<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 19, 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 May 3, 2000, the Company had 303,165 shares of capital stock
outstanding, comprised of 27,763 shares of common stock, 76,974 shares of series
A convertible preferred stock, 125,498 shares of series B convertible preferred
stock, and 72,930 shares of series C convertible preferred stock.
<PAGE> 2
SPINCYCLE, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<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..................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 14
PART II - OTHER INFORMATION............................................ 15
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 3. Defaults Upon Senior Securities............................... 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 5. Other Information............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
</TABLE>
2
<PAGE> 3
SPINCYCLE, INC.
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 19, December 26,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,461,689 $ 4,125,919
Landlord allowances 77,250 176,340
Prepaid expenses 339,998 92,490
Inventory 305,763 298,477
Land held for sale-leaseback 1,919,209 1,919,209
Other current assets 665,050 685,508
------------- -------------
Total current assets 7,768,959 7,297,943
Property and equipment, net 92,602,133 95,241,610
Goodwill, net 12,402,130 12,634,520
Other assets 4,193,456 4,370,021
------------- -------------
Total assets $ 116,966,678 $ 119,544,094
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,127,022 $ 885,231
Accrued utilities 1,219,446 1,296,144
Accrued expenses 1,815,926 2,666,326
Current portion of deferred rent 493,335 493,335
Current portion of long-term debt 297,460 207,460
------------- -------------
Total current liabilities 4,953,189 5,548,496
Long-term debt 131,365,220 127,940,845
Deferred rent 3,233,063 3,407,741
Other liabilities 403,494 428,520
------------- -------------
Total liabilities 139,954,966 137,325,602
------------- -------------
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 (80,889,635) (75,682,855)
------------- -------------
Total shareholders' equity (deficit) (22,988,288) (17,781,508)
------------- -------------
Total liabilities and shareholders' equity $ 116,966,678 $ 119,544,094
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
-3-
<PAGE> 4
SPINCYCLE, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------
MARCH 19, MARCH 21,
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 13,297,898 $ 11,605,515
Cost of revenues -- store operating expenses, excluding
depreciation and amortization 8,835,640 8,711,615
------------ ------------
Gross operating profit, excluding depreciation and 4,462,258 2,893,900
amortization
Preopening costs -- 113,372
Depreciation and amortization 3,369,459 3,151,607
Selling, general and administrative expenses 2,312,475 2,515,957
Loss on disposal of property & equipment -- 31,500
------------ ------------
Operating loss (1,219,676) (2,918,536)
Interest income 25,322 37,126
Interest expense, net of amount capitalized (4,012,426) (3,375,663)
------------ ------------
Net loss $ (5,206,780) $ (6,257,073)
Net loss applicable to holders of common stock $ (187.54) $ (225.37)
============ ============
Weighted average number of common shares outstanding 27,763 27,763
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
-4-
<PAGE> 5
SPINCYCLE, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
YEAR-TO-DATE
-------------------------------
MARCH 19, MARCH 21,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(5,206,780) $(6,257,073)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,369,459 3,151,607
Loss on disposal of property and equipment -- 31,500
Amortization of debt issuance costs 195,592 256,514
Amortization of discount on long-term debt 3,534,967 3,123,966
Changes in assets and liabilities:
Landlord allowances 99,090 (267,460)
Prepaid expenses (157,508) 336,811
Inventory (7,286) (136,911)
Other current assets 20,458 25,573
Other assets 10,004 (36,177)
Accounts payable 241,791 (440,021)
Construction payables -- (389,393)
Accrued utilities (76,698) (120,438)
Accrued expenses and other liabilities (875,426) (934,085)
Deferred rent (174,678) 578,389
----------- -----------
Net cash provided by (used in) operating activities 972,985 (1,077,198)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of fixed assets (496,196) (5,613,837)
Proceeds from sale of fixed assets -- 2,000
Capitalized interest (1,612) (79,186)
----------- -----------
Net cash provided by (used in) investing activities (497,808) (5,691,023)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments of debt (122,012) (79,477)
Debt issuance costs paid (17,395) (129,753)
Increase in debt -- 5,890,000
Stock issuance costs paid -- 9,600
----------- -----------
Net cash provided by (used in) financing activities (139,407) 5,690,370
----------- -----------
Net increase (decrease) in cash and cash equivalents 335,770 (1,077,851)
Cash and cash equivalents, beginning of period 4,125,919 4,239,099
----------- -----------
Cash and cash equivalents, end of period $ 4,461,689 $ 3,161,248
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment financed with long-term debt $ 11,420 $ 122,694
Insurance premium financing $ 90,000 $ --
CASH FLOW DURING THE YEAR FOR THE FOLLOWING:
Interest paid $ 210,707 $ --
</TABLE>
The accompanying notes are an integral part of these financial
statements.
