, an increase of approximately
$3.6 million from approximately $9.2 million for the corresponding period in
1999. The increase was primarily attributable to increased revenue from the
maturation of our stores. Our store EBITDA increases as revenues increase due to
the fixed nature of many of the store level expenses.
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<PAGE> 11
Depreciation and amortization. Our depreciation and amortization expense was
approximately $4.5 million in the third quarter of 2000, an increase of
approximately $50,000 from approximately $4.4 million for the corresponding
period in 1999. Depreciation and amortization was approximately $11.3 million
for year-to-date 2000, an increase of approximately $400,000 from approximately
$10.9 million for the corresponding period in 1999. The increase was principally
due to property and equipment acquired in connection with our 1999 expansion.
Selling, general and administrative expenses. Our selling, general and
administrative expenses were approximately $3.4 million in the third quarter of
2000, an increase of approximately $500,000 from approximately $2.9 million in
the corresponding period of 1999. Selling, general and administrative expenses
were approximately $8.3 million for year-to-date 2000, a $400,000 increase from
$7.9 million for the corresponding period in 1999. Selling, general and
administrative expenses as a percentage of revenue were approximately 21% for
the third quarter of 2000 and 20% for the corresponding quarter 1999. Selling,
general and administrative expenses decreased as a percentage of revenue from
approximately 21% for year-to-date 1999 to approximately 20% for year-to-date
2000. The decrease was due to the maturation of our stores and our
implementation of certain initiatives to reduce these expenses, including our
1999 reductions in force.
EBITDA. Our EBITDA in the third quarter of 2000 was approximately $1.2
million, an increase of approximately $460,000 from our EBITDA of approximately
$740,000 for the corresponding period in 1999. EBITDA was approximately $4.5
million for year-to-date 2000, an increase of approximately $3.3 million from
approximately $1.2 million for the corresponding period in 1999. The increase
was primarily attributable to the continued maturation of our stores. The EBITDA
generated in the first three quarters of 2000 exceeded the EBITDA generated
during all of fiscal 1999 by approximately $2.0 million and marked the sixth
consecutive quarter that we achieved positive EBITDA. For the remainder of 2000,
we will continue to focus on strategies to improve unit level economics and
reduce general and administrative expenses.
Interest income and interest expense, net. Our interest income was
approximately $18,000 in the third quarter of 2000, a decrease of approximately
$17,000 from approximately $35,000 in the third quarter of 1999. Our interest
income was approximately $64,000 year-to-date 2000, a decrease of approximately
$35,000 from approximately $99,000 year-to-date 1999. The decrease in interest
income was primarily attributable to a lower average cash balance during the
third quarter and year-to-date 2000 compared to the third quarter and
year-to-date 1999. Our interest expense, net of capitalized interest was
approximately $5.9 million in the third quarter of 2000, an increase of
approximately $900,000 from approximately $5.0 million in the corresponding
period in 1999. Interest expense, net of capitalized interest was approximately
$14.3 million year-to-date 2000, an increase of approximately $2.5 million from
approximately $11.8 million in the corresponding period in 1999. The increase in
interest expense, net was primarily attributable to the increase in accretion of
interest expense related to our April 1998 offering of senior discount notes and
warrants and interest expense accrued for borrowings under our existing credit
facilities. We had approximately $9.3 million in borrowings under our former
credit facility at the end of the third quarter of 1999 and had approximately
$9.5 million in borrowings at the end of the third quarter of 2000 under our
existing credit facilities.
Net loss. Our net loss recorded in the third quarter of 2000 was
approximately $9.2 million, an increase of approximately $100,000 from
approximately $9.1 million in the third quarter of 1999. The net loss recorded
year-to-date 2000 was approximately $21.0 million, a decrease of approximately
$1.0 million from the $22.0 million net loss recorded in the corresponding
period of 1999. The decreased loss was primarily attributable to the additional
income provided by our operations, partially offset by the increase in interest
expense related to our April 1998 offering of senior discount notes and
warrants, and the interest expense associated with our outstanding borrowings
under our credit facilities.
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LIQUIDITY AND CAPITAL RESOURCES
At October 1, 2000, we had total assets of approximately $107.6 million,
including current assets of approximately $5.7 million. Cash and cash
equivalents were approximately $2.2 million.
Our cash provided by operations during the year-to-date period ended October
1, 2000 was approximately $700,000, a $2.5 million increase from our cash used
in operations during the corresponding period in 1999 of approximately $1.7
million. Our cash provided by operations year-to-date 2000 was primarily
attributable to the store EBITDA realized during the period. The increase in our
cash provided by operating activities in the year-to-date period ended October
1, 2000 was the result of the continued maturation of our stores.
