<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 11, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-57883
SPINCYCLE, INC
(Exact name of registrant as specified in its charter)
Delaware 41-1821793
(State of Incorporation) (I.R.S. Employer Identification No.)
15990 N. Greenway Hayden Loop, Suite #400, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 707-9999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of July 26, 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
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<S> <C>
PART I - FINANCIAL INFORMATION.................................................. 3
Item 1. Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 13
PART II - OTHER INFORMATION..................................................... 14
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities and Use of Proceeds......................... 14
Item 3. Defaults Upon Senior Securities................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............... 14
Item 5. Other Information................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
</TABLE>
<PAGE> 3
SPINCYCLE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 11, DECEMBER 26,
2000 1999
(UNAUDITED)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,961,818 $ 4,125,919
Landlord allowances 77,250 176,340
Prepaid expenses 276,359 92,490
Inventory 296,748 298,477
Land held for sale-leaseback 1,919,209 1,919,209
Other current assets 866,994 685,508
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Total current assets 7,398,378 7,297,943
Property and equipment, net 89,794,369 95,241,610
Goodwill, net 12,210,934 12,634,520
Other assets 3,999,187 4,370,021
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Total assets $ 113,402,868 $ 119,544,094
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,132,133 $ 885,231
Accrued utilities 1,183,092 1,296,144
Accrued expenses 1,775,969 2,666,326
Current portion of deferred rent 493,335 493,335
Current portion of long-term debt 251,007 207,460
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Total current liabilities 4,835,536 5,548,496
Long-term debt 134,755,200 127,940,845
Deferred rent 2,993,666 3,407,741
Other liabilities 378,468 428,520
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Total liabilities 142,962,870 137,325,602
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Shareholders' equity (deficit):
Series A, Series B and Series C convertible preferred stock,
$.01 par value, 370,000 shares authorized, 275,402
shares issued and outstanding 50,845,810 50,845,810
Common stock, $.01 par value, 630,000 shares authorized,
27,763 shares issued and outstanding 278 278
Common stock warrants 5,625,000 5,625,000
Additional paid-in capital - common stock 1,430,259 1,430,259
Accumulated deficit (87,461,349) (75,682,855)
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Total shareholders' equity (deficit) (29,560,002) (17,781,508)
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Total liabilities and shareholders' equity $ 113,402,868 $ 119,544,094
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED YEAR-TO-DATE
------------------------------- -------------------------------
JUNE 11, JUNE 13, JUNE 11, JUNE 13,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 12,508,826 $ 11,963,189 $ 25,806,725 $ 23,568,704
Cost of revenues -- store operating expenses 8,746,308 9,228,078 17,581,948 17,939,693
Preopening costs -- 1,012 -- 114,384
Depreciation and amortization 3,373,369 3,314,676 6,742,828 6,466,283
Selling, general and administrative expenses 2,657,821 2,489,875 4,970,296 5,005,832
Loss on disposal of property & equipment -- 43,735 -- 75,235
------------ ------------ ------------ ------------
Operating loss (2,268,672) (3,114,187) (3,488,347) (6,032,723)
Interest income 20,174 26,462 45,495 63,588
Interest expense, net of amount capitalized (4,323,216) (3,500,738) (8,335,642) (6,876,401)
------------ ------------ ------------ ------------
Net loss $ (6,571,714) $ (6,588,463) $(11,778,494) $(12,845,536)
------------ ------------ ------------ ------------
Net loss per common share $ (236.71) $ (237.31) $ (424.25) $ (462.69)
============ ============ ============ ============
Weighted average number of common shares outstanding 27,763 27,763 27,763 27,763
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
SPINCYCLE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
YEAR-TO-DATE
-------------------------------
JUNE 11, JUNE 13,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(11,778,494) $(12,845,536)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,742,828 6,466,284
Loss on disposal of property and equipment -- 75,235
Amortization of debt issuance costs 406,810 441,298
Amortization of discount on long-term debt 7,406,167 6,351,393
Changes in assets and liabilities:
Landlord allowances 99,090 283,235
Prepaid expenses (183,869) 449,200
Inventory 1,729 (165,517)
Other current assets (181,486) 6,890
Other assets 36,425 (34,406)
Accounts payable 246,902 (2,476,930)
Construction payables -- (389,393)
Accrued utilities (113,052) 130,205
Accrued expenses and other liabilities (940,409) (382,157)
Deferred rent (414,075) 223,247
------------ ------------
Net cash provided by (used in) operating activities 1,328,566 (1,866,952)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of fixed assets (832,902) (8,102,599)
Proceeds from sale of fixed assets -- 49,010
Capitalized interest (1,612) (134,946)
------------ ------------
Net cash provided by (used in) investing activities (834,514) (8,188,535)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments of debt (660,512) (107,644)
Debt issuance costs paid (87,641) (230,251)
Increase in debt 90,000 8,790,000
------------ ------------
Net cash provided by (used in) financing activities (658,153) 8,452,105
------------ ------------
Net increase (decrease) in cash and cash equivalents (164,101) (1,603,382)
Cash and cash equivalents, beginning of period 4,125,919 4,239,099
------------ ------------
Cash and cash equivalents, end of period $ 3,961,818 $ 2,635,717
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment financed with long-term debt $ 22,247 $ 136,084
CASH FLOW DURING THE YEAR FOR THE FOLLOWING:
Interest paid $ 575,666 $ 185,457
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
SPINCYCLE, INC.