-5-
<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.
2. UNAUDITED INTERIM RESULTS OF OPERATIONS
The results of operations for the periods ended March 19, 2000 and March
21, 1999 are not necessarily indicative of the results to be expected for a
full fiscal year.
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.
-6-
<PAGE> 7
5. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Company's interest expense, net of amount capitalized, consists of the
following:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------
MARCH 19, MARCH 21,
2000 1999
----------- -----------
<S> <C> <C>
Accretion of Senior Discount Notes $ 3,534,967 $ 3,123,966
Interest expense on Alliance and LaSalle debt 232,070 --
Interest expense on Heller -- 61,918
Amortization of debt issue costs 195,592 256,515
Other interest expense 51,409 12,450
Capitalized interest (1,612) (79,186)
----------- -----------
Interest expense, net $ 4,012,426 $ 3,375,663
=========== ===========
</TABLE>
6. LONG-TERM DEBT
At March 19, 2000 and December 26, 1999, long-term debt included the
following:
<TABLE>
<CAPTION>
MARCH 19, DECEMBER 26,
2000 1999
------------- -------------
<S> <C> <C>
12.75% Senior Discount Notes Due 2005
($144,990,000 principal amount), net of
unamortized discount $ 120,739,337 $ 117,204,370
Alliance Laundry Systems LLC Credit
Facility; interest at prime plus 1.0%; due 3,000,000 3,000,000
in installments through 2006
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 7,494,051
Other notes payable; interest at 11% due in
various installments through September 2001 429,292 449,884
------------- -------------
131,662,680 128,148,305
Less current portion (297,460) (207,460)
------------- -------------
$ 131,365,220 $ 127,940,845
============= =============
</TABLE>
-7-
<PAGE> 8
7. SUBSEQUENT EVENTS.
On May 1, 2000, the Company's majority owned subsidiary, CleanWave,
LLC, a Delaware limited liability company, entered into an amended and restated
limited liability company agreement and a unit purchase agreement, among other
transaction documents, with Shell Chemical Company ("Shell"). E-Wash, LLC was
formed on February 28, 2000 and was re-named CleanWave, LLC on March 6, 2000.
Its only member upon formation was CleanWave, Inc., a Delaware corporation and a
wholly owned subsidiary of the Company, which was formed on January 7, 2000 as
E-Wash, Inc. and was re-named on March 6, 2000.
CleanWave, LLC will conduct 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 collectively
own their CleanWave, LLC units pursuant to restricted unit agreements by and
among CleanWave, LLC, CleanWave, Inc. and each of the individuals. The
restricted unit agreements vest one-third of each individual's units 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. The grant of these restricted
units is subject to approval by the Company's stockholders.
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 12 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 the limited liability
company units of CleanWave if and when CleanWave, LLC enters into certain
strategic relationships with specified third parties and/or Shell provides
certain services to CleanWave, LLC pursuant to the terms of an option for
additional units issued to Shell.
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.
-8-
<PAGE> 9
The Company will be 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 shall become CleanWave employees.
Going forward, SpinCycle will be compensated for providing laundry processing
services on a price per pound basis as well as with fees to offset training and
field management expenses and to offset occupancy costs. The terms of this
agreement are set forth in a laundry services agreement between the Company and
CleanWave, LLC. 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.
Currently, CleanWave, LLC's only officers are Peter Ax and Christopher
Lombardi, who are also officers of the Company. CleanWave, LLC has a board of
directors, currently comprised of Peter Ax, Christopher Lombardi, John H.
Muehlstein, Daniel K. Carlson and R. Krug Fenz. Messrs. Carlson and Fenz are
Shell's representatives on the board.
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.
-9-
<PAGE> 10
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 our web site at www.cleanwave.com which
will be available after May 22, 2000. Our objective is to pick-up, wash, dry,
fold, package and return each customer's laundry within 24 hours. The laundry is
currently being processed 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. Our 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 March 19, 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. We do not intend to close any further stores. We are
actively pursuing the sale or alternative use of two of the businesses that we
closed during 1999.
Our rapid development and acquisition of laundromats has required significant
capital resources. Our expansion has been facilitated through private equity
investments, proceeds from the issuance of our senior discount notes, borrowings
from our credit facilities and revenue generated from our stores. From inception
to date, we have not been profitable and have generated net operating losses and
negative cash flow from operations. We had expected to access the public equity
markets in late 1998 or early 1999 to provide additional growth capital for our
planned expansion, but 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.
We ended the first quarter of 2000 with approximately $2.1 million of EBITDA.
The EBITDA generated in the first quarter of 2000 was the highest that we have
ever achieved 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.
-10-
<PAGE> 11
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.
First Quarter 2000 Compared to First Quarter 1999
Revenues. Our revenues were approximately $13.3 million for the first quarter
of 2000, an increase of approximately $1.7 million from approximately $11.6
million in 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
$8.8 million in the first quarter of 2000, an increase of approximately $100,000
from approximately $8.7 million in the corresponding period in 1999. The
increase in our store operating expenses, excluding depreciation and
amortization was primarily attributable to the increased customer volume
indicated by our increase in revenues. Operating expenses as a percentage of
revenues were approximately 75% for the first quarter 1999. Operating expenses
as a percentage of revenues decreased to approximately 66% for the first quarter
of 2000, which is a result of the maturation of our stores' revenue and our
implementation of initiatives designed to reduce store operating expenses.
Gross operating profit. Our gross operating profit was approximately $4.5
million in the first quarter of 2000, an increase of approximately $1.6 million
from approximately $2.9 million in the corresponding period in 1999. The
increase was primarily attributable to our aforementioned increase in revenues
during the period. Our gross margin percentage increases as revenues increase
due to the fixed nature of many of the store level expenses.
Preopening costs. We had no preopening costs in the first quarter of 2000, a
decrease of approximately $113,000 from the corresponding period in 1999. We
expense preopening costs as incurred. During the first quarter of 1999 we opened
nine stores and had three stores under construction. During the first quarter of
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 $4.5 million in the first
quarter of 2000, an increase of approximately $1.7 million from approximately
$2.8 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.
-11-
<PAGE> 12
Depreciation and amortization. Our depreciation and amortization expense was
approximately $3.4 million in the first quarter of 2000, an increase of
approximately $200,000 from approximately $3.2 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 $2.3 million in the first quarter of
2000, a decrease of approximately $200,000 from approximately $2.5 million in
the corresponding period of 1999. Selling, general and administrative expenses
decreased as a percentage of revenues from 22% for the first quarter of 1999 to
17% for the first quarter of 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 first quarter of 2000 was approximately $2.1
million, an increase of approximately $1.8 million from our EBITDA of
approximately $265,000 for the corresponding period in 1999. The increase was
primarily attributable to the continued maturation of our stores.
Interest income and interest expense, net. Our interest income decreased to
approximately $25,000 in the first quarter of 2000, a decrease of approximately
$12,000 from approximately $37,000 in the first quarter of 1999. The decrease in
interest income was primarily attributable to a lower average cash balance
during the first quarter of 2000 compared to the first quarter of 1999. Our
interest expense, net of capitalized interest was approximately $4.0 million in
the first quarter of 2000, an increase of approximately $600,000 from
approximately $3.4 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
facility. We had approximately $5.8 million in borrowings under our former
credit facility at the end of the first quarter of 1999 and had approximately
$10.5 million in borrowings at the end of the first quarter of 2000 under our
existing credit facilities.
Net loss. Our net loss recorded in the first quarter of 2000 was $5.2
million, a decrease of approximately $1.1 million from our $6.3 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.
-12-
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At March 19, 2000, we had total assets of approximately $116.5 million,
including current assets of approximately $7.3 million. Cash and cash
equivalents were approximately $4.0 million.
Our cash provided by operations during the quarter ended March 19, 2000 was
approximately $970,000, a $2.1 million increase from our cash used in operations
during the corresponding period in 1999 of approximately $1.1 million. Our cash
provided by operations in the first quarter of 2000 was primarily attributable
to the gross operating profit realized during the quarter. The increase in our
cash provided by operating activities in the quarter ended March 19, 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 quarter ended March 19, 2000
was approximately $500,000, a $5.2 million decrease from our cash used in
investing activities of approximately $5.7 million for the corresponding period
in 1999. Our reduced spending on investing activities in the quarter ended March
19, 2000 is due to the substantial decrease in our expansion activities.
Our cash used in financing activities was approximately $140,000 during the
quarter ended March 19, 2000, a decrease of approximately $5.8 million from our
cash provided by financing activities of approximately $5.7 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 credit facility.
We generated approximately $2.1 million of positive EBITDA during our first
quarter of fiscal 2000. We expect to generate positive EBITDA in all 13 periods
of 2000. As of March 19, 2000 we had drawn approximately $10.5 million from our
existing facilities, and had $4.5 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 March 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.
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 March 19, 2000
was approximately $7.5 million. These payments, which are substantially in
excess of any historic net cash flow we have generated, will be in addition to
our selling, general and administrative expense and any other interest or other
expenses we may have at that time. Absent our ability to modify these debt
service obligations, it is unlikely that we will be able to make these required
cash payments when due.
POTENTIAL LOSS OF NET OPERATING LOSSES
As of March 19, 2000, we had net operating losses ("NOLs") of approximately
$49.1 million for U.S. federal income tax purposes. These NOLs, if not utilized
to offset taxable income in future periods, will begin to expire in 2011.
Section 382 of the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder, impose limitations on the ability of corporations to use
NOLs if the corporation experiences a more than 50% change in ownership during
any three year period. It is probable that we have experienced one or more
ownership changes in 1996, 1997 and 1998 as a result of raising various rounds
of private equity or that such an ownership change may have occurred or be
deemed to have occurred due to events beyond our control (such as transfers of
common stock by certain stockholders or the exercise or treatment of our issued
and outstanding warrants, conversion rights or stock options). Further, there
can be no assurance that we will not take additional actions, such as the
issuance of additional stock, that would cause an ownership change to occur. In
addition, the NOLs are subject to examination by the Internal Revenue Service
("IRS"), and are thus subject to adjustment or disallowance resulting from any
such IRS examination.
-13-
<PAGE> 14
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 new stores will achieve sales and profitability comparable to the
existing stores or to our strategic plan. There can be no assurance that an
adequate revenue base will be established or that we will generate positive cash
flow from operations. Any investor or potential investor in SpinCycle must
consider these risks and others that are detailed in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-14-
<PAGE> 15
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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a). Exhibit 10.1 Form of Restricted Unit Agreement by and among SpinCycle,
Inc., E-Wash, Inc. (n/k/a CleanWave, Inc.), E-Wash, LLC (n/k/a
CleanWave, LLC) and certain senior executive officers dated February
28, 2000.
Exhibit 10.2 Restricted Unit Agreement by and among SpinCycle, Inc.,
E-Wash, Inc. (n/k/a CleanWave, Inc.), E-Wash, LLC (n/k/a CleanWave,
LLC) and Peter Ax dated February 28, 2000.
Exhibit 27.1 Financial Data Schedule
(b). None.
-15-
<PAGE> 16
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: May 3, 2000 By /s/ Peter L. Ax
---------------------------------------
Peter L. Ax
Chief Executive Officer
-16-
<PAGE> 17
EXHIBIT INDEX
- -------------------------------------------------------------------------------
Exhibit 10.1 Form of Restricted Unit Agreement by and among SpinCycle,
Inc., E-Wash, Inc. (n/k/a CleanWave, Inc.), E-Wash, LLC (n/k/a
CleanWave, LLC) and certain senior executive officers dated February
28, 2000.
Exhibit 10.2 Restricted Unit Agreement by and among SpinCycle, Inc.,
E-Wash, Inc. (n/k/a CleanWave, Inc.), E-Wash, LLC (n/k/a CleanWave,
LLC) and Peter Ax dated February 28, 2000.
Exhibit 27.1 Financial Data Schedule
<PAGE> 1
Exhibit 10.1
RESTRICTED UNIT AGREEMENT
This Restricted Unit Agreement (the "Agreement"), made this 28th day of
February, 2000, by and among SpinCycle, Inc., a Delaware corporation (the
"Company"), E-Wash, Inc., a Delaware corporation, and its successors and assigns
("E-Wash"), E-Wash, LLC, a Delaware limited liability company, and its
successors and assigns ("Limited"), and ________________________, an employee of
the Company (hereinafter called the "Employee");
W I T N E S S E T H:
WHEREAS, E-Wash, as of the date hereof, is a wholly-owned subsidiary of
the Company; and
WHEREAS, Limited, as of the date hereof, is a wholly-owned subsidiary
of E-Wash; and
WHEREAS, the Board of Directors of the Company has determined it to be
in the best interest of the Company to issue restricted units in Limited to
certain key executives of the Company in order to provide such executives which
an additional stake in the growth and prosperity of Limited and to encourage
them to continue serving the Company; and
WHEREAS, the issuance of such units is subject to the terms and
conditions as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto, it is agreed as follows:
1. Issuance of Units. Subject to the provisions of Section 11 hereof, Limited
hereby issues to the Employee and the Employee accepts _______ Units (the
"Units") of Limited, subject to the restrictions, terms and conditions set forth
in this Agreement. In exchange for such Units, the Employee shall or has
contributed to the capital of Limited the amount set forth on Exhibit A of the
Limited Liability Company Agreement of Limited opposite the Employee's name.