Our cash used in investing activities during the year-to-date period ended
October 1, 2000 was approximately $1.3 million, a $7.4 million decrease from our
cash used in investing activities of approximately $8.7 million for the
corresponding period in 1999. Our reduced spending on investing activities in
the year-to-date period ended October 1, 2000 is due to the substantial decrease
in our expansion activities.
Our cash used in financing activities was approximately $1.3 million during
the year-to-date period ended October 1, 2000, a decrease of approximately $10.1
million from our cash provided by financing activities of approximately $8.8
million during the corresponding period in 1999. We borrowed funds primarily to
pay for our capital expenditures related to our 1999 store rollout plan. The
funds were obtained primarily from our former credit facility.
We generated approximately $4.5 million of positive EBITDA during our first
three fiscal quarters of 2000. We expect to generate positive EBITDA in all 13
periods of 2000. As of October 1, 2000 we had drawn approximately $9.5 million
from our existing facilities, and had $5.5 million additional borrowing capacity
on these credit facilities based on the applicable financial covenants. We
expect to be able to meet our current operating obligations with cash flows from
our store operations. We believe that our cash flow from operations will provide
us with sufficient capital resources through the third quarter of 2001.
Significant variances in budgeted store revenue, store EBITDA, or unforeseen
capital requirements could result in insufficient capital resources if they
exceed our cash flow from operations or availability on our credit facilities.
As we have not received the requisite number of landlord consents required at
closing, borrowing availability under the LaSalle facility could be reduced by
$1.0 million. LaSalle has not notified us that our availability has been
limited.
Effective September 30, 2000, the Company and LaSalle Bank National Association
executed an amendment to the LaSalle Facility that modified the minimum tangible
net worth and capitalized expenditure covenants. Additionally, effective
September 30, 2000, the Company and Alliance Laundry Systems LLC executed an
amendment to the Alliance Facility that modified the minimum tangible net worth
covenant and capitalized expenditure covenants. The terms of the covenants and
modification to the covenants for both of these facilities are substantially
identical.
The amendment to the tangible net worth covenant reduces the tangible net
worth that we must maintain in order to remain in compliance. The capital
expenditure covenant was increased for fiscal 2000 from $1.0 million to $2.0
million in order to allow for certain non-recurring capital expenditures. We
have approximately $5.5 million of borrowing capacity remaining on the LaSalle
Facility and no remaining capacity on the Alliance Facility.
Beginning November 1, 2001, we will be required to make semi-annual cash
payments of approximately $9.24 million on our senior discount notes.
Additionally, on September 30, 2001, we will be required to repay the principal
balance owing on the LaSalle facility. The principal balance on October 1, 2000
was approximately $6.5 million. 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. Absent our ability to modify these debt
service obligations, it is unlikely that we will be able to make these required
cash payments when due, which could have a material and adverse effect on the
Company. A special committee of our Board of Directors has been formed to
investigate possible alternatives.
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POTENTIAL LOSS OF NET OPERATING LOSSES
As of October 1, 2000, we had net operating losses ("NOLs") of approximately
$64.1 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.
SEASONALITY
Coin-operated laundromat industry data, as well as data generated from our
mature 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 seasonality in the
90 stores that were mature for the entire 1999 fiscal year. During the 1999
fiscal year, revenues in these stores decreased approximately 8.8%, from a peak
during the third period to a low in the eighth period. These 90 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 2000 budgets to account for the
seasonal patterns experienced in 1999.
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
Not applicable.
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SPINCYCLE, INC.
--------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently 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.
SpinCycle, Inc.'s stockholders were solicited beginning on May 25, 2000
regarding election of directors and the grant of restricted units in Cleanwave,
LLC to SpinCycle management. The requisite consents were obtained as of June 30,
2000 and were previously reported in our Quarterly Report on Form 10-Q for the
period ended June 11, 2000 filed on July 26, 2000.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
(a). Exhibit 10.1 First Amendment to Loan and Security Agreement between
SpinCycle, Inc. and LaSalle Bank National Association
dated September 30, 2000.
Exhibit 10.2 First Amendment to Loan and Security Agreement between
SpinCycle, Inc. and Alliance Laundry Systems, LLC dated
September 30, 2000.
Exhibit 27.1 Financial Data Schedule
</TABLE>
(b). None.
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<PAGE> 15
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
SPINCYCLE, INC.
Date: November 13, 2000 By /s/ Peter L. Ax
---------------------------------
Peter L. Ax
Chief Executive Officer
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EXHIBIT INDEX
<TABLE>
<S> <C>
(a). Exhibit 10.1 First Amendment to Loan and Security Agreement between
SpinCycle, Inc. and LaSalle Bank National Association
dated September 30, 2000.
Exhibit 10.2 First Amendment to Loan and Security Agreement between
SpinCycle, Inc. and Alliance Laundry Systems, LLC dated
September 30, 2000.
Exhibit 27.1 Financial Data Schedule
</TABLE>