NOTES TO FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL INFORMATION - BASIS OF PRESENTATION
The unaudited financial information presented herein has been prepared in
accordance with the instructions to Form 10-Q and Regulation S-X and does
not include all of the information and note disclosures required by
generally accepted accounting principles. Therefore, this information should
be read in conjunction with the audited financial statements for the year
ended December 26, 1999 and notes thereto included in the Form 10-K of
SpinCycle, Inc. (the "Company") filed with the Securities and Exchange
Commission ("SEC") on March 27, 2000. This information reflects all
adjustments that are, in the opinion of management, necessary for a fair
statement of the Company's financial position, results of operations and
cash flows for the interim periods reported. These adjustments are of a
normal and recurring nature.
The results of operations for the periods ended June 11, 2000 and June
13, 1999 are not necessarily indicative of the results to be expected for a
full fiscal year.
2. LIQUIDITY
During the year-to-date period ended June 11, 2000, the Company
experienced a net loss of $11,778,494 and had an accumulated deficit of
$87,461,349. 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. Year-to-date 2000, the
Company has maintained positive EBITDA for all fiscal periods. Management
believes that the availability of funds from the LaSalle Bank National
Association credit facility and operating revenues from its 172 units opened
as of fiscal quarter ended June 11, 2000, will enable the Company to
maintain operations for the foreseeable future.
Beginning November 1, 2001, we will be required to make semi-annual cash
payments of approximately $9.24 million on our senior discount notes.
Additionally, on September 30, 2001, we will be required to repay the
principal balance owing on the LaSalle facility. The principal balance on
June 11, 2000 was approximately $7.0 million. These payments, which are
substantially in excess of any historic net cash flow we have generated,
will be in addition to our selling, general and administrative expense and
any other interest or other expenses we may have at that time. Absent our
ability to modify these debt service obligations, it is unlikely that we
will be able to make these required cash payments when due.
3. EARNINGS PER SHARE
Net loss per common share is computed using the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
which requires the presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic EPS is computed by dividing the net loss applicable to holders of
common stock by the weighted average number of common shares outstanding
during each period. Diluted EPS is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period
adjusted for dilutive stock options and warrants and dilutive common shares
assumed to be issued on conversion of preferred stock to common stock.
Diluted EPS has not been presented, as the computation is anti-dilutive due
to the Company's net loss in each period.
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<PAGE> 7
4. JOINT VENTURES
On January 7, 2000, the Company formed E-Wash, Inc., a Delaware
corporation, as a wholly-owned subsidiary. The Company's board of directors
designated E-Wash, Inc. as an unrestricted subsidiary of the Company on
February 3, 2000. On February 28, 2000, E-Wash, Inc. formed E-Wash, LLC, a
Delaware limited liability company. These entities were re-named CleanWave,
Inc. and CleanWave, LLC, respectively, on March 6, 2000. On May 30, 2000,
these entities were renamed as Cleanwave, Inc. and Cleanwave, LLC,
respectively. All references herein are to the entities as they were named
as of the end of the Company's second quarter.
On May 1, 2000, Cleanwave, LLC entered into an amended and restated
limited liability company agreement and a unit purchase agreement, among
other transaction documents with Shell Chemical Company ("Shell").
Cleanwave, LLC now conducts the pick up and delivery laundry business which
the Company has been testing in Miami since August 1999. Pursuant to the
unit purchase agreement, Shell acquired units representing a 30% interest in
Cleanwave, LLC. The balance of Cleanwave, LLC units are owned by Cleanwave,
Inc. (52.5%) and seven members of the Company's senior management (17.5% in
the aggregate). The seven members of senior management of the Company own
their units pursuant to restricted unit agreements. The restricted unit
agreements provide that one-third of each individual's units vest as of the
date of grant (February 28, 2000) and vest an additional one-third on each
of the first two anniversaries of the grant date. As the remainder of these
grants vest in the future, the Company will determine their current value at
the vesting dates in order to recognize compensation expense. The grant of
these restricted units was approved by the Company's stockholders on June
30, 2000.
Shell received one-third (10%) of its 30% interest in Cleanwave, LLC in
exchange for services rendered and expenses undertaken prior to closing:
these expenses related primarily to market research. Shell purchased the
remaining two-thirds (20%) of its interest for $5.0 million in cash. The
$5.0 million is expected to be used to operate the Cleanwave business in the
Miami market for approximately the next 6 months and to pay certain expenses
incurred by the parties prior to closing, such as branding and capital
expenditures. Shell also has the opportunity to earn up to an additional 11%
of Cleanwave, LLC if and when Cleanwave, LLC enters into certain strategic
relationships with specified third parties and/or Shell provides certain
services to Cleanwave, LLC.
Cleanwave, LLC and Shell and certain related parties of each concurrently
entered into an intellectual property transfer and license agreement
regarding the ownership and licensing of existing intellectual property
owned by the Company and/or contributed to Cleanwave, LLC and future
intellectual property created by and/or on behalf of the Company, Cleanwave,
LLC or Shell. Cleanwave and Shell also entered into an interim services and
products agreement pursuant to which Cleanwave agrees to grant Shell a right
of first refusal to provide certain products and services to Cleanwave.
The Company is providing the laundry processing services (personnel and
facilities) to Cleanwave, LLC for a one-year period, subject to extension
and termination as agreed by the parties. All personnel previously hired to
drive vans and staff the call center have become Cleanwave employees.
SpinCycle is being compensated for providing laundry processing services on
a price per pound basis as well as with fees to offset training and field
management services and to offset occupancy costs. The Company has also
agreed to provide certain administrative services, such as payroll
processing, human resources, executive staffing and information systems, to
Cleanwave, LLC for a term of one year, subject to extension by the parties.
For these services the Company will receive 5% of Cleanwave, LLC's annual
gross revenues, subject to a minimum annual amount of $250,000. Intercompany
expenses between Cleanwave, LLC and the Company were immaterial for the
fiscal quarter ended June 11, 2000.
Currently, Cleanwave, LLC's only officers are Peter Ax and Christopher
Lombardi, who are also officers of the Company. Cleanwave, LLC has a board
of directors, currently comprised of Peter Ax, Christopher Lombardi, John H.
Muehlstein, Daniel K. Carlson and Krug R. Fenz. Messrs. Carlson and Fenz are
Shell's representatives on the board.
The Company was required to and did obtain a waiver from its lenders,
LaSalle Bank National Association and Alliance Laundry Systems LLC in
connection with this transaction.
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<PAGE> 8
Based on the substantive participation rights granted to Shell under the
amended and restated limited liability company agreement, the Company is not
deemed to have effective control of Cleanwave, LLC, therefore the equity
method of accounting will be applied. Additionally, the Company does not
have a cash investment nor has it loaned any funds to Cleanwave, LLC
constituting a basis in this interest. As a consequence, the Company has not
recorded any of Cleanwave, LLC's losses to date under the equity method or
eliminated their portion of any intercompany transactions. The Company will
continue this accounting treatment until such time as Cleanwave, LLC becomes
profitable.
5. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Company's interest expense, net of amount capitalized, consists of the
following:
<TABLE>
<CAPTION>
QUARTERS ENDED YEAR-TO-DATE
------------------------------ -------------------------------
JUNE 11, 2000 JUNE 13, 1999 JUNE 11, 2000 JUNE 13, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Accretion of Senior Discount Notes $ 3,871,200 $ 3,227,427 $ 7,406,167 $ 6,351,393
Interest expense on Alliance and LaSalle debt 229,971 -- 462,041 --
Amortization of debt issue costs 211,218 184,785 406,810 441,300
Other interest expense 10,827 144,286 62,236 218,654
Capitalized interest -- (55,760) (1,612) (134,946)
----------- ----------- ----------- -----------
Interest expense, net $ 4,323,216 $ 3,500,738 $ 8,335,642 $ 6,876,401
=========== =========== =========== ===========
</TABLE>
6. LONG-TERM DEBT
At June 11, 2000 and December 26, 1999, long-term debt included the
following:
<TABLE>
<CAPTION>
JUNE 11, DECEMBER 26,
2000 1999
------------- -------------
<S> <C> <C>
12.75% Senior Discount Notes Due 2005 ($144,990,000 principal
amount), net of unamortized discount $ 124,610,536 $ 117,204,370
Alliance Laundry Systems LLC Credit Facility; interest at prime
plus 1.0%; due in installments through 2006 3,000,000 3,000,000
LaSalle Bank National Association Credit Facility; interest at
either prime plus 1.0% or LIBOR plus 3.0%; due September 30, 2001 7,058,327 7,494,051
Other notes payable; interest at 11% due in various installments
through September 2001 337,344 449,884
------------- -------------
135,006,207 128,148,305
Less current portion (251,007) (207,460)
------------- -------------
$ 134,755,200 $ 127,940,845
============= =============
</TABLE>
The Company obtained waivers from LaSalle and Alliance with respect to the
tangible net worth covenants in their respective loan agreements for the
quarters ended December 26, 1999, March 19, 2000 and June 11, 2000. The Company
is currently negotiating with LaSalle and Alliance to restate the provisions of
these covenants.
-8-
<PAGE> 9
SPINCYCLE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SpinCycle is a specialty retailing company engaged in the coin laundry
business. We were founded in October 1995 to develop and implement SpinCycle's
unique concept of a national chain of branded coin-operated laundromats and to
serve as a platform for a nationwide consolidation in the coin-operated
laundromat industry. We were formed with the goal of becoming the leading
operator of high quality coin-operated laundromats in the United States by
establishing SpinCycle as a national brand, providing a superior level of
customer service and by exercising disciplined management control in our
expansion and business plan.
During 1999, we began to explore the demand for and viability of a pick-up
and delivery service for home laundry. We began offering this service in the
greater Miami area in August of 1999. Customers can order this service by
calling a toll free number or accessing the Cleanwave web site at
www.cleanwave.com. Cleanwave's objective is to pick-up, wash, dry, fold, package
and return each customer's laundry within 24 hours. The laundry is currently
being processed by our employees at two of our Miami locations during the hours
these stores are closed to retail customers, thus allowing us to leverage our in
place assets. Cleanwave's results to date have been promising and we expect to
expand this service to the entire Miami market and expand to other SpinCycle
markets as demand dictates and resources permit.
To date, our primary use of capital has been for the development and
acquisition of laundromats and for general corporate purposes. Our store count
grew rapidly in our first three years, from our first store opening in April
1996, through year end 1996, 1997 and 1998 when we had a total of 14, 71 and 163
stores, respectively. By year-end 1999 we had 172 stores. As of June 11, 2000,
we had not opened any additional stores, we had no other stores under
construction and were party to three leases for stores that we do not currently
have plans to develop. We continue to maintain a significant backlog of
potential acquisition and development sites, but do not expect to enter into any
commitments to purchase or develop stores prior to procuring additional growth
capital or generating sufficient cash flow from operations.
To date we have closed four stores: one during 1998, following a lease
buyout by our landlord at that location and three additional stores during 1999
due to poor performance. In connection with these store closures, we recognized
approximately $1.0 million in losses on impairment and disposal of long-lived
assets during fiscal 1999. We do not presently foresee closing any additional
stores. We are actively pursuing the sale or alternative use of two of the
locations that we closed during 1999.
Our rapid development and acquisition of laundromats has required
significant capital resources. Our expansion has been facilitated through
private equity investments, proceeds from the issuance of our senior discount
notes, borrowings from our credit facilities and revenue generated from our
stores. Inception to date, we have not been profitable and have generated net
operating losses and negative cash flow from operations. We had expected to
access the public equity markets in late 1998 or early 1999 to provide
additional growth capital for our planned expansion, but have found that
SpinCycle's valuation under current market conditions would provide an
unfavorable return to our investors. Until such time as we can access the public
equity markets or other sources of capital, we have elected to proceed
cautiously with our planned expansion, slowing our growth through development or
acquisition to judiciously utilize available sources of growth capital.
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<PAGE> 10
RESULTS OF OPERATIONS
EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely accepted
financial indicator of an entity's ability to incur and service debt. While
EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles ("GAAP") and should not be considered
as an indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to provide
additional information with respect to our ability to meet our future debt
service, capital expenditures and working capital requirements.
Store EBITDA is defined as EBITDA before allocation of any selling, general
and administrative expenses. While Store EBITDA is not intended to represent
operating income or loss as defined by GAAP (as GAAP operating income or loss
includes such allocation of selling, general and administrative expenses) and
should not be considered as an indicator of operating performance as measured by
GAAP, it is included herein to provide additional information with respect to
store-level cash operating margins.
Second Quarter and Year-To-Date 2000 Compared to Second Quarter and Year-To-Date
1999
Revenues. Our revenues were approximately $12.5 million for the second
quarter of 2000, an increase of approximately $500,000 from approximately $12.0
million in the corresponding period in 1999. Revenues were approximately $25.8
million for year-to-date 2000, an increase of approximately $2.2 million from
approximately $23.6 million for the corresponding period in 1999. Our growth in
revenue was primarily attributable to the continued maturation of our developed
and acquired stores.
Store operating expenses, excluding depreciation and amortization. Our store
operating expenses, excluding depreciation and amortization were approximately
$8.7 million in the second quarter of 2000, a decrease of approximately $500,000
from approximately $9.2 million in the corresponding period in 1999. Store
operating expenses were approximately $17.6 million for year-to-date 2000, a
decrease of approximately $400,000 from approximately $17.9 million for the
corresponding period in 1999. The decreases in our store operating expenses,
excluding depreciation and amortization were primarily attributable to our
measures to reduce store operating expenses, specifically repair and
maintenance, labor, and telecom, partially offset by our increase in utility
expenses due to our increased customer volume. Operating expenses as a
percentage of revenues were approximately 77% for the second quarter 1999 and
approximately 76% for year-to-date 1999. Operating expenses as a percentage of
revenues decreased to approximately 70% for the second quarter of 2000 and
approximately 68% for year-to-date 2000, which is a result of the continued
maturation of our stores' revenue and our implementation of initiatives designed
to reduce store operating expenses.
Preopening costs. We had no preopening costs in the second quarter of 2000,
a decrease of approximately $1,000 from approximately $1,000 in the
corresponding period in 1999. We had no preopening costs for year-to-date 2000,
a decrease of approximately $114,000 from approximately $114,000 for the
corresponding period in 1999. We expense preopening costs as incurred. During
the second quarter of 1999 we did not open any stores and had three stores under
construction. For the year-to-date period ended June 13, 1999 we had opened nine
stores and had three stores under construction. During the second quarter and
year-to-date 2000 we did not open any stores or have any stores under
construction. We have delayed indefinitely the opening of three stores which we
have under lease.
Store EBITDA. Our store EBITDA was approximately $3.8 million in the second
quarter of 2000, an increase of approximately $1.1 million from approximately
$2.7 million for the corresponding period in 1999. Store EBITDA was
approximately $8.2 million for year-to-date 2000, an increase of approximately
$2.6 million from approximately $5.6 million for the corresponding period in
1999. The increase was primarily attributable to increased revenue from the
maturation of our stores. Our store EBITDA increases as revenues increase due to
the fixed nature of many of the store level expenses.
Depreciation and amortization. Our depreciation and amortization expense was
approximately $3.4 million in the second quarter of 2000, an increase of
approximately $100,000 from approximately $3.3 million for the corresponding
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<PAGE> 11
period in 1999. Depreciation and amortization was approximately $6.7 million for
year-to-date 2000, an increase of approximately $300,000 from approximately $6.5
million for the corresponding period in 1999. The increase was principally due
to property and equipment acquired in connection with our 1999 expansion.
Selling, general and administrative expenses. Our selling, general and
administrative expenses were approximately $2.7 million in the second quarter of
2000, an increase of approximately $200,000 from approximately $2.5 million in
the corresponding period of 1999. Selling, general and administrative expenses
were approximately $5.0 million for year-to-date 2000, and for the corresponding
period in 1999. Selling, general and administrative expenses for the second
quarter of 1999 and the second quarter of 2000 as a percentage of revenue were
approximately 21%. Selling, general and administrative expenses decreased as a
percentage of revenue from approximately 21% for year-to-date 1999 to
approximately 19% for year-to-date 2000. The decrease was due to the maturation
of our stores and our implementation of certain initiatives to reduce these
expenses, including our 1999 reductions in force.
EBITDA. Our EBITDA in the second quarter of 2000 was approximately $1.1
million, an increase of approximately $860,000 from our EBITDA of approximately
$240,000 for the corresponding period in 1999. EBITDA was approximately $3.3
million for year-to-date 2000, an increase of approximately $2.7 million from
approximately $500,000 for the corresponding period in 1999. The increase was
primarily attributable to the continued maturation of our stores.
We concluded the year-to-date period ended June 11, 2000 with approximately
$3.3 million of EBITDA. The EBITDA generated in the first two quarters of 2000
exceeded the EBITDA generated during all of fiscal 1999 by approximately
$800,000 and marked the fifth consecutive quarter that we achieved positive
EBITDA. For the remainder of 2000, we will continue to focus on strategies to
improve unit level economics and reduce general and administrative expenses.
Interest income and interest expense, net. Our interest income was
approximately $20,000 in the second quarter of 2000, a decrease of approximately
$6,000 from approximately $26,000 in the second quarter of 1999. Our interest
income was approximately $45,000 year-to-date 2000, a decrease of approximately
$19,000 from approximately $64,000 year-to-date 1999. The decrease in interest
income was primarily attributable to a lower average cash balance during the
second quarter and year-to-date 2000 compared to the second quarter and
year-to-date 1999. Our interest expense, net of capitalized interest was
approximately $4.3 million in the second quarter of 2000, an increase of
approximately $800,000 from approximately $3.5 million in the corresponding
period in 1999. Interest expense, net of capitalized interest was approximately
$8.3 million year-to-date 2000, an increase of approximately $1.4 million from
approximately $6.9 million in the corresponding period in 1999. The increase in
interest expense, net was primarily attributable to the increase in accretion of
interest expense related to our April 1998 offering of senior discount notes and
warrants and interest expense accrued for borrowings under our existing credit
facilities. We had approximately $8.7 million in borrowings under our former
credit facility at the end of the second quarter of 1999 and had approximately
$10.0 million in borrowings at the end of the second quarter of 2000 under our
existing credit facilities.
Net loss. Our net loss recorded in the second quarter of 2000 and the second
quarter of 1999 was approximately $6.6 million. The net loss recorded
year-to-date 2000 was approximately $11.8 million, a decrease of approximately
$1.0 million from the $12.8 million net loss recorded in the corresponding
period of 1999. The decreased loss was primarily attributable to the additional
income provided by our operations, partially offset by the increase in interest
expense related to our April 1998 offering of senior discount notes and
warrants, and the interest expense associated with our outstanding borrowings
under our credit facilities.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At June 11, 2000, we had total assets of approximately $113.4 million,
including current assets of approximately $7.4 million. Cash and cash
equivalents were approximately $4.0 million.
Our cash provided by operations during the year-to-date period ended June
11, 2000 was approximately $1.3 million, a $3.2 million increase from our cash
used in operations during the corresponding period in 1999 of approximately $1.9
million. Our cash provided by operations year-to-date 2000 was primarily
attributable to the store EBITDA realized during the period. The increase in our
cash provided by operating activities in the year-to-date period ended June 11,
2000 was the result of the continued maturation of our stores and reductions in
our selling, general and administrative expenses as discussed above.
Our cash used in investing activities during the year-to-date period ended
June 11, 2000 was approximately $800,000, a $7.4 million decrease from our cash
used in investing activities of approximately $8.2 million for the corresponding
period in 1999. Our reduced spending on investing activities in the year-to-date
period ended June 11, 2000 is due to the substantial decrease in our expansion
activities.
Our cash used in financing activities was approximately $660,000 during the
year-to-date period ended June 11, 2000, a decrease of approximately $9.1
million from our cash provided by financing activities of approximately $8.5
million during the corresponding period in 1999. We borrowed funds primarily to
pay for our capital expenditures related to our 1999 store rollout plan. The
funds were obtained primarily from our former credit facility.
We generated approximately $3.3 million of positive EBITDA during our first
two fiscal quarters of 2000. We expect to generate positive EBITDA in all 13
periods of 2000. As of June 11, 2000 we had drawn approximately $10.0 million
from our existing facilities, and had $5.0 million additional borrowing capacity
on these credit facilities based on the applicable financial covenants. Going
forward, we expect to be able to meet our current obligations with cash flows
from our store operations. We believe that our cash flow from operations will
provide us with sufficient capital resources through June of 2001. Significant
variances in budgeted store revenue or store EBITDA or unforeseen capital
requirements could result in insufficient capital resources if they exceed our
cash flow from operations or our availability on our credit facilities. As we
have not received the requisite number of landlord consents required at closing,
borrowing availability under the LaSalle facility could be reduced by $1.0
million. LaSalle has not notified us that our availability has been limited. The
Company obtained waivers from LaSalle and Alliance with respect to the tangible
net worth covenants in their respective loan agreements for the quarters ended
December 26, 1999, March 19, 2000 and June 11, 2000. The Company is currently
negotiating with LaSalle and Alliance to restate the provisions of these
covenants.
Beginning November 1, 2001, we will be required to make semi-annual cash
payments of approximately $9.24 million on our senior discount notes.
Additionally, on September 30, 2001, we will be required to repay the principal
balance owing on the LaSalle facility. The principal balance on June 11, 2000
was approximately $7.0 million. These payments, which are substantially in
excess of any historic net cash flow we have generated, will be in addition to
our selling, general and administrative expense and any other interest or other
expenses we may have at that time. Absent our ability to modify these debt
service obligations, it is unlikely that we will be able to make these required
cash payments when due.
POTENTIAL LOSS OF NET OPERATING LOSSES
As of June 11, 2000, we had net operating losses ("NOLs") of approximately
$55.4 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
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<PAGE> 13
stock, that would cause an ownership change to occur. In addition, the NOLs are
subject to examination by the Internal Revenue Service ("IRS"), and are thus
subject to adjustment or disallowance resulting from any such IRS examination.
SEASONALITY
Coin-operated laundromat industry data, as well as data generated from our
mature stores, indicates that the coin operated laundry business experiences
seasonal variations in operating performance during the later spring and summer
seasons. We believe this seasonality is a result of the reduced volume of
heavier clothing worn during the spring and summer months, which results in
lower laundry machine usage. We observed the effect of such seasonality in the
90 stores that were mature for the entire 1999 fiscal year. During the 1999
fiscal year, revenues in these stores decreased approximately 8.8%, from a peak
during the third period to a low in the eighth period. These 90 stores
experienced a significant increase in revenues in the final quarter of the year,
completing the seasonal cycle. As we now have a significant base of data
regarding seasonality, we have adjusted our 2000 budgets to account for the
seasonal patterns experienced in 1999.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about our
confidence in our prospects, strategies and expectations about expansion into
new markets, growth in existing markets, comparable store sales and ability to
attract new sources of financing, are forward-looking statements that involve
risks and uncertainties. These risks and uncertainties include, but are not
limited to, (1) our historical and anticipated losses and negative cash flow;
(2) debt service requirements, restrictions and covenants related to our
substantially leveraged financial position; (3) considerable competition from
local and regional operators in all of our markets; (4) our ability to hire,
train, retain and assimilate competent management and store-level employees; (5)
our ability to identify new markets in which to successfully compete; (6) our
ability to locate suitable sites for building or acquisition; (7) our ability to
negotiate acceptable lease terms; and (8) our dependence on timely fulfillment
by landlords and others of their contractual obligations. No assurance can be
given that the existing stores will achieve sales and profitability comparable
to our strategic plan. There can be no assurance that an adequate revenue base
will be established or that we will generate sufficient positive cash flow from
operations to satisfy our debt service obligations beginning on November 1,
2000. Any investor or potential investor in SpinCycle must consider these risks
and others that are detailed in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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<PAGE> 14
SPINCYCLE, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently involved in various legal proceedings of a character
normally incident to businesses of our nature. We do not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition or results of operations of SpinCycle.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) SpinCycle, Inc. commenced a written consent solicitation of all of its
stockholders on May 25, 2000.
(b) The written solicitation of stockholders involved the election of
directors. The following directors were re- elected to serve as
directors of the Company:
Alfredo Brener: representative of holders of Series A and B Convertible
Preferred Stock
Peer Pedersen: representative of holders of Series C Convertible
Preferred Stock
Peter Ax, James Hutton, John H. Muehlstein, John Wallace: at-large
representatives
Mr. Robert J. Lunn was also elected as an at-large representative of the
stockholders. Mr. Lunn replaces Mr. Dean Buntrock who chose not to stand
for re-election.
(c) The Company conducted a written stockholder solicitation regarding the
election of the board of directors and the grant of restricted units in
Cleanwave, LLC to seven members of the Company's senior management team
commenced on May 25, 2000. The requisite stockholder votes had been
received as of June 30, 2000.
The holders of Series A and Series B Convertible Preferred Stock share the
right to elect one member to the Company's board of directors. The election
of Mr. Brener has been approved by the requisite number of stockholders. As
of the date hereof, those results were as follows:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Series A Stock 60,850 1,000 152
Series B Stock 79,270 2,421 3,632
</TABLE>
The holders of Series C Convertible Preferred Stock have the right to
elect one member to the Company's board of directors. The election of Mr.
Pedersen has been approved by the requisite number of stockholders.
As of the date hereof, those results were as follows:
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<PAGE> 15
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Series C Stock 48,625 0 0
</TABLE>
All of the Company's stockholders share the right to elect five members of
the Company's board of directors. The affirmative vote of a majority of all of
the Company's shares, treated as a single class, are required to elect the
nominees. The election of all of the nominees has been approved by the requisite
number of stockholders. As of the date hereof, those results were as follows:
(i) Election of Peter Ax:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Common Stock 19,896 0 5,555
Series A Stock 61,730 1,000 72
Series B Stock 82,691 2,421 0
Series C Stock 39,856 0 0
</TABLE>
(ii) Election of James Hutton:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Common Stock 19,896 0 5,555
Series A Stock 61,730 1,000 72
Series B Stock 82,691 2,421 0
Series C Stock 39,856 0 0
</TABLE>
(iii) Election of John H. Muehlstein:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Common Stock 19,896 0 5,555
Series A Stock 61,730 1,000 72
Series B Stock 82,691 2,421 0
Series C Stock 39,856 0 0
</TABLE>
(iv) Election of John Wallace:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Common Stock 19,896 0 5,555
Series A Stock 61,730 1,000 72
Series B Stock 82,691 2,421 0
Series C Stock 39,856 0 0
</TABLE>
(v) Election of Robert J. Lunn:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Common Stock 19,896 0 5,555
Series A Stock 61,730 1,000 72
Series B Stock 82,691 2,421 0
Series C Stock 39,856 0 0
</TABLE>
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<PAGE> 16
On February 28, 2000, the compensation committee of the Company's board of
directors granted restricted units in Cleanwave, LLC representing 25% of the
Company's interest in Cleanwave, LLC (17.5% after the Shell investment). These
grants were subject to the consent of the holders of 76% of the Series A shares,
51% of the holders of Series B shares and 51% of the holders of Series C shares.
The stockholders approved all of these matters by the requisite vote as of June
30, 2000. As of the date hereof, the results were as follows:
(vi) Waiver of preemptive rights:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Series A Stock 60,476 1,606 720
Series B Stock 74,217 5,053 6,053
Series C Stock 48,545 0 80
</TABLE>
(vii) Waiver of notice with respect to preemptive rights:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Series A Stock 52,276 1,606 8,920
Series B Stock 72,886 6,384 6,053
Series C Stock 46,495 0 2,130
</TABLE>
(viii) Consent to issuance of securities with a purchase price less than the
price paid for the respective series of preferred shares:
<TABLE>
<CAPTION>
APPROVED DISAPPROVED ABSTAINED
<S> <C> <C> <C>
Series A Stock 58,076 1,606 3,120
Series B Stock 72,886 6,384 6,053
Series C Stock 47,405 0 1,220
</TABLE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a). Exhibit 27.1 Financial Data Schedule
(b). None.
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<PAGE> 17
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
SPINCYCLE, INC.
Date: July 26, 2000 By /s/ Peter L. Ax
---------------------------
Peter L. Ax
Chief Executive Officer
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