2.
3. Restrictions. Notwithstanding any provisions of the Limited Liability Company
Agreement of Limited, while any Units are subject to the forfeiture provisions
described in Section 4 below (the "Restricted Units"), the Employee may not
directly or indirectly, by operation of law or otherwise, voluntarily or
involuntarily, anticipate, alienate, attach, sell, assign, pledge, encumber,
charge or otherwise transfer any Restricted Units.
4.
5. Award Date. The effective date of issuance of the Units to the Employee (the
"Award Date") shall be February 28, 2000.
<PAGE> 2
6. Restrictions and Restricted Period.
7.
8. (a) Units shall be issued in the name of the Employee upon the execution by
the Employee of this Agreement, and shall be evidenced on the books and records
of Limited. One-third of the Units issued herein shall be free of any transfer
or forfeiture restrictions set forth in Sections 2 and 4 of this Agreement as of
the Award Date.
9.
10. (b) If the Employee terminates service with the Company, or the Company
terminates the service of the Employee for any reason whatsoever prior to the
first anniversary of the Award Date, two-thirds of the Units issued to the
Employee herein shall be forfeited and void, and the cash capital contribution
paid by the Employee in respect of such forfeited Restricted Units shall be
returned to the Employee. If the Employee is in the employ of the Company on the
first anniversary of the award date, an additional one-third of the Units
granted to the Employee herein shall be free of all restrictions contained in
this Agreement.
11.
12. (c) If the Employee terminates service with the Company, or the Company
terminates the service of the Employee for any reason whatsoever after the first
anniversary of the Award Date but prior to the second anniversary of the Award
Date, one-third of the Units shall be forfeited and void, and the cash capital
contribution paid by the Employee in respect of such forfeited Restricted Units
shall be returned to the Employee. If the Employee is in the employ of the
Company on the second anniversary of the Award Date, all restrictions with
respect to all Units covered by this Agreement shall lapse.
13.
14. (d) Notwithstanding the foregoing provisions of this Section 4, all
forfeiture and transfer restrictions with respect to the Units (other than as
provided in Section 9 hereof) shall lapse (i) upon the death or permanent and
total disability of the Employee; (ii) if the Company exercises its "Bring-Along
Rights" described in Section 7 hereof; or (iii) if there is a "Change in
Control."
15.
16. A "Change in Control" shall mean:
17.
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "1934 Act")) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the 1934 Act) of 50% or more of the combined voting power of all
of the then outstanding voting classes or series of units of Limited
(the "Outstanding Voting Units"); provided, however, that the following
acquisitions shall not constitute a Change of Control: (A) any
acquisition directly from Limited or any of its subsidiaries, (B) any
acquisition by Limited or any of its subsidiaries, (C) any acquisition
by any employee benefit plan (or related trust) sponsored or maintained
by Limited or any of its subsidiaries, (D) any acquisition by any
corporation with respect to which, following such acquisition, more
than 50% of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by individuals, entities or groups who were the
beneficial owners, respectively, of at least 50% of the Outstanding
Voting Units
2
<PAGE> 3
immediately prior to such acquisition in substantially the same
proportions as their ownership, immediately prior to such acquisition,
of the Outstanding Voting Units, or (E) the acquisition of Outstanding
Voting Units by any individual, entity or group which on the Award Date
owned 50% or more of the Outstanding Voting Units;
(ii) Approval by the holders of a majority of the
Units of Limited of a reorganization, merger or consolidation, in each
case, with respect to which all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Voting Units immediately prior to such reorganization,
merger or consolidation do not, following such reorganization, merger
or consolidation, beneficially own, directly or indirectly, more than
50% of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from or surviