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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 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
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(State of Incorporation) (I.R.S. Employer Identification No.)
15990 N. Greenway Hayden Loop, Suite #400, Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
(480) 707-9999
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(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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. NA
As of March 27, 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.
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SPINCYCLE, INC.
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I 3
Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of 5
Security Holders
PART II 5
Item 5. Market for Registrant's Common Equity 5
and Related Stockholder Matters
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of 8
Operations
Item 7A. Quantitative and Qualitative Disclosures 14
About Market Risk
Item 8. Financial Statements and Supplementary 15
Data
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 33
PART III 33
Item 10. Directors and Executive Officers of the 33
Registrant
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial 39
Owners and Management
Item 13. Certain Relationships and Related 41
Transactions
PART IV 41
Item 14. Exhibits, Financial Statement Schedules, 41
and Reports on Form 8-K
SIGNATURES 42
</TABLE>
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SPINCYCLE, INC.
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PART I
ITEM 1. BUSINESS
SpinCycle, Inc. ("SpinCycle"), a Delaware corporation, 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. SpinCycle 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 executing its business plan. In sharp contrast to many
existing laundromats, a SpinCycle laundromat is an inviting, spacious and
well-equipped facility that is conveniently located, clean, well-lighted and
always attended.
Since opening our first store in April 1996, we have acquired and developed
stores at a rapid pace. By year-end 1996 we had opened 14 stores, in 1997 we
added 57 stores, in 1998 we added 93 stores (in 1998 we closed one store
following a lease buyout by a landlord) and in 1999 we had a net increase of
nine stores (in 1999 we closed three stores that were purchased in previous
years as part of multi-location acquisitions). As of March 27, 2000, we had 172
stores in 25 markets, including 109 developed stores and 63 acquired stores. Our
stores are located primarily in densely populated urban markets. During 2000, we
anticipate selective expansion within our existing markets. We expect our growth
during 2000 to be significantly less than our growth in previous years, as
future growth will be contingent upon raising additional growth capital (See
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Overview herein).
Our developed stores are generally between 3,500 and 5,500 square feet,
significantly larger than the 1,500 to 2,500 square feet of a typical
laundromat, and generally contain 50 washers of varied capacities and 54 large
capacity dryers. Each store is staffed during operating hours by at least one
customer service representative who assists customers, maintains the facility
and performs other services, if offered. Customers can sort and fold laundry
while watching color television with cable programming at 12 to 14 folding
stations and purchase food, beverages and laundry supplies from vending
machines. Our acquired stores typically conform to a SpinCycle developed store
in terms of location (physical location and area demographics), store size and
machine mix and converted to a SpinCycle store with new signage, fresh paint and
installation of our computer and point of sale systems.
We have employed a systematic two-pronged approach of opportunistic
development and consolidation. We approach expansion methodically, utilizing our
knowledge of our customer as the basis for our growth. We base our expansion
decisions on a careful examination of the market. Utilizing demographic studies
which analyze the concentration of the typical SpinCycle customer, we determine
target markets and define trade areas within these markets, then
opportunistically develop or acquire stores that meet, or can be converted to
meet, our target store economics.
In order to maximize machine utilization, and increase store revenue we
have introduced several new initiatives as potential revenue generators to our
stores. In 1998, we introduced the following programs:
WASH & FOLD whereby customers deliver their laundry to our stores and our
staff washes, dries and folds it, generally within one day. We have made a
significant effort to create a uniform, branded service of our Wash & Fold
service by, among other things, training our employees in consistent
performance, folding, separation and packaging of each customer's laundry.
We use premium soap, softeners and other laundry products in this service,
and our goal is to create a consistent, premium service chain-wide. As of
December 26, 1999 we were offering Wash & Fold in approximately 80% of our
stores.
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FULL-SIZED LAUNDRY SOAP SALES in our stores in addition to the single
load-sized boxes of laundry soap that are dispensed through vending
machines. The introduction of these products has proven to be a significant
customer convenience, and as of December 26, 1999 we were offering
full-sized laundry soap sales in approximately 95% of our stores.
DRY CLEANER DEPOT whereby we provide our Wash & Fold service, branded as
"TLC" or "Total Laundry Care", to dry cleaners who elect to offer the
service at their store. The dry cleaner collects the laundry and delivers
it to a designated SpinCycle location. We process the laundry overnight for
pick-up by the dry cleaner.
In October 1999, based on the success of the programs we initiated in 1998,
we began test marketing a pick-up and delivery service for home laundry in the
Miami market. Customers of the service have their everyday laundry picked up,
professionally laundered and then returned to them at their home or office. In
addition to everyday laundry, the subscribers to this service can have their dry
cleaning picked up, processed by a third-party dry cleaning partner, and
returned to them. In order to initiate the service, customers can visit our web
site (www.e-wash.com) or call a toll free number. The customer is provided with
either a small (approximately 15 lbs.), medium (approximately 25 lbs.), or large
(approximately 40 lbs.) bag in which to place the customer's laundry to be
processed. The bag is returned to the customer washed, dried and folded along
with all of their laundry.
Initial demand for this service has been strong. The laundry is typically
being processed between the hours of 12:00 a.m. and 6:00 a.m. (hours our stores
are not open to retail customers). We are currently processing the laundry in
two of our Miami stores and utilizing five vans for pick-up and delivery. In
addition, we have converted previously unused adjacent storage space at one of
these stores into a call center and dispatching hub. We believe that we are
uniquely positioned to offer this service on a national basis in that we have
processing facilities in 25 markets across the United States.
The Coin Laundry Association estimates the coin-operated laundromat business
is a $2.0 - $3.0 billion industry with approximately 25,000 laundromats
nationwide. The industry is generally characterized by small, unattractive
stores with limited customer service. The industry is highly fragmented with
approximately 89% of the owners operating two or fewer stores and only 4% of the
owners operating more than five stores. Although there is no single chain of
laundromats with which we compete on a national basis, we experience significant
competition in all of our markets from local "mom and pop" operators, and in
some markets, from local or regional chains. In Texas, for example, we compete
against Kwik Wash, which is a chain of approximately 150 stores owned by
Coinmach Corporation, a publicly traded company. While Coinmach Corporation has
substantially greater resources than SpinCycle, their laundromats are on average
smaller, deliver significantly inferior service and, in general, we believe they
pose little competitive threat. We also compete against other laundry services,
including laundry facilities available in apartment buildings, which are often
run by large route operators whose resources are often substantially greater
than ours.
As of December 26, 1999, we had 959 total employees of whom 490 are full time
and 469 are part-time. Each of our full-time employees is eligible for medical
benefits, which management believes helps us hire and retain the best available
employees. Our part-time employees work primarily in our stores and are engaged
primarily in customer service functions.
ITEM 2. PROPERTIES
As of December 26, 1999, we had opened a total of 172 stores in 25 markets.
SpinCycle stores are generally located in densely populated urban markets,
including Albuquerque, Atlanta, Austin, Baltimore, Chicago, Cleveland, Dallas,
Detroit, El Paso, Houston, Indianapolis, Kansas City, Los Angeles, Miami,
Milwaukee, Minneapolis, Norfolk, Philadelphia, Phoenix, Richmond, San Antonio,
San Diego, St. Louis, Washington, D.C. and West Palm Beach. Our stores generally
range in size from 3,500 to 5,500 square feet. We lease 166 of these locations
and own the real estate where six of these stores are operating. As of March 27,
2000 we were also
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party to four leases for stores which we do not believe we will open in 2000.
Our store leases are generally for ten-year initial terms with four five-year
renewal options. SpinCycle leases its headquarters, which is located at 15990
North Greenway Hayden Loop, Suite 400, Scottsdale, Arizona 85260 pursuant to a
five year lease with two five-year renewal options.
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in various legal proceedings of a character
normally incident to businesses like ours. 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 our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the year ended December 26, 1999 we issued options to purchase an
aggregate of 3,156 shares of our common stock to our employees, all of which
have an exercise price of $200 and substantially all of which vest 20% per year
on each anniversary of grant. In addition, we issued options to purchase an
aggregate of 120 shares of our common stock to our non-employee directors, all
of which have an exercise price of $200 and all of which vest one-third per year
on each anniversary of grant. There is no public market for any of our equity
securities. As of March 27, 2000, we had approximately 44 holders of our common
stock and approximately 173 holders of our equity securities. We have not paid
any dividends and do not expect to pay any dividends in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table reflects our summary historical financial and certain
other data for the periods indicated, and should be read in conjunction with our
financial statements, including the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. Our 1995 fiscal year was for the period
from October 10, 1995 (inception) through December 31, 1995, and our 1996 fiscal
year was for the period from January 1, 1996 through December 31, 1996. On
December 1, 1997, we elected to change our financial reporting to a 13 period
fiscal year, comprised of 13 four-week periods (each period containing four
Monday through Sunday weeks). As such, our 1997 fiscal year was the period from
January 1, 1997 through December 28, 1997, our 1998 fiscal year was the period
from December 29, 1997 through December 27, 1998 and our 1999 fiscal year was
the period from December 28, 1998 through December
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26, 1999. The following summary historical statement of operations data, insofar
as it relates to each of the fiscal years 1995 through 1999, has been derived
from audited annual financial statements.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
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DECEMBER 31, DECEMBER 31, DECEMBER 28, DECEMBER 27, DECEMBER 26,
1995 1996 1997 1998 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ -- $ 1,015 $ 8,653 $ 30,936 $ 52,174
----------- ------- -------- -------- --------
Operating income (loss) (5) (3,873) (13,337) (15,270) (13,953)
----------- ------- -------- -------- --------
Net income (loss) before
extraordinary loss (5) (3,894) (13,796) (24,321) (29,663)
Extraordinary loss from early
extinguishment of debt -- -- -- (334)(1) (782)(2)
----------- ------- -------- -------- --------
Net income (loss) (5) (3,894) (13,796) (24,655) (30,445)
Re-pricing of series C preferred
stock(3) -- -- -- (1,459) --
Accretion of mandatorily redeemable
Preferred stock -- -- (1,941) (756) --
----------- ------- -------- -------- ----------
Net income (loss) applicable to
holders of common stock $ (5) $(3,894) $(15,737) $(26,870) $ (30,445)
=========== ======== ========= ========= ===========
Net loss per common share $(1,362.75) $(117.42) $(412.76) $(937.60) $(1,096.60)
=========== ======== ========= ========= ===========
Weighted average number of common
shares outstanding 4 33,162 38,127 28,658 27,763
Cash dividends declared -- -- -- -- --
=========== ======== ========= ========= ===========
SELECTED OPERATING DATA:
Cash flows provided by (used in)
Operating activities $ (33) $2,380 $(8,973) $ (3,877) $ (618)
Cash flows provided by (used in)
Investing activities (18) (8,504) (22,862) (58,936) (9,092)
Cash flows provided by (used in)
Financing activities 56 6,479 39,724 58,803 9,597
EBITDA(4)(5) (5) (3,305) (10,516) (5,685) 2,536
Store EBITDA(6) -- (651) 213 5,736 12,969
Depreciation and amortization -- 568 2,341 9,562 14,310
Capital expenditures(7) $ 18 $ 13,391 $ 54,220 $ 68,312 $ 9,845
Stores open at end of period -- 14 71 163 172
</TABLE>
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SELECTED FINANCIALS CONTINUED
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 28, DECEMBER 27, DECEMBER 26,
1995 1996 1997 1998 1999
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Property and equipment ....................... $ 18 $ 12,841 $ 53,969 $ 100,657 $ 95,242
Total assets ................................. 55 13,809 75,496 128,256 119,544
Total debt ................................... -- 4,592 35,926 103,432 128,148
Total liabilities ............................ 60 10,890 46,330 115,593 137,326
Mandatorily redeemable........................ -- 6,810 48,793 -- --
preferred stock(8)
Convertible preferred......................... -- -- -- 50,846 50,846
stock(8)
Stockholders' equity (deficit)................ (5) (3,891) (19,627) 12,663 (17,782)
</TABLE>
(1) Our net loss for the year ended December 27, 1998, includes the
extraordinary loss associated with the write off of approximately $334 of
unamortized deferred financing costs related to two of our prior credit
facilities.
(2) Our net loss for the year ended December 26, 1999 includes the extraordinary
loss associated with the write off of approximately $782 of unamortized
deferred financing costs related to the replacement of our former bank
credit facility.
(3) We have recognized the fair value of the 7,295 shares of common stock issued
pursuant to the re-pricing of the series C convertible preferred stock as a
return to the series C preferred stockholders. Accordingly, this amount has
been deducted from our net loss in determining the net loss available to
common stockholders for purposes of calculating basic and diluted earnings
per share. See also Note 9 of our Financial Statements.
(4) 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.
(5) EBITDA for the fiscal years ended December 26, 1999, December 27, 1998 and
December 28, 1997, excludes the losses on impairment and disposal of
long-lived assets of $2,187, $23 and $480, respectively.
(6) Store EBITDA is 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.
(7) Capital expenditures includes the purchase of laundromat equipment pursuant
to a supply agreement and financed with borrowings in connection with our
former senior credit facilities of approximately $164, $2,455 and $31,358 in
fiscal 1999, 1998 and 1997, respectively. The capital expenditures for 1997
include approximately $11,485 of laundromat equipment for use in stores
opened in 1998. The capital expenditures for 1998 and 1997 include
approximately $872 and $4,120 for land acquired and held for sale-leaseback
transactions, $1,919 of which is shown under the heading "Land held for
sale-leaseback" on our balance sheet at December 26, 1999. Capital
expenditures also include the cash outlay to acquire new businesses (net of
cash acquired). Such outlays totaled approximately $26,880 and $12,064 for
the years ended December 27, 1998 and December 28, 1997, respectively.
(8) Concurrently with the closing of the sale of our senior discount notes, the
put rights previously associated with our series A and series B convertible
preferred stock were terminated, and therefore, those shares were no longer
mandatorily redeemable.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SpinCycle is a specialty retailing company engaged in the coin-operated
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.
Fiscal 1999 was a very exciting year for us, as we achieved several financial
milestones. We realized positive EBITDA in all 1999 periods. We experienced
approximately 7.7% same store sales growth for our mature (both acquired and
developed) stores. Our average store EBITDA has increased from approximately
$36,000 for fiscal 1998 to approximately $75,000 for fiscal 1999. In addition to
achieving many financial goals, we were also able to replace our former bank
credit facility with other credit facilities which better fit our capital needs
and provides for additional borrowing capacity at reduced cost (see "-Liquidity
and Capital Resources" below).
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, 1998 and 1999 we had 14, 71, 163 and 172 stores, respectively.
We are also party to four leases for property that we do not intend to develop
as stores by year-end 2000. We have not made any further commitments for
acquisitions or new store developments. We closed three stores during 1999, all
of which were part of multi-store acquisitions from prior years.
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. Until such time as we can access the public
equity markets with a favorable valuation, or access other sources of expansion
capital, we have elected to proceed cautiously with our expansion, slowing our
development or acquisition to judiciously utilize available sources of growth
capital.
We continue to maintain a significant backlog of potential development sites,
but do not expect to sign any additional commitments to develop stores prior to
procuring additional growth capital or generating sufficient cash flow from
operations. This lack of significant growth capital prompted a significant
decrease in our growth rate, and in February 1999 and again in April 1999 we
implemented a reduction in force. These reductions in force were primarily
focused on our growth-related and administrative personnel, including regional
directors of development and acquisitions and corporate and field level
construction managers.
During 1999, our quarter to quarter performance increased significantly
compared to prior years, primarily due to our maturing store base. Our first,
second and third quarters consisted of three periods (12 weeks) in 1998, while
the fourth quarter contained four periods (16 weeks). Beginning in 1999, our
first, second and fourth quarters contain three periods, and our third quarter
contains four periods.
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RESULTS OF OPERATIONS
Year Ended December 26, 1999 Compared to Year Ended December 27, 1998:
Revenues. Our revenues were approximately $52.2 million for 1999, an increase
of approximately $21.3 million from approximately $30.9 million in 1998. Our
growth in revenue was primarily attributable to the continued maturation of our
developed and acquired stores and a net increase of nine stores since the end of
1998.
Store Operating Expenses, excluding depreciation and amortization. Our store
operating expenses, excluding depreciation and amortization ("store operating
expenses") were approximately $39.1 million in 1999, an increase of
approximately $14.6 million from approximately $24.5 million in 1998. The
increase in store operating expenses was primarily attributable to the 93
stores that we added during 1998 being operational for all of 1999 and a net
increase of nine stores in 1999. Our store operating expenses as a percentage
of revenues decreased from 79% in 1998 to approximately 75% in 1999. This
decrease is a result of the maturation of certain developed stores and our
slowed growth in 1999 which has enabled us to further concentrate our efforts
toward operating efficiencies.
Gross Operating Profit. Our gross operating profit was approximately $13.1
million in 1999, an increase of approximately $6.7 million from approximately
$6.4 million in 1998. This increase was primarily attributable to our
aforementioned increase in revenues during the period and our focus on improving
operating efficiencies.
Pre-opening Costs. Our pre-opening costs were approximately $117,000 in 1999,
a decrease of approximately $575,000 from approximately $692,000 in 1998. We
expense our pre-opening costs as incurred. This decrease was the result of our
slowed growth during 1999.
Store EBITDA. Our Store EBITDA was approximately $13.0 million in 1999, an
increase of approximately $7.3 million from store EBITDA of $5.7 million in
1998. This increase was primarily attributable to a net increase of nine stores
during 1999, a full year's operating results from the 93 stores that were
opened during 1998, increased revenue from the operations and maturation of
both new and existing stores and increased control of store operating expenses.
Depreciation and Amortization. Our depreciation and amortization expense was
approximately $14.3 million in 1999, an increase of approximately $4.7 million
from approximately $9.6 million in 1998. This increase was principally due to
our purchases of property and equipment in connection with our 1998 and 1999
expansion.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were approximately $10.4 million in 1999, a decrease of
approximately $1.0 million from approximately $11.4 million in 1998. The
decrease was primarily attributable to two reductions in force that were
initiated in February and April of 1999 in which 28 general and administrative
employees were released from their employment. Selling, general and
administrative expenses decreased as a percentage of revenue to 20% in 1999 from
37% in 1998. This decrease was due to increased revenue generated from a larger
base of mature and maturing stores opened in 1998 and 1999 and the initiation of
the two reductions in force during 1999.
Losses on impairment and disposal of long-lived assets. Losses on impairment
and disposal of long-lived assets totalled approximately $2.2 million for 1999
and included losses on store closures of approximately $1.0 million, impairment
of underperforming stores of $585,000, a loss on sale-leaseback transaction of
$390,000 and other losses on asset dispositions in the normal course of
business of $199,000. (See notes 2 and 3 to our financial statements for
further details.) These transactions included writedowns of leasehold
improvements and goodwill associated with the closed and impaired stores. The
balance sheet at December 26, 1999 includes accrued lease obligations
aggregating $528,000 relating to the closed stores.
Interest Income and Interest Expense, net. Our interest income was
approximately $128,000 in 1999, a decrease of approximately $1.2 million from
approximately $1.3 million in 1998. The decrease in interest income was
primarily attributable to a lower average cash balance during 1999 as compared
to 1998 when we had the proceeds of our senior discount notes on hand. Interest
expense, net of capitalized interest was approximately $15.8 million in 1999, an
increase of approximately $5.4 million from approximately $10.4 million in 1998.
Our increase in interest expense, net was primarily attributable to the
accretion of interest expense related to our senior discount notes outstanding
since April 1998 and interest expense for borrowings on our bank credit
facility. Our outstanding borrowings under the LaSalle facility were
approximately $7.5 million at the end of fiscal year 1999. Our outstanding
borrowings under the Alliance facility were $3.0 million at the end of fiscal
1999.
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Net Loss before Extraordinary Loss. The net loss before extraordinary loss
recorded in 1999 was $29.7 million, an increase of approximately $5.4 million
from the $24.3 million net loss recorded in 1998. Our increased loss was
primarily attributable to depreciation and amortization associated with the
number of new stores both acquired and developed since the end of 1997, the
increase in interest expense discussed above and the increase in losses on
impairment and disposal of long-lived assets of approximately $2.2 million.
Extraordinary Loss from Early Extinguishment of Debt. The extraordinary loss
relates to the write-off of the unamortized balance of debt issuance costs that
were paid in connection with our former bank credit facility. (See note 15 to
our financial statements.) These costs were written off as a result of the
replacement of this facility with the LaSalle Bank National Association
and Alliance Laundry Systems LLC facilities.
Year Ended December 27, 1998 Compared to Year Ended December 28, 1997:
Revenues. Our revenues were approximately $30.9 million for 1998, an increase
of approximately $22.2 million from approximately $8.7 million in 1997. Our
growth in revenue was primarily attributable to the addition of 93 stores since
the end of 1997 and the maturation of our developed stores, which were opened in
1996.
Store Operating Expenses, excluding depreciation and amortization. Our store
operating expenses were approximately $24.5 million in 1998, an increase of
approximately $16.5 million from approximately $8.0 million in 1997. The
increase in store operating expenses was primarily attributable to our addition
of 93 stores during 1998. Our store operating expenses as a percentage of
revenues decreased from 92% in 1997 to approximately 79% in 1998. This is a
result of the maturation of certain developed stores, our acquisition of
additional stores and the implementation of initiatives designed to reduce store
operating expenses, particularly labor expense. Our implementation of these
initiatives began in the first quarter of 1998.
Gross Operating Profit. Our gross operating profit was approximately $6.4
million in 1998, an increase of approximately $5.7 million from approximately
$670,000 in 1997. This increase was primarily attributable to our aforementioned
increase in revenues during the period and our initiatives to reduce store
operating expenses, particularly labor expenses.
Pre-opening Costs. Our pre-opening costs were approximately $692,000 in 1998,
an increase of approximately $235,000 from approximately $457,000 in 1997. We
expense our pre-opening costs as incurred. This increase was the result of our
acquisition and development of 93 additional stores which opened during 1998.
Store EBITDA. Our Store EBITDA was approximately $5.7 million in 1998, an
increase of approximately $5.5 million from store EBITDA of $213,000 in 1997.
This increase was primarily attributable to the addition of 93 developed or
acquired stores during 1998, increased revenue from the operations and
maturation of both new and existing stores and increased control of store
expenses.
Depreciation and Amortization. Our depreciation and amortization expense was
approximately $9.6 million in 1998, an increase of approximately $7.3 million
from approximately $2.3 million in 1997. This increase was principally due to
our purchases of property and equipment in connection with our expansion.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were approximately $11.4 million in 1998, an increase of
approximately $700,000 from approximately $10.7 million in 1997. The increase
was primarily attributable to the increase in our corporate infrastructure in
the later half of 1997 in order to allow us to manage our anticipated nationwide
expansion. Specifically, during the last half of 1997, we hired additional
professionals to provide for nationwide operations and real estate development
and to establish a dedicated acquisitions department. However, selling, general
and administrative expenses decreased as a percentage of revenue to 37% in 1998
from 123% in 1997. This decrease was due to increased revenue generated from a
larger base of mature and maturing stores opened in 1997 and 1998, the
acquisition of additional stores and the implementation of our initiatives to
reduce these costs.
10
<PAGE> 11
Interest Income and Interest Expense, net. Our interest income increased to
approximately $1.3 million in 1998, an increase of approximately $867,000 from
approximately $433,000 in 1997. The increase in interest income was primarily
attributable to our investment of the $96.8 million of net proceeds from our
April 1998 private offering of approximately $145.0 million aggregate principal
amount of 12.75% senior discount notes and warrants to purchase common stock
which were ultimately used for capital investment and to fund operations.
Interest expense, net of capitalized interest was approximately $10.4 million in
1998, an increase of approximately $9.5 million from approximately $892,000 in
1997. Our increase in interest expense, net was primarily attributable to
accretion of the original issue discount related to the offering.
Net Loss before Extraordinary Loss. The net loss before extraordinary loss
recorded in 1998 was $24.3 million, an increase of approximately $10.5 million
from the approximately $13.8 million net loss recorded in 1997. Our increased
loss was primarily attributable to depreciation and amortization associated with
the number of new stores both acquired and developed since the end of 1997 and
the increases in selling, general and administrative expenses and interest
expense discussed above.
Extraordinary Loss from Early Extinguishment of Debt. The extraordinary loss
relates to the write-off of the unamortized balance of debt issue costs that
were paid in connection with our former facilities and, to a lesser extent, the
equipment and acquisition credit facilities (See note 15 to the Financial
Statements.) These costs were written off as a result of the early repayment and
termination of these credit facilities with the proceeds of the offering.
Re-pricing of Series C Preferred Stock. On April 14, 1998, we issued 7,295
shares of our common stock to series C stockholders in connection with the
re-pricing of the series C convertible preferred stock offering, originally
priced at $220 per share. Pursuant to a stockholder consent dated March 18, 1998
and obtained as of April 14, 1998, the series C offering was converted to a unit
offering, whereby each series C unit offered was comprised of ten shares of
series C preferred stock and one share of common stock for $2,200 per unit. In
accordance with existing authoritative guidance, the additional fair value of
the consideration transferred to series C stockholders of $1,459,000 (i.e., the
7,295 shares of common stock issued in connection with the conversion of the
original offering to a unit offering multiplied by $200 per share) has been
treated as a return to series C stockholders. Accordingly, $1,459,000 has been
deducted from our net loss for the year-to-date period ended December 27, 1998
in determining the net loss applicable to common shareholders for the
calculation of earnings per share.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Used in Operating Activities. Our net cash used in operating
activities was approximately $618,000 in 1999, a decrease of approximately $3.3
million compared to our net cash used in operating activities of approximately
$3.9 million in 1998. This decrease was due primarily to an increase of
approximately $6.7 million in gross operating profit generated during 1999 from
our mature and maturing stores partially offset by a decrease in our accounts
payable of approximately $4.1 million at fiscal year end 1999 as compared to
fiscal year end 1998.
Net Cash Used in Investing Activities. Our net cash used in investing
activities was approximately $9.1 million in 1999, a decrease of approximately
$49.8 million compared to net cash used in investing activities of approximately
$58.9 million in 1998. The decrease was due to our slow down of expansion
activities during 1999. In 1999 we opened 12 stores as compared to 93 stores
opened in 1998.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities was approximately $9.6 million in 1999, a decrease of approximately
$49.2 million from net cash provided by financing activities of approximately
$58.8 million in 1998. We borrowed funds primarily to pay for our capital
expenditures related to our 1999 store rollout plan. The funds were obtained
primarily from our Heller facility which was subsequently replaced by our
LaSalle and Alliance facilities. In the comparable 1998 period, the proceeds
from our senior discount notes were the source of our borrowings.
We generated approximately $2.5 million of positive EBITDA during fiscal
1999. During 2000, we expect to be able to meet our current obligations with
cash flows from our store operations. On November 17, 1999 we entered into a
$12.0 million secured revolving credit facility with LaSalle Bank National
Association to replace our facility with Heller Financial, Inc. Availability
under the Heller facility was based upon a borrowing base formula determined by
income from store operations and net book value of laundry equipment. At the
closing of the LaSalle facility, we repaid the $9.3 million outstanding on the
Heller facility, which was the maximum we could have borrowed on the facility at
the time as a result of the financial covenants contained in the Heller
facility, and had no additional borrowing capacity on the $40.0 million Heller
facility.
The LaSalle facility has less restrictive financial covenants than the Heller
facility. The financial covenants include minimum tangible net worth, a senior
interest coverage ratio and a minimum net book value of laundry equipment
covenant. The LaSalle facility will mature on September 30, 2001, and requires
monthly payment of interest only until that date. All principal and interest
accrued but unpaid at maturity are payable on the maturity date. As of March 27,
2000, we have made all monthly interest payments due on the LaSalle facility on
a timely basis.
Obligations under the LaSalle facility bears interest with reference to
either the "Reference Rate" or the "LIBOR Rate" as we determine at the time we
incur each obligation. "Reference Rate Loans" shall bear interest at the rate of
prime (as set by LaSalle from time to time) plus 1.0%. "LIBOR Rate Loans" shall
bear interest at the rate of 3.0% plus the interest rate per annum equal to the
quotient obtained by dividing (x) the rate of interest determined by LaSalle to
be the average of the rate per annum at which deposits in U.S. dollars are
generally offered to LaSalle in the London Interbank Market at 11:00 A.M. London
time, two business days before the first day of such interest period, for a
period equal to such interest period and in the amount of the applicable "LIBOR
Rate Loan" by (y) the difference between 100% and any applicable reserve
requirements (rounded upward to the nearest whole multiple of 1/100 of one
percent per annum), including without limitation, any statutory maximum
requirement for LaSalle to hold reserves for "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the of the Federal Reserve System (or
any similar reserves under any successor regulation or regulations).
Simultaneous with the closing of the LaSalle facility, we entered into a
revolving credit facility with Alliance Laundry Systems LLC in the maximum
principal amount of $3.0 million. Alliance is our main laundry equipment
supplier. The Alliance facility requires monthly payments of interest only,
until and including the first business day of September, 2001. Thereafter,
the facility requires 59 monthly payments comprised of $50,000 of principal plus
the accrued interest on the unpaid principal balance and a sixtieth payment of
accrued interest only. Obligations under the Alliance facility shall bear
interest at the rate of prime (as set by LaSalle from time to time) plus 1.0%.
The financial covenants under the Alliance facility include minimum tangible net
worth, a senior interest coverage ratio and a minimum net book value of laundry
equipment. As of March 27, 2000, we have made all monthly interest payments due
on the Alliance facility on a timely basis.
12
<PAGE> 13
In connection with these loans, LaSalle and Alliance entered into an
intercreditor agreement pursuant to which they agreed to allocate between them
first priority security interest upon (I) all of our now owned and hereafter
acquired real and personal property and all proceeds thereof and (II) all
general intangibles and other intangible assets (including, without limitation,
trademarks and trade names) of ours, if any, and the proceeds thereof such that
Alliance has first priority with respect to those assets at and in connection
with 15 of our stores and LaSalle has a first priority security interest in the
balance of our assets.
We used the $3.0 million of proceeds from the Alliance facility to pay down
the LaSalle line to approximately $7.1 million and to finance amounts we owed to
Alliance. Additionally, we drew approximately $350,000 to cover accrued interest
on the Heller line and costs associated with the closing of the LaSalle and
Alliance facilities. The principal balance on the LaSalle facility on December
26, 1999 was approximately $7.5 million. We currently have $4.5 million of
borrowing availability under the LaSalle facility. LaSalle has reserved the
right to reduce our availability under the facility in an amount not to exceed
$1.0 million if we have not obtained appropriate consents from the landlords of
all of our stores on or before December 26, 1999. Obtaining these consents was a
closing condition which LaSalle waived at closing. As of December 26, 1999 we
had obtained approximately 95% of the required consents. LaSalle has not
notified us that our ability has been limited by $1.0 million. During the fourth
quarter of 1999, we were required to write off deferred financing charges which
had been capitalized in connection with the Heller facility.
The LaSalle and Alliance facilities specify customary events of default
including non-payment of principal, interest or fees, violation of covenants,
inaccuracy of representations and warranties, cross defaults to other
agreements, bankruptcy and insolvency events and material judgements and
liabilities.
We believe that our cash flow from operations and availability under our
credit facility will provide us with sufficient capital resources through fiscal
2000. Significant variances in budgeted store revenue or Store EBITDA or
unforeseen capital requirements could result in insufficient capital resources.
Beginning on 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. 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 obtain additional
sources of funding or to significantly modify these required debt service
obligations, it is unlikely that we will be able to make these required cash
payments when due.
POTENTIAL LOSS OF NET OPERATING LOSSES
As of December 26, 1999, we had net operating losses ("NOLs") of
approximately $44.2 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.
13
<PAGE> 14
YEAR 2000
We began preparation for the Year 2000 date transition in 1999. In connection
with this effort, we completed an inventory of all mission critical systems with
Year 2000 implications, assessed the readiness of those systems and replaced,
retired or upgraded those systems that were not Year 2000 ready. The discovery
phase of our program was complete in 1999 and all desktop systems, application
software, and servers were updated to a compliant level. We also completed the
remediation and testing phase for all embedded computer chip systems. In 1999,
we requested letters of compliance from each of our vendors and installed
upgrades and patches to systems that were not compliant.
During the Year 2000 date transition, we did not experience any failure of
mission critical systems nor have we experienced any significant problem with
regard to third party suppliers. We do not anticipate any material adverse
effect to our business in the future as a result of Year 2000 related problems.
Total costs associated with our Year 2000 project were funded with operating
cash flow and approximated $50,000.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of SpinCycle, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of mandatorily redeemable preferred stock and shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of SpinCycle, Inc. at December 26, 1999 and December 27,
1998, and the results of its operations and its cash flows for the three years
in the period ended December 26, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Phoenix, Arizona
March 24, 2000
15
<PAGE> 16
SPINCYCLE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,125,919 $ 4,239,099
Landlord allowances 176,340 781,628
Prepaid expenses 92,490 582,006
Inventory 298,477 112,964
Land held for sale-leaseback 1,919,209 2,194,533
Other current assets 685,508 687,483
------------- -------------
Total current assets 7,297,943 8,597,713
Property and equipment, net 95,241,610 100,657,304
Goodwill, net 12,634,520 13,610,471
Other assets 4,370,021 5,390,972
------------- -------------
Total assets $ 119,544,094 $ 128,256,460
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 885,231 $ 4,986,996
Construction payables - 389,393
Accrued utilities 1,296,144 1,003,766
Accrued expenses 2,666,326 2,626,384
Current portion of deferred rent 493,335 311,557
Current portion of long-term debt 207,460 210,275
------------- -------------
Total current liabilities 5,548,496 9,528,371
Long-term debt 127,940,845 103,221,752
Deferred rent 3,407,741 2,650,724
Other liabilities 428,520 192,308
------------- -------------
Total liabilities 137,325,602 115,593,155
------------- -------------
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 (75,682,855) (45,238,042)
------------- -------------
Total shareholders' equity (deficit) (17,781,508) 12,663,305
------------- -------------
Total liabilities and shareholders' equity $ 119,544,094 $ 128,256,460
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
SPINCYCLE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Revenues $ 52,173,829 $ 30,936,080 $ 8,652,888
Cost of revenues -- store operating expenses, excluding
depreciation and amortization 39,087,921 24,508,404 7,982,566
------------ ------------- ------------
Gross operating profit, excluding depreciation
and amortization 13,085,908 6,427,676 670,322
Preopening costs 116,882 691,890 456,920
Depreciation and amortization 14,310,352 9,561,742 2,340,647
Selling, general and administrative expenses 10,433,310 11,420,877 10,729,663
Losses on impairment and disposal of long-lived assets 2,177,972 22,913 479,500
------------ ------------- ------------
Operating loss (13,952,608) (15,269,746) (13,336,408)
Interest income 128,017 1,299,615 432,812
Interest expense, net of amount capitalized (15,838,664) (10,351,341) (891,913)
------------ ------------- ------------
Net loss before extraordinary loss $(29,663,255) $(24,321,472) $(13,795,509)
Extraordinary loss from early extinguishment of debt (781,558) (333,596) -
------------ ------------- ------------
Net loss $(30,444,813) $(24,655,068) $(13,795,509)
Repricing of Series C preferred stock -- (1,459,000) -
Accretion of redeemable preferred stock -- (755,667) (1,941,878)
------------ ------------- ------------
Net loss applicable to holders of common stock $(30,444,813) $(26,869,735) $(15,737,387)
============ ============= ============
Net loss per common share (both basic and diluted):
Net loss applicable to holders of common stock
before extraordinary loss $ (1,068.45) $ (925.96) $ (412.76)
Extraordinary loss from early extinguishment of debt (28.15) (11.64) -
------------ ------------- ------------
Net loss applicable to holders of common stock $ (1,096.60) $ (937.60) $ (412.76)
============ ============= ============
Weighted average number of common shares outstanding 27,763 28,658 38,127
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
SPINCYCLE, INC.
STATEMENTS OF MANDATORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Mandatorily
Common Stock Redeemable Convertible
Warrants Preferred Stock Preferred Stock
-------------------- ------------------------ ----------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 54,478 $ 6,809,700 -- $ --
Issuance of Series A Redeemable
Preferred Stock, net 21,350 2,598,750
Issuance of Series A Redeemable
Preferred Stock for services 1,146 143,300
Issuance of Series B Redeemable
Preferred Stock, net 125,498 24,382,912
Issuance of Common Stock for services
Accretion of Series A and Series B
Redeemable Preferred Stock 1,941,878
Issuance of Series C Redeemable
Preferred Stock, net 59,741 12,916,265
Payments of stock subscriptions
Net loss
-----------------------------------------------------------------------------------
Balance at December 28, 1997 262,213 48,792,805 -- --
Repurchase of common stock
Issuance of Series C Redeemable
Preferred Stock, net 13,189 2,904,500
Accretion of Series A and Series B
Redeemable Preferred Stock 755,667
Issuance of Common Stock Warrants 26,661 5,625,000
Issuance of 7,295 shares of common stock
(Series C repricing @ $200 per share) (1,459,000)
Series C Redeemable Preferred Stock
Issuance Costs Paid (93,448)
Cancellation of put rights on Mandatorily
Redeemable Preferred Stock (275,402) (50,900,524) 275,402 50,900,524
Series C Convertible Preferred Stock
Issuance Costs Paid (54,714)
Common Stock Issuance Costs Paid
Net loss
----------------------------------------------------------------------------------
Balance at December 27, 1998 26,661 5,625,000 -- -- 275,402 50,845,810
Net loss
----------------------------------------------------------------------------------
Balance at December 26, 1999 26,661 $ 5,625,000 -- $ -- 275,402 $50,845,810
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
Stock Common Stock Additional
Subscriptions ------------------------ Paid-in Accumulated
Receivable Shares Amount Capital Deficit
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- 34,280 $ 343 $ 8,227 $ (3,899,374)
Issuance of Series A Redeemable
Preferred Stock, net (2,668,750)
Issuance of Series A Redeemable
Preferred Stock for services
Issuance of Series B Redeemable
Preferred Stock, net (24,999,912)
Issuance of Common Stock for services 4,207 42 1,046
Accretion of Series A and Series B
Redeemable Preferred Stock (1,941,878)
Issuance of Series C Redeemable
Preferred Stock, net (13,272,265)
Payments of stock subscriptions 40,940,927
Net loss (13,795,509)
-----------------------------------------------------------------------------------
Balance at December 28, 1997 -- 38,487 385 9,273 (19,636,761)
Repurchase of common stock (18,019) (180) (9,273) (190,546)
Issuance of Series C Redeemable
Preferred Stock, net
Accretion of Series A and Series B
Redeemable Preferred Stock (755,667)
Issuance of Common Stock Warrants
Issuance of 7,295 shares of common stock
(Series C repricing @ $200 per share) 7,295 73 1,458,927
Series C Redeemable Preferred Stock
Issuance Costs Paid
Cancellation of put rights on Mandatorily
Redeemable Preferred Stock
Series C Convertible Preferred Stock
Issuance Costs Paid
Common Stock Issuance Costs Paid (28,668)
Net loss (24,655,068)
----------------------------------------------------------------------------------
Balance at December 27, 1998 -- 27,763 278 1,430,259 (45,238,042)
Net loss (30,444,813)
----------------------------------------------------------------------------------
Balance at December 26, 1999 $ -- 27,763 $ 278 $1,430,259 $(75,682,855)
==================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
SPINCYCLE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $ (30,444,813) $ (24,655,068) $ (13,795,509)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 14,310,352 9,561,742 2,340,647
Losses on impairment and disposal of long-lived assets 2,186,911 -- 479,500
Extraordinary loss from early extinguishment of debt 781,558 333,596 --
Issuance of stock for services -- -- 144,388
Amortization of debt issuance costs 979,923 728,719 --
Amortization of discount on long-term debt 14,243,841 8,584,476 --
Changes in assets and liabilities:
Landlord allowances 605,288 299,768 (911,396)
Prepaid expenses 489,516 (98,180) (282,393)
Inventory (185,513) (41,447) (22,308)
Other current assets 1,975 265,398 (912,819)
Other assets (74,829) (412,660) (269,200)
Accounts payable (4,101,765) (963,090) 1,129,879
Construction payables (389,393) (561,849) 188,395
Accrued utilities 292,378 386,987 607,938
Accrued expenses (252,059) 957,851 1,238,395
Deferred rent 938,795 1,736,553 1,091,462
----------------------------------------------------
Net cash provided by (used in) operating activities $ (617,835) $ (3,877,204) $ (8,973,021)
----------------------------------------------------
Cash flows provided by (used in) investing activities:
Purchase of fixed assets (9,518,380) (38,624,850) (10,470,529)
Proceeds from sale of fixed assets 55,260 94,253 --
Net proceeds from sale-leaseback transactions 534,333 6,827,018 --
Acquisition of businesses, net of cash acquired -- (26,880,283) (12,063,521)
Capitalized interest (163,332) (351,787) (327,727)
----------------------------------------------------
Net cash used in investing activities: $ (9,092,119) $ (58,935,649) $ (22,861,777)
----------------------------------------------------
Cash flows provided by (used in) financing activities:
Advances from shareholder -- -- (150,000)
Payments of debt (9,575,834) (47,689,160) (23,974)
Debt issuance costs paid (711,443) (6,016,805) --
Increase in debt 19,884,051 104,156,083 --
Proceeds from issuance of common stock warrants -- 5,625,000 --
Proceeds from issuance of stock -- 2,904,500 --
Proceeds from stock subscriptions, net -- -- 39,897,927
Stock issuance costs paid -- (176,827) --
----------------------------------------------------
Net cash provided by financing activities $ 9,596,774 $ 58,802,791 $ 39,723,953
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (113,180) (4,010,062) 7,889,155
Cash and cash equivalents, beginning of period 4,239,099 8,249,161 360,006
----------------------------------------------------
Cash and cash equivalents, end of period $ 4,125,919 $ 4,239,099 $ 8,249,161
====================================================
Supplemental disclosure of non-cash financing activities:
Stock subscriptions for issuance of redeemable preferred stock $ -- $ -- $ 40,940,927
Equipment financed with long-term debt $ 164,219 $ 2,454,840 $ 31,357,918
Repurchase of common stock $ -- $ 199,999 $ --
Accretion of mandatorily redeemable preferred stock $ -- $ 755,667 $ 1,941,878
Issuance of common stock (Series C repricing) $ -- $ 1,459,000 $ --
Cash flow during the year for the following:
Interest paid $ 654,611 $ 1,370,023 $ 1,173,236
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
SPINCYCLE, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SpinCycle, Inc. ("SpinCycle" or the "Company") is a specialty retailing
company engaged in the coin-operated laundry business. The Company currently
operates 172 stores in 25 markets throughout the United States. The Company
was incorporated under the laws of the state of Minnesota on October 10, 1995
and subsequently reincorporated under the laws of the State of Delaware. The
Company was in the developmental stage from October 10, 1995 (inception) to
June 30, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include all accounts of SpinCycle. On October 1,
1997, the Company dissolved its wholly - owned subsidiary, Pinnacle
Financial, Inc., a commercial equipment leasing company. This dissolution had
no effect on the Company's financial statements.
FISCAL YEAR CHANGE
As of December 1, 1997, the Company changed its fiscal year previously
ended December 31 to a thirteen period fiscal year, comprised of thirteen
four week periods ending on the last Sunday in December. This change in
fiscal year-end had an immaterial effect on the Company's 1997 results of
operations and financial condition.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying
value of cash equivalents approximates fair value. At December 26, 1999,
$181,317 of time deposits were pledged as collateral on outstanding letters
of credit related to agreements in place with suppliers and as collateral for
the Company's corporate office lease agreement.
CONCENTRATION OF RISK
The Company places its cash with high quality credit institutions. At
times, cash balances may be in excess of the FDIC insurance limit. The
Company has not experienced any losses on its cash balances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
LANDLORD ALLOWANCES AND DEFERRED RENT
Landlord allowances represent incentives received by the Company on certain
of its store leases. Deferred rent represents the related unearned incentive
recorded at lease inception and is amortized as a reduction to rent
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<PAGE> 21
expense over the term of the related leases.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Capitalized amounts include
expenditures which materially extend the useful lives of existing facilities
and equipment. Expenditures for repairs and maintenance, which do not
materially extend the useful lives of the related assets, are charged to
expense as incurred. During construction, the Company capitalizes interest
monthly by applying the effective interest rate on certain borrowings to the
average balance of expenditures. Interest capitalized during the years 1999,
1998 and 1997 was $163,332, $351,787 and $327,727, respectively.
During fiscal 1999 the Company closed three stores and recognized a loss of
$1,003,653 including the writedown of leasehold improvements and the accrual
of lease obligations remaining for these stores through the conclusion of
their lease terms. This loss has been included in the caption "Loss on
impairment and disposal of long-lived assets" in the accompanying income
statements. At December 26, 1999 the Company has also included $99,693 in
accrued expenses and $428,520 in other noncurrent liabilities representing
the obligations remaining under the related leases.
DEPRECIATION AND AMORTIZATION
Depreciation is provided on the straight-line method over the following
useful lives:
Years
Laundry equipment 7 to 15
Leasehold improvements Shorter of economic life or lease term.
Computer and office equipment 5
Store equipment (other than laundry equipment) 5
GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS
Goodwill represents the excess of cost over the net tangible and
identifiable intangible assets of acquired businesses. Goodwill is stated at
cost and is amortized on a straight-line basis over 15 years. Pursuant to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company evaluates the
recoverability of goodwill and its other long-lived assets whenever a
significant change in the business environment indicates that expected future
net cash flows (undiscounted and without interest) would become less than the
carrying amount of the asset. Accumulated amortization of goodwill amounted
to $1,591,100 at December 26, 1999 and $642,576 at December 27, 1998.
During the fourth quarter of fiscal 1999 the Company updated its evaluation
of the recoverability of goodwill and other long-lived assets associated with
certain underperforming stores that continue in operation. Based on this
analysis, the Company determined that the long-lived assets associated with
two stores were substantially impaired and, as a result, recorded an
impairment loss of $585,000. The impairment losses were determined based on
estimated net realizable values and projections of net cash flows. This loss
has been included in the caption "Losses on impairment and disposal of
long-lived assets" in the accompanying income statement. This loss has been
applied against goodwill and leasehold improvements associated with these
stores.
REVENUE RECOGNITION
The Company recognizes revenue upon performance of services.
STOCK COMPENSATION
The Company measures compensation cost related to employee stock options
using the intrinsic value
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<PAGE> 22
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The fair value based method of accounting is used for
equity instruments issued to non employees for goods or services.
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using currently enacted tax rates.
As a result of the current uncertainty as to the future realizability of
the tax benefits associated with approximately $29.4 million of net operating
losses incurred to date, no income tax benefit has been recorded in the
financial statements.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company incurred
$320,485, $1,026,193 and $1,574,839 in advertising costs for the fiscal years
ended December 26, 1999, December 27, 1998 and December 28, 1997,
respectively.
PRE-OPENING COSTS
The Company expenses pre-opening costs as incurred. The Company incurred
$116,882, $691,890 and $456,920 in pre-opening costs during the years ended
December 26, 1999, December 27, 1998 and December 28, 1997, respectively.
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.
LIQUIDITY
During fiscal 1999, the Company experienced a net loss of $30,444,813 and
at December 26, 1999 had an accumulated deficit of $75,682,855. The Company's
history of losses has been largely due to the large general and
administrative infrastructure it put in place to handle the rapid growth it
has experienced, as well as depreciation and the accretion of interest on its
senior discount notes. During fiscal 1999, the Company maintained positive
EBITDA for all fiscal periods. Management believes that the availability of
funds from the LaSalle credit facility (see Note 7) and operating revenues
from its 172 units opened as of fiscal year end 1999, will enable the Company
to maintain operations for the foreseeable future.
Beginning on 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, the company will be required to repay
the principal balance owing on the LaSalle facility. The principal balance on
the LaSalle facility on December 26, 1999 was approximately $7.5 million.
These payments, which are substantially in excess of any historic net cash
flow the Company has have generated, will be in addition to the Company's
selling, general and administrative expense and any other interest or other
expenses we may have at that time. Absent our ability to obtain additional
sources of funding or to significantly modify these required debt service
obligations, it is unlikely that the Company will be able to make these
required cash payments when due.
3. SALE-LEASEBACK TRANSACTIONS
On December 31, 1997, the Company entered into a sale-leaseback transaction
with newly formed SpinDevCo, L.L.C. (SpinDevCo), a subsidiary of
McMahon-Oliphant, Inc. SpinDevCo, McMahon-Oliphant, Inc. and their affiliates
have no relationship or connection with the Company or any of its affiliates
other than the transaction described in this note. Eleven properties
consisting of land of $2.4 million and improvements of $4.0 million thereon
that were previously acquired by the Company were sold to SpinDevCo for
approximately
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<PAGE> 23
$6.4 million, then leased back under an operating lease with a 20 year term.
The Company received approximately $1.5 million in cash and a note in the
principal amount of approximately $4.9 million, which was originally due and
payable on April 30, 1998. The note was secured by mortgages on the
properties. The transaction also required the Company to contribute in cash
approximately $2,450,000 to be applied towards additional tenant improvements
for the properties. SpinDevCo requested, and on May 30, 1998 the Company
granted, an extension (the "Extended Note") of the maturity date of the note
through September 30, 1998 in return for the payment of $125,000 of accrued
interest and additional interest payments through that date. The purpose of
this extension was to allow SpinDevCo additional time to obtain the permanent
financing with which to repay the Company's note. On October 15, 1998, the
Company received approximately $4.9 million in cash from SpinDevCo in
repayment of outstanding principal and interest on the Extended Note.
Simultaneously, the Company purchased three sites from SpinDevCo for
approximately $1.75 million in cash, the same amount for which it had
previously sold them to SpinDevCo. The Company is currently operating stores
at these three sites.
On June 17, 1999, the Company entered into a sale-leaseback transaction
with MBI Leasing, Inc. One property consisting of land of $220,000 and
improvements of $750,000 thereon that was previously acquired by the Company
was sold to MBI Leasing, Inc. for approximately $535,000, then leased back
under an operating lease with a 20 year term. The Company received cash for
this transaction. The transaction qualifies for sale-leaseback accounting in
accordance with SFAS No. 98 "Accounting for Leases - Sale-Leaseback
Transactions Involving Real Estate". The Company recognized a loss on the
sale of approximately $390,000.
Land held for sale-leaseback of $1,919,209 at December 26, 1999 is stated
at cost which approximates estimated net realizable value.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------- -------------
<S> <C> <C>
Leasehold improvements $ 61,753,822 $ 56,540,640
Laundry equipment 41,678,878 40,412,479
Construction in progress 1,880,916 2,566,227
Store equipment 6,856,352 5,882,432
Computer and office equipment 8,062,340 7,038,919
------------- ------------
120,232,308 112,440,697
Less: Accumulated
depreciation (24,990,698) (11,783,393)
============= ============
$95,241,610 $100,657,304
============= ============
</TABLE>
Effective June 15, 1998, the Company revised its estimate of the useful
lives of its laundry equipment. Laundry equipment was previously depreciated
over ten years and those lives have now been changed to periods that range
from seven up to 15 years. The useful life changes for laundry equipment were
made to better reflect the estimated periods during which these assets will
remain in service. The revised lives have were for previously recorded assets
and newly acquired assets. The effect of the change was a reduction to
depreciation expense and a corresponding decrease to the net loss applicable
to holders of common stock for the year ended December 27, 1998 of
approximately $538,823, or $18.80 per share.
Depreciation expense was $13,361,828, $8,917,958 and $2,310,647 for the
years ended December 26, 1999, December 27, 1998 and December 28, 1997,
respectively.
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<PAGE> 24
5. ACQUISITIONS
During the year ended December 27, 1998, the Company acquired 40 existing
coin laundry businesses for a total cash outlay of $26,880,283, 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 $7,710,115 and did not assume any material liabilities of the
sellers other than, in certain cases, assuming the leases of the related
real property. Goodwill is amortized on a straight-line basis over 15
years.
During the year ended December 28, 1997, the Company acquired 27 existing
coin laundry businesses for a total cash outlay of $12,063,521, 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 $6,180,839 and did not assume any material liabilities of the
sellers other than, in certain cases, assuming the leases of the related
real property. Goodwill is amortized on a straight-line basis over 15
years.
The following unaudited pro forma information presents a summary of
results of operations of the Company and the acquired coin laundry
businesses as if the acquisitions had occurred January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 27, 1998 DECEMBER 28, 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales......................................................... $ 37,897,974 $ 25,524,222
Net loss.......................................................... $ (25,389,546) $ (16,273,242)
Net loss per common share......................................... $ (963.23) $ (477.75)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in the basis of fixed assets,
additional amortization expense as a result of goodwill and other
intangible assets, and an increased interest expense on acquisition debt.
They do not purport to be indicative of the results of operations which
actually would have resulted had the combinations been in effect on January
1, 1997 or of future results of operations of the entities.
6. OTHER ASSETS
In connection with the issuance of the senior discount notes ("Notes"),
as discussed in Note 7, the Company paid approximately $4,600,000 of debt
issue costs, which are being amortized over the term of the Notes. In
connection with the LaSalle and Alliance credit facilities, as discussed in
Note 7, the Company paid approximately $270,000 of debt issue costs which
are being amortized over the terms of these facilities. The unamortized
balance of these debt issue costs is included as a component of other
assets on the Company's balance sheet at December 26, 1999.
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<PAGE> 25
7. LONG-TERM DEBT
At December 26, 1999 and December 27, 1998, long-term debt included:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
12.75% Senior Discount Notes Due 2005 ($144,990,000 principal
amount), net of unamortized discount ........................... $ 117,204,370 $ 102,960,529
</TABLE>
<TABLE>
<S> <C> <C>
Alliance Laundry Systems LLC Credit Facility; interest at
prime plus 1.0%; due in installments through 2006............. 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 ......................................................... 7,494,051
Other notes payable; interest at 11% due in various installments
through September 2001 ....................................... 449,884 471,498
------------- -------------
128,148,305 103,432,027
Less current portion ........................................... (207,460) (210,275)
------------- -------------
$ 127,940,845 $ 103,221,752
============= =============
</TABLE>
Long-term debt is scheduled to mature during future fiscal years as
follows:
<TABLE>
<S> <C>
2000 .................................... $ 207,460
2001 .................................... 7,936,475
2002 .................................... 600,000
2003 .................................... 600,000
2004 .................................... 600,000
Thereafter .............................. 145,990,000
=============
$ 155,933,935
=============
</TABLE>
On April 29, 1998, the Company completed the offering of $144,990,000
aggregate principal amount at maturity of 12.75% unsecured senior discount
notes (the "Notes") and warrants (the "Warrants") to purchase 26,661 shares
of the Company's common stock with an exercise price of $0.01 per share for
gross proceeds to the Company of $100,001,053 (the "Offering"). The net
proceeds from the Offering of approximately $96.8 million, net of
underwriting expenses, were used principally to pay certain other expenses
of the Offering, repay approximately $46.9 million in existing
indebtedness, to provide funds for investment in new stores and for general
corporate purposes. The Notes will mature on May 1, 2005. No cash interest
will accrue on the Notes prior to May 1, 2001. The Notes will begin to
accrue cash interest at a rate of 12.75% per annum commencing May 1, 2001,
and cash interest will be payable thereafter on November 1 and May 1 of
each year, commencing November 1, 2001. The Notes will be redeemable at the
option of the Company, in whole or in part, on or after May 1, 2002, at the
following redemption prices if redeemed during the 12-month period
commencing on May 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ -----------
<S> <C>
2002........................... 106.375%
2003........................... 103.188%
2004 and thereafter............ 100.000%
</TABLE>
In addition, at any time and from time to time prior to May 1, 2001, the
Company may redeem in the aggregate up to 35% of the Accreted Value of the
Notes with the proceeds of one or more Public Equity Offerings following
which there is a Public Market, at a redemption price of 112.75% of the
Accreted Value to the date of redemption; provided, however, that at least
$94.2 million of the aggregate principal amount of the Notes at maturity
remain outstanding after any such redemption. Upon a Change of Control,
each holder of the Notes (a "Holder") will have the right to require the
Company to purchase all or any part of such Holder's Notes at a purchase
price equal to 101% of the Accreted Value thereof, plus accrued and unpaid
interest, if any, to the date of purchase.
The Notes are senior, unsecured obligations of the Company ranking pari
passu in right of payment of principal and interest with all other existing
and future senior unsecured obligations of the Company and will rank senior
to all future subordinated debt of the Company. The Notes will be
effectively subordinated to all
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<PAGE> 26
Secured Indebtedness of the Company, if any, to the extent of the value of the
assets securing such indebtedness and to all indebtedness and other obligations
(including trade payables) of the Company's future subsidiaries, if any. The
Warrants will be exercisable at any time on or after the earlier of April 29,
1999 or 60 days after the consummation of an initial public offering of the
Company's common stock, and will expire on May 1, 2005.
Prior to the Offering, the Company had in place a $45.0 million credit
facility from Raytheon Commercial Laundry, LLC ("Raytheon"), one of the largest
commercial laundry equipment vendors, which had most recently provided the
Company with approximately $30.0 million of equipment financing and $15.0
million of acquisition financing. This facility provided 100% financing for
commercial laundry equipment purchases (based upon list prices) and store
acquisitions. The Company procured a bank credit facility with LaSalle National
Bank ("LaSalle") in March 1998, which provided the Company with $15.0 million
for acquisitions and general corporate purposes. On April 29, 1998, the Company
repaid all indebtedness outstanding under these two facilities with the net
proceeds from the Offering and terminated the related loan agreements (see Note
15.)
On April 29, 1998, the Company also closed a secured revolving credit
facility in the maximum principal amount of $40.0 million with Heller Financial,
Inc. (the "Heller Facility").
On November 17, 1999 the Company entered into a $12.0 million secured
revolving credit facility with LaSalle Bank National Association to replace its
secured revolving credit facility from Heller Financial, Inc. Availability under
the Heller facility was based upon a borrowing base formula determined by income
from store operations and net book value of laundry equipment. At the time, the
Company had borrowed $9.3 million and had no additional borrowing capacity on
the $40.0 million Heller facility.
The LaSalle facility has less restrictive financial covenants than the
Heller facility. The financial covenants include minimum tangible net worth, a
senior interest coverage ratio and a minimum net book value of laundry
equipment. The LaSalle facility will mature on September 30, 2001, and requires
monthly payment of interest only until that date. All principal and interest
accrued but unpaid at maturity are payable on the maturity date.
Obligations under the LaSalle facility bears interest with reference
to either the "Reference Rate" or the "LIBOR Rate" as we determine at the time
we incur each obligation. "Reference Rate Loans" shall bear interest at the rate
of prime (as set by LaSalle from time to time) plus 1.0%. "LIBOR Rate Loans"
shall bear interest at the rate of 3.0% plus the interest rate per annum equal
to the quotient obtained by dividing (x) the rate of interest determined by
LaSalle to be the average of the rate per annum at which deposits in U.S.
dollars are generally offered to LaSalle in the London Interbank Market at 11:00
A.M. London time, two business days before the first day of such interest
period, for a period equal to such interest period and in the amount of the
applicable "LIBOR Rate Loan" by (y) the difference between 100% and any
applicable reserve requirements (rounded upward to the nearest whole multiple of
1/100 of one percent per annum), including without limitation, any statutory
maximum requirement for LaSalle to hold reserves for "Eurocurrency Liabilities"
under Regulation D of the Board of Governors of the of the Federal Reserve
System (or any similar reserves under any successor regulation or regulations).
Simultaneous with the closing of the LaSalle facility, we entered into a
revolving credit facility with Alliance Laundry Systems LLC in the maximum
principal amount of $3.0 million. Alliance is our main laundry equipment
supplier. The Alliance facility requires monthly payments of interest only,
until and including the first business day of September 2001. Thereafter, the
facility requires 59 monthly payments comprised of $50,000 of principal plus
accrued interest on the unpaid principal balance and a sixtieth payment of
accrued interest only. Obligations under the Alliance facility shall bear
interest at the rate of prime (as set by LaSalle from time to time) plus 1.0%.
The financial covenants under the Alliance facility include minimum tangible net
worth, a senior interest coverage ratio and a minimum net book value of laundry
equipment.
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<PAGE> 27
In connection with these loans, LaSalle and Alliance entered into an
intercreditor agreement pursuant to which they agreed to allocate between
them first priority security interest upon (I) all of the Company's now
owned and hereafter acquired real and personal property and all proceeds
thereof and (II) all of the Company's general intangibles and other
intangible assets (including, without limitation, trademarks and trade
names), if any, and the proceeds thereof such that Alliance has first
priority with respect to those assets at and in connection with 15 of the
Company's stores and LaSalle has a first priority security interest in the
balance of the Company's assets. The Company used the $3.0 million of
proceeds from the Alliance facility to pay down the LaSalle line to
approximately $7.1 million and to finance amounts it owed to Alliance.
Additionally, the Company drew approximately $350,000 to cover accrued
interest on the Heller facility and costs associated with the closing of the
LaSalle and Alliance facilities. The Company currently has $4.5 million of
borrowing availability under the LaSalle facility. LaSalle has reserved the
right to reduce the Company's availability under the facility in an amount
not to exceed $1.0 million if the Company has not obtained appropriate
consents from the landlords of all of its leased stores on or before
December 26, 1999. Obtaining these consents was a closing condition which
LaSalle waived at closing. As of December 26, 1999 the Company had obtained
approximately 95% of the required consents. LaSalle has not notified the
Company that its ability has been limited by $1.0 million. During the fourth
quarter of 1999, the Company was required to write off deferred financing
charges which had been capitalized in connection with the Heller facility.
The LaSalle and Alliance facilities specify customary events of default
including non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross defaults to
other agreements, bankruptcy and insolvency events and material judgements
and liabilities.
On September 18, 1998, the Company entered into an agreement with
PeopleSoft USA, Inc. ("PeopleSoft") for the purchase of a new accounting
software system and the related hardware, installation and training fees.
The transaction was financed through several installments of a note payable
to Newcourt Financial USA, Inc. The Company began utilizing the software for
substantially all of its accounting processes at the beginning of its fiscal
1999 second quarter. PeopleSoft has verified to the Company that its
products are Year 2000 compliant. As of December 26, 1999, the Company owed
$449,884 on this note. The note bears interest at a rate of 11% and is due
in several installments, the last of which is due September 18, 2001. The
note agreement contains no financial covenants.
8. INCOME TAXES
Deferred income tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 26, 1999 DECEMBER 27, 1998
------------------ ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $17,694,768 $ 11,771,636
OID Interest ................... 8,358,631 3,016,241
Other .......................... 2,088,594 400,290
----------- ------------
28,141,993 $ 15,188,167
----------- ------------
Deferred tax liabilities
Depreciation ................... -- (371,437)
Other .......................... (23,272) (4,490)
------------ ------------
(23,272) (375,927)
------------ ------------
Net deferred tax asset ................. 28,118,721 14,812,240
Less: valuation allowance ..... (28,118,721) (14,812,240)
------------ ------------
$ -- $ --
============ ============
</TABLE>
In assessing the realizability of its deferred tax assets, the Company
considers whether it is more likely than
27
<PAGE> 28
not that some or all of such assets will be realized. As a result of
historical operating losses, the Company has fully reserved its net deferred
tax assets as of December 26, 1999. The Company will consider release of the
valuation allowance once profitable operations have been sustained.
As of December 26, 1999, the Company had net operating loss
carryforwards of approximately $44.2 million, which will begin to expire in
2011. In the event of a change in ownership as defined by section 382 of the
Internal Revenue Code, a significant limitation may be imposed on the
availability of the Company's net operating loss carryforwards. It is
probable that the Company has experienced one or more ownership changes in
prior years as a result of the Company raising various rounds of private
equity or that such an ownership change may have occurred or be deemed to
have occurred.
9. CAPITAL STOCK
The Company has issued 76,974 shares of series A, 125,498 shares of
series B, and 72,930 shares of series C convertible preferred stock
(collectively, the Preferred Stock). Concurrently with the closing of its
1998 senior discount note offering, the redemption rights of the holders
of the "Preferred Stock" were terminated. The previous put rights could have
required the Company to purchase all of the Preferred Stock at any time
after June 1, 2001, at a redemption price equal to the greater of the
purchase price of the shares plus accrued but unpaid dividends, if any, or,
the appraised value of the shares.
Holders of the Preferred Stock are entitled to one vote for each share
held on all matters and do not have cumulative voting rights. Dividends on
the preferred stock are payable only when declared by the Board of Directors
and are not cumulative. Each share of the Preferred Stock is convertible
into one share of common stock on a one-for-one basis and will be converted
into common stock concurrently with a qualified public offering of the
Company's common stock. The Company has reserved common shares equivalent to
the outstanding preferred shares. The Preferred Stock has a liquidating
preference over the common stock. In the event of liquidation, the holders
of Preferred Stock are entitled to receive an amount equal to the price paid
for the shares to the Company and participate on a pro rata basis with
common stock shareholders for the remaining assets of the Company. In
connection with the issuance of the Preferred Stock, the Company incurred
approximately $1,043,000 of issuance costs.
On April 14, 1998, 7,295 shares of the Company's common stock were
issued to series C stockholders in connection with the re-pricing of the
series C convertible preferred stock offering, originally priced at $220 per
share. Pursuant to a stockholder consent dated March 18, 1998 and obtained
as of April 14, 1998, the series C offering was converted to a unit
offering, whereby each series C unit offered was comprised of ten shares of
series C preferred stock and one share of common stock for $2,200 per unit.
In accordance with existing authoritative guidance, the additional fair
value of the consideration transferred to series C stockholders of
$1,459,000 (i.e. the 7,295 shares of common stock issued in connection with
the conversion of the original offering to a unit offering multiplied by
$200 per share) has been treated as a return to series C stockholders.
Accordingly, $1,459,000 has been deducted from the Company's net loss for
the fiscal year ended December 27, 1998 in determining the net loss
applicable to common shareholders for the calculation of earnings per share.
On June 30, 1997, the Company effected a one-for-twenty-five reverse
stock split of its preferred and common stock. Per share par value did not
change as a result of this event. Accordingly, all references to shares
issued and outstanding in the financial statements have been retroactively
restated to give effect to the stock split.
10. STOCK OPTIONS
The SpinCycle, Inc. 1995 Amended and Restated Stock Option Plan (the
"Plan") provides for the issuance of employee stock options. Under the
provisions of the Plan, the Compensation and Organization Committee (the
28
<PAGE> 29
"Committee"), which is appointed by the Board of Directors of the Company
has the discretion to determine, among other things, the employees to whom
options may be granted; the number of options to be granted; the vesting
period assigned to the options; and such other terms and conditions,
consistent with the terms of the Plan, as the Committee deems appropriate.
Substantially all options currently outstanding at December 26, 1999 vest
ratably over a five year period from the date granted. The Committee also
has the discretion to determine whether options granted shall be Incentive
Stock Options ("ISOs") within the meaning of section 411(a) of the Internal
Revenue Code or non-qualified stock options. The Company has reserved 69,270
shares of its common stock for issuance in connection with the Plan.
During 1997, the Company's Board of Directors approved a similar stock
option plan for non-employee directors (the "Director Option Plan"). The
Company has reserved 2,000 shares of its common stock for issuance in
connection with this plan. As of December 26, 1999, 320 options have been
granted under this plan.
The option price for all non-qualified stock options is also determined
by the Committee, provided that in no event shall it be less than 85% of the
fair market value of the stock at the time the option is granted. The option
price for each option which is intended to qualify as an ISO shall be 100%
of the fair market value of the stock at the time the option is granted
(110% if the participant owns at least 10% of the stock immediately before
the ISO is granted). A summary of option activity under both the Plan and
the Director Option Plan for each of the fiscal years ended December 28,
1997 and December 27, 1998 and December 26, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTION SHARES PRICE
-----------------------------------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996 ................... 10,616 125.00
ACTIVITY DURING FISCAL YEAR 1997:
Granted .......................................... 21,287 152.27
Exercised ........................................ -- --
Expired/terminated ............................... (774) 178.29
------- -------
Outstanding at December 28, 1997 ................... 31,129 142.33
ACTIVITY DURING FISCAL YEAR 1998:
Granted .......................................... 21,173 200.00
Exercised ........................................ -- --
Expired/terminated ............................... (11,629) 146.84
------- -------
Outstanding at December 27, 1998 ................... 40, 673 171.00
ACTIVITY DURING FISCAL YEAR 1999:
Granted .......................................... 3,276 200.00
Exercised ........................................ -- --
Expired/terminated ............................... (9,925) 198.79
------ -------
Outstanding at December 26, 1999 ................... 34,024 $166.19
------ -------
Exercisable at December 26, 1999 ................... 14,284 $165.64
Exercisable at December 27, 1998 ................... 7,680 $153.23
Exercisable at December 28, 1997 ................... 6,456 $148.79
Weighted average grant-date fair value of options
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C>
granted during fiscal 1999 ......................... 3,276 $ 0.00
Weighted average grant-date fair value of options
granted during fiscal 1998 ......................... 21,173 $ 45.27
Weighted average grant-date fair value of options
granted during fiscal 1997 ......................... 21,287 $ 39.15
Weighted average grant-date fair value of options
granted during fiscal 1996 ......................... 10,616 $ 19.83
</TABLE>
The following table summarizes information about our stock options
outstanding as of December 26, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Number Weighted -Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/26/99 Contractual Life Exercise Price at 12/26/99 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$125.00 15,536 7.31 $125.00 6,544 $125.00
$200.00 18,488 8.67 $200.00 7,740 $200.00
</TABLE>
30
<PAGE> 31
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for
the stock option agreements. Had compensation cost for the Company's
agreements been determined based on the fair value at the grant date for
awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No.
123, the Company's net loss and net loss per common share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss -- as reported $ 30,444,813 $ 24,655,068 $ 13,795,509
Net loss -- pro forma $ 30,469,360 $ 24,862,349 $ 13,924,560
Net loss per common share -- as reported $ (1,096.60) $ (937.60) $ (412.76)
Net loss per common share -- pro forma $ (1,097.48) $ (944.83) $ (416.15)
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model applying the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Weighted-average risk-free interest rate 4.96% 5.26% 6.15%
Expected life of options 5 years 5 years 5 years
</TABLE>
11. COMMITMENTS
The Company leases substantially all of its stores and corporate offices
under operating leases that are not cancelable. The leases expire at
various dates through 2024. The Company has the option to extend the terms
of the leases for periods ranging from five to 26 years. Certain leases
require payment of property taxes, utilities, common area maintenance costs
and insurance. Minimum lease payments due under the agreements for future
fiscal years are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 10,596,244
2001 10,517,467
2002 9,841,311
2003 9,285,030
2004 8,470,423
Thereafter 44,338,579
------------
$ 93,049,054
============
</TABLE>
Rent expense totaled $10,133,620, $7,280,216 and $2,518,937 for the
years ended December 26, 1999, December 27, 1998 and December 28, 1997,
respectively.
The Company has entered into employment agreements with two of its key
executive officers. These agreements do not exceed four years in term,
provide for a covenant not to compete for a term of one year subsequent to
termination of the agreements, and provide for the payment of one year of
base salary in the event that the employees are terminated.
12. EXECUTIVE SEVERANCE AGREEMENTS
As a result of the resignation of the Company's former CEO and Chairman
of the Board of Directors in January 1998, and in accordance with the terms
of his employment agreement, the Company was obligated to pay this executive
$400,000 over the remaining two-year term of his employment agreement. This
amount, including related payroll taxes, was accrued at December 28, 1997.
In addition, in March of 1998, the
31
<PAGE> 32
Company agreed to repurchase 18,019 shares of common stock owned by this
executive for a sum of $200,000 to be paid as salary in the third year after
his resignation. The current and long-term portions of this liability are
included in accrued expenses and other liabilities, respectively, on the
Company's balance sheet at December 26, 1999.
In addition, the Company forgave a loan outstanding to the executive of
$50,000, plus any interest accrued thereon. The expense associated with this
forgiveness of debt is included in general and administrative expenses in
the Company's statement of operations for the year ended December 28, 1997.
This executive also relinquished rights to any stock options previously
granted to him by the Company as well as his subordinate right of first
refusal with respect to certain other common shares.
In July 1998, the Company and Mr. Bruce Mosby, the Company's former
Chief Operating Officer, agreed that Mr. Mosby would leave the Company's
employ. Later, a legal dispute arose concerning his departure. In October
1998, the Company and Mr. Mosby agreed to submit their dispute regarding
their employment separation agreement to mediation. While mediation did not
resolve the matter, the dispute was settled in February 1999. As a result of
the settlement, Mr. Mosby received $125,000 from the Company to be paid as
salary over one year and another $170,000 from the Company's insurance
carrier which was paid in February of 1999.
13. RELATED PARTY TRANSACTIONS
Two directors of the Company are partners in a law firm that provides
legal services to the Company. The Company paid approximately $840,000, $2.3
million and $400,000 in legal fees and costs to this firm during the fiscal
years ended December 26, 1999, December 27, 1998 and December 28, 1997,
respectively. No payments were made to this firm prior to 1997.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The carrying amounts
for cash and cash equivalents, landlord allowances, accounts payable and
accrued expenses reported in the Company's balance sheet approximate fair
value based on the short maturity of those instruments. The carrying value
of the LaSalle and Alliance facilities and the other note payable is a
reasonable estimate of fair value as the risk is commensurate with the terms
and collateral of the agreement. The fair value of the Company's publicly
traded debt was approximately $46.4 million based on the bid prices in the
public bond market as of December 26, 1999.
15. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In connection with the termination of the Raytheon and LaSalle loan
agreements in 1998, the Company recognized an extraordinary loss of
approximately $334,000 for the write-off of the unamortized balance of debt
issue costs related to these agreements. This amounted to a net loss per
share amount of $11.64. There was no tax effect on this loss, based on the
Company fully reserving against the deferred tax asset.
In connection with the termination of the Heller facility (as discussed
in Note 7), the Company recognized an extraordinary loss of approximately
$782,000 for the write-off of the unamortized balance of debt issue costs
related to this agreements. This amounted to a net loss per share amount of
$28.15. There was no tax effect on this loss, based on the Company fully
reserving against the deferred tax asset.
16. REDUCTION IN FORCE
32
<PAGE> 33
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 the Company's 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.
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 paid approximately
$72,000 in severance and approximately $20,000 in accrued vacation benefits
to these employees. These expenses were recorded in the second quarter of
1999.
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, left 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.
Additionally, Mr. John S. Banas, III, the company's general counsel, was
terminated June 10, 1999. The Company has no plans to hire another general
counsel.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
33
<PAGE> 34
The following table sets forth the age and position of the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter Ax 40 Chief Executive Officer and Chairman of the Board
Christopher A. Lombardi 39 Chief Development Officer
Matthew B. Campbell 43 Chief Operating Officer
Alfredo Brener 48 Director
Dean Buntrock 68 Director
James E. Hutton 61 Director
John H. Muehlstein 45 Director
Peer Pedersen 75 Director
John Wallace 39 Director
</TABLE>
Peter L. Ax has been the Chief Executive Officer since January 1998 and the
Chairman of the Board since March 1998. From December 1996 to January 1998 Mr.
Ax was Chief Financial Officer and was Vice Chairman of the Board from December
1996 until March 1998. From March 1995 to December 1996, Mr. Ax served as Head
of the Private Equity Division and Senior Vice President of Lehman Brothers.
From March 1994 to March 1995, Mr. Ax was responsible for the private placement
of fixed income securities on the fixed income syndicate desk at Lehman
Brothers. From September 1991 to March 1994, Mr. Ax served in the Investment
Banking Division of PaineWebber, Inc. Mr. Ax has served as the Chairman of the
Board of Directors of Takes.com since March 1999. Mr. Ax has a M.B.A. from The
Wharton School at the University of Pennsylvania, a J.D. from the University of
Arizona, a B.S. from the University of Arizona and is a C.P.A.
Christopher A. Lombardi has been the Chief Development Officer since March
1996. From May 1994 to March 1996, Mr. Lombardi served as Vice President of
Development of Northstar Restaurants, Inc., a franchise area developer for
Boston Chicken, Inc., where he coordinated and directed the real estate
selection and construction in developing 54 stores in 22 months. From May 1990
to May 1994, Mr. Lombardi served as Franchise Operations Manager for Blockbuster
Video, Inc. During his four years at Blockbuster, Mr. Lombardi's territory grew
from 29 to 79 stores in the Midwestern United States and western Canada. Mr.
Lombardi has a B.A. from the University of Chicago.
Matthew B. Campbell has been Chief Operating Officer since February 1999.
Previously, he was Vice President, Operations from July 1998 to February 1999.
From November 1997 to July 1998 he was Chief Learning Officer. From September
1990 through November 1997 Mr. Campbell was employed by Thorn Americas where he
served as the Senior Director of Training, Management and Development. Prior to
joining Thorn Americas, Mr. Campbell served as a professor of Political Science
at Troy State University. Mr. Campbell has a B.A. from Southwest Texas State
University, an M.A. from the University of Toledo and a Ph.D. (ABD) from the
University of Virginia.
Alfredo Brener has been a Director since June 1996. Since 1987 Mr. Brener
has been President and Chief Executive Officer of Breco Holdings, Inc., a
Houston-based diversified holding company. Mr. Brener is the former Chairman of
the Board of Boys Market, Inc., a Los Angeles-based supermarket chain; Grupo
Mexicano de Video, S.A. de C.V., the Blockbuster Mexico franchisee; Discovery
Zone de Mexico, S.A. de C.V., the Discovery Zone Mexico franchisee; and a
director of Fiesta Mart Supermarket, a Houston-based supermarket chain. Mr.
Brener is also a director of E-Stamp Corp. and Chairman of the Board of Super
Stand Entertainment Co.
Dean Buntrock has been a Director since January 1998. Mr. Buntrock was the
founder and Chairman of the Board of Waste Management, Inc. from 1968 to July
1997 and was its Chief Executive Officer from 1968 until June 1996 and from
February 1997 until August 1997. Mr. Buntrock was Chairman of the Board of
Wheelabrator Technologies, Inc. from March 1997 until December 1997. Mr.
Buntrock was also a director of Boston Chicken, Inc., WM International, First
National Bank of Chicago and Stone Container Corp.
34
<PAGE> 35
James E. Hutton has been a Director since April 1996. Since June 1993, Mr.
Hutton has been Vice President of Operations for Burrel Professional Labs, Inc.
Mr. Hutton serves on the boards of C.N.B. Bancshares Inc. Savings Bank; North
Coast Distributing Company, a Miller Beer distributor; and T. P. Orthodontics, a
manufacturer of orthodontic prosthesis devices. From 1973 to 1993, Mr. Hutton
was a tax partner with Geo. S. Olive & Co., a public accounting firm.
Previously, Mr. Hutton was with the accounting firm of Dogan, Roby & Company.
Mr. Hutton is a C.P.A.
John H. Muehlstein has been a Director since April 1997. Since 1986, Mr.
Muehlstein has been a partner of Pedersen & Houpt, P.C., Chicago, Illinois,
counsel to the Company. Mr. Muehlstein's practice focuses on private capital
transactions and corporate finance. Mr. Muehlstein is a director of Blue Rhino
Corporation and Einstein/Noah Bagel Corp. Mr. Muehlstein is a nephew of Mr.
Pedersen, another of our directors.
Peer Pedersen has been a Director since November 1997. Mr. Pedersen has been
a partner of the law firm Pedersen & Houpt, P.C. for the past 40 years and is
its Chairman and Managing Partner. Mr. Pedersen is also a director Tennis
Corporation of America, Extended Stay America, Inc. and Spraying Systems Co. Mr.
Pedersen is an uncle of Mr. Muehlstein, another of our directors.
John Wallace has been a Director since June 1996. From June 1996 to
September 1997, Mr. Wallace was one of our Regional Vice Presidents -- Real
Estate. From March 1994 to March 1996, Mr. Wallace served as a Director in the
Corporate Finance/Merchant Banking Department at First Southwest Company. In
1986, Mr. Wallace founded and, from 1986 to 1989, he served as the President of
Houston Video Enterprises, which had the rights to Blockbuster Video franchises
for the Houston area. During this period Mr. Wallace assisted with the opening
of 12 company-owned video superstores and 40 additional franchise stores. In
1990, Mr. Wallace and several equity partners formed Grupo Mexicano de Video,
S.A. de C.V. which held the franchise rights to Blockbuster Video in Mexico. Mr.
Wallace served as the General Director from 1990 through 1993, during which time
Grupo Mexicano de Video opened in excess of 80 stores throughout Mexico.
ITEM 11. EXECUTIVE COMPENSATION
35
<PAGE> 36
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
we paid during the years ended December 26, 1999, December 27, 1998 and December
28, 1997 to the Company's Chief Executive Officer and our four other executive
officers with annual compensation of $100,000 or more (collectively, the "Named
Executive Officers"). We did not grant stock appreciation rights to any Named
Executive Officer during the year ended December 26, 1999.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------- -----------------------
Securities
Other Underlying
Annual Stock
Fiscal Salary Bonus Compensation Options
Name and Principal Position Year ($) ($) (1) ($) (2) (#)
- --------------------------------------- ------ ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Peter L. Ax 1999 250,000 100,000 0(3) 0
Chief Executive Officer and Chairman 1998 252,007 0 0(3) 3,000
1997 150,000 450,000(4) 0(3) 8,038(5)(6)
Christopher A. Lombardi 1999 150,000 25,000 0(3) 0
Chief Development Officer 1998 147,884 0 0(3) 2,000
1997 110,640 25,000 32,300 38(5)
Matthew B. Campbell 1999 150,000 50,000 0(3) 0
Chief Operating Officer 1998 128,076 0 0(3) 1,400
1997 13,846 21,000 0(3) 600
</TABLE>
-----------------
(1) Bonuses, unless otherwise noted, are recorded in the year earned. Bonuses
for 1999 were paid in January 2000.
(2) The amounts presented for each of the Named Executive Officers are
comprised primarily of relocation compensation related to SpinCycle's move
to Arizona and automobile allowances.
(3) The amounts of such perquisites and other personal benefits are not shown
because the aggregate amount of such compensation, if any, did not exceed
the lesser of $50,000 or 10% of total salary and bonus reported for such
executive officer.
(4) In April 1997, we paid Mr. Ax $400,000 for services rendered prior to
joining SpinCycle in connection with the private offer and sale of the our
series B convertible preferred stock. Mr. Ax was engaged by us in lieu of
engaging an investment bank as the placement agent. Mr. Ax was also paid a
bonus for 1997 of $50,000.
(5) Each of Messrs. Ax and Lombardi were granted fully vested options to
purchase 38 shares of common stock in connection with their respective
agreements to relocate to Arizona.
(6) As a founder of SpinCycle, Mr. Ax was granted an option to purchase 8,000
shares of common stock at $125.00 per share. These options vest over time
upon attaining certain performance goals, provided, however, that if such
goals are not attained by January 30, 2002 such options shall be fully
vested.
OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
36
<PAGE> 37
The following table sets forth certain information with respect to the
value of the stock options held by the Named Executive Officers at December 26,
1999. No Named Executive Officer exercised any stock options or stock
appreciation rights during the year ended December 26, 1999 or had any stock
appreciation rights outstanding at December 26, 1999. We did not grant any stock
options to any of the three Named Executive Officers in 1999.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
DECEMBER 26, AT DECEMBER 26,
1999(#)(1) 1999($)(2)
-------------------- --------------------
VESTED UNVESTED VESTED UNVESTED
------ -------- ------ --------
<S> <C> <C> <C> <C>
Peter L. Ax........... 638(3) 10,400(4) -- --
Christopher A. Lombardi 1,638(3) 2,400 -- --
Matthew B. Campbell... 520 1,480 -- --
</TABLE>
- ----
(1) All of the options granted to the Named Executive Officers were granted
under the 1995 Option Plan. The options granted were for shares of our
common stock. Unless otherwise noted, the options granted to the Named
Executive Officers vest 20% on each anniversary of the grant.
(2) Options to purchase 8,000 shares of common stock were granted to Mr. Ax
and options to purchase 2,000 shares of common stock were granted to each
Mr. Lombardi. These options have an exercise price of $125.00 per share.
The balance of the options granted to the Named Executive Officers are
exercisable at a price of $200.00 per share.
(3) Each of Messrs. Ax and Lombardi were granted fully vested options to
purchase 38 shares of common stock in connection with their respective
agreements to relocate to Arizona.
(4) 8,000 of Mr. Ax's options vest upon attainment of certain performance
goals, provided, however that if such goals are not attained by January
31, 2002, such options shall be fully vested.
DIRECTOR COMPENSATION; NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Currently, our directors receive no cash compensation for serving on the
Board of Directors. They do, however, receive reimbursement for expenses
reasonably incurred in connection with their service to us as directors. In
1997, we adopted a non-employee director stock option plan (the "Director Option
Plan") to attract and compensate our non-employee directors. The Director Option
Plan was approved by our stockholders in June 1997. We have reserved 2,000
shares of common stock for issuance under the Director Option Plan effective
upon the consummation of the senior discount notes offering. Pursuant to the
plan, all non-employee directors as of the effective date of the Director Option
Plan (July 1, 1997) and as of the first board meeting after the annual
stockholders meeting of each year beginning in 1998, are entitled to a grant of
options to purchase 20 shares of common stock at a price per share equal to the
fair market value per share of the common stock as of the grant date. The
initial grants under the plan vested immediately; subsequent grants vest over
three years on each anniversary of the grant dates. As of December 26, 1999
options to purchase 320 shares have been granted under the Director Option Plan.
Of the 320 stock options granted, 122 options are vested as of December 26,
1999. The remaining 198 options vest in the following manner: 79 on July 1,
2000, 79 on July 1, 2001 and 40 on July 1, 2002.
EMPLOYMENT AGREEMENTS
37
<PAGE> 38
We have entered into employment agreements with each of Messrs. Ax and
Lombardi. Mr. Ax's agreement, effective as of December 1, 1996 has a term of
four years with automatic one year extensions thereafter, subject to the
provision of at least six months written notice by either party. The agreement
includes a one year post-termination non-competition clause. If Mr. Ax is
terminated by SpinCycle for any other reason except for "cause" as defined in
the agreement, Mr. Ax is entitled to salary and benefits for the remainder of
the term of the agreement, including any bonuses accrued but unpaid as of the
date of termination. In the event of a merger, consolidation or sale of all or
substantially all of our assets, or a reorganization or recapitalization
pursuant to which at least a majority of the equity investment and voting
control is the same as ours, then we may assign our obligations under the
agreement to the surviving or purchasing entity. The terms of the employment
agreement between SpinCycle and Mr. Lombardi are substantially the same as with
Mr. Ax except that upon termination other than for "cause" Mr. Lombardi is
entitled to salary and benefits for one year. Also, Mr. Lombardi's employment
agreement was effective as of June 1, 1997 and has a term of three years with
automatic one year extensions thereafter, subject to the provision of at least
ninety days' written notice by either party.
1995 AMENDED AND RESTATED STOCK OPTION PLAN
We adopted a stock option plan in 1995, which was amended and restated in
1997 (the "1995 Option Plan"), to attract, retain and motivate selected
employees and officers. The 1995 Option Plan was approved by our stockholders in
June 1997. Pursuant to the 1995 Option Plan, options to purchase up to 69,270
shares of our common stock may be granted to our employees or consultants. The
1995 Option Plan is administered by the Compensation Committee which determines
the persons who are to receive options and the number of shares subject to each
option. As of December 26, 1999, options covering an aggregate of 33,044 shares
of common stock were outstanding, of which 13,502 were vested and none had been
exercised. We also have outstanding one non-plan option to purchase 660 shares
of our common stock.
38
<PAGE> 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our capital stock as of March 27, 2000 by each person known by us
to own beneficially more than 5% of our capital stock; each of our directors;
each of our Named Executive Officers; and all of our executive officers and
directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
OF CAPITAL STOCK VOTING RIGHTS
BENEFICIALLY -------------
NAME OWNED (1)
- ------ ----------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Dean Buntrock(2) ............................ 25,682 8.47%
Peer Pedersen(3) ............................ 25,358 8.36
Peter L. Ax(4)(11) .......................... 9,255 3.05
John Wallace(5) ............................. 3,567 1.18
Christopher A. Lombardi(6)(11) .............. 3,238 1.06
James E. Hutton(7) .......................... 1,080 *
John H. Muehlstein(8) ....................... 811 *
Mathew B. Campbell(9)(11) ................... 520 *
Alfredo Brener(10) .......................... 27 *
------- -----
Total for Directors and
Executive Officers .......................... 69,538 22.92%
======= =====
Other Beneficial Owners:
Howard C. Warren(12) ........................ 23,681 7.81
William Farley(13) .......................... 21,420 7.07
------- -----
Total for All Beneficial Owners (11
persons) ........................ 114,639 37.80%
======= =====
</TABLE>
- --------------
* Less than 1%.
(1) Includes shares of common stock, series A stock, series B stock, series C
stock, vested options to purchase common stock and options to purchase
common stock, which will vest within 60 days of March 27, 2000.
(2) Includes 2,096.5 shares of series C stock and 432 shares of common stock
held by Mr. Buntrock, 386 shares of series A stock and 2,421 shares of
series B stock held by Mr. Buntrock's wife, and 772 shares of series A
stock, 4,842 shares of series B stock, 11,366 shares of series C stock and
1,137 shares of common stock held by The Butterfield Group L.L.C., of
which Mr. Buntrock's wife is the manager; 2,222.5 shares of series C stock
held by Big Sky Limited Partnership, of which Mr. Buntrock is the sole
general partner and vested options to purchase seven shares of common
stock held by Mr. Buntrock. The business address of Mr. Buntrock is
Oakbrook Terrace Tower, One Tower Lane, Suite 2242, Oakbrook Terrace,
Illinois 60181.
(3) Includes 4,352 shares of series A stock, 9,684 shares of series B stock,
9,559 shares of series C stock, 1,756 shares of common stock and vested
options to purchase seven shares of common stock held by Mr. Pedersen. The
business address of Mr. Pedersen is 161 North Clark Street, Suite 3100,
Chicago, Illinois 60601.
(4) Includes 450 shares of series C stock, 8,167 shares of common stock and
vested options to purchase 638 shares of common stock held by Mr. Ax.
(5) Includes 2,880 shares of series A stock and vested options to purchase 687
shares of common stock held by Mr. Wallace. The business address of Mr.
Wallace is 3624 Piping Rock, Houston, Texas 77027.
39
<PAGE> 40
(6) Includes 1,200 shares of common stock and vested options to purchase 2,038
shares of common stock held by Mr. Lombardi.
(7) Includes 800 shares of series A stock, 230 shares of series C stock, 23
shares of common stock and vested options to purchase 27 shares of common
stock held by Mr. Hutton. The business address of Mr. Hutton is 1311
Merrilville Road, Crown Point, Indiana 46307.
(8) Includes 484 shares of series B stock, 273 shares of series C stock and 27
shares of common stock held jointly by Mr. Muehlstein and his wife. Mr.
Muehlstein also has vested options to purchase 27 shares of common stock.
Mr. Muehlstein's business address is 161 North Clark Street, Suite 3100,
Chicago, Illinois 60601.
(9) Includes vested options to purchase 520 shares of common stock held by Mr.
Campbell.
(10) Includes vested options to purchase 27 shares of common stock held by Mr.
Brener. The business address of Mr. Brener is 5298 Memorial Drive,
Houston, Texas 77007.
(11) The address of each such person is 15990 N. Greenway/Hayden Loop, Suite
400, Scottsdale, Arizona 85260.
(12) Includes 4,351 shares of series A stock, 9,684 shares of series B stock,
8,769 shares of series C stock and 877 shares of common stock. Mr.
Warren's business address is c/o Absolute Ventures, 420 Green Bay Road,
Suite 103, Kenilworth, Illinois 60043.
(13) Includes 386 shares of series A stock and 2,421 shares of series B stock
held by the Retirement Program of Farley Inc. of which Mr. Farley is the
sole member of the Pension Investment Committee; 1,158 shares of series A
stock, 7,264 shares of series B stock, 4,546 shares of series C stock and
455 shares of common stock held by Velocity Capital LLC of which Mr.
Farley is the sole member; 2,273 shares of series C stock and 227 shares
of common stock held by the Fruit of the Loom Pension Trust of which Mr.
Farley is the sole member of the Pension Investment Committee that has
sole voting power and investment power over these shares; and 370 shares
of series A stock and 2,320 shares of series B stock held by the Acme Boot
Company, Inc. Pension Plan of which Mr. Farley is the sole member of the
Investment Committee. Mr. Farley's business address is 233 South Wacker
Drive, Chicago, Illinois 60606.
40
<PAGE> 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1998, Messrs. Buntrock and Pedersen, either directly or through
their affiliates, purchased $1,950,300 and $2,000,020, respectively, of series C
units, comprised of series C stock and shares of common stock.
As part of our settlement of our former chief operating officer's claim
against us, we agreed to seek out a buyer for his 800 shares of our common
stock. Mr. Pedersen, one of our directors and the managing partner of our
outside counsel, purchased those shares in a private transaction on March 12,
1999, for $120,000.
Messrs. Muehlstein and Pedersen are partners and members of the management
committee of the law firm of Pedersen & Houpt, a Professional Corporation, which
has served as our counsel since March 1997. In that connection, the firm has
been paid fees for services rendered. In 1999 we paid Pedersen & Houpt
approximately $840,000 in fees.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibit 27.1
(b) None.
(c) None.
(d) None.
41
<PAGE> 42
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPINCYCLE, INC.
Date: March 27, 2000 By /s/ Peter L. Ax
-------------------------------
Peter L. Ax
Chief Executive Officer
42
<PAGE> 43
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION OF THE SECURITIES EXCHANGE ACT
No annual report or proxy material is being sent to security holders.
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> DEC-26-1999
<CASH> 4,126
<SECURITIES> 0<F1>
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 298
<CURRENT-ASSETS> 7,298
<PP&E> 120,232
<DEPRECIATION> (24,991)
<TOTAL-ASSETS> 119,544
<CURRENT-LIABILITIES> 5,548
<BONDS> 127,941
0<F1>
50,846
<COMMON> 0<F1>
<OTHER-SE> (68,627)
<TOTAL-LIABILITY-AND-EQUITY> 119,544
<SALES> 52,174
<TOTAL-REVENUES> 52,174
<CGS> 0<F1>
<TOTAL-COSTS> 39,205
<OTHER-EXPENSES> 26,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,711
<INCOME-PRETAX> (29,663)
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> (29,663)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 782
<CHANGES> 0<F1>
<NET-INCOME> (30,445)
<EPS-BASIC> (1,096.60)
<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>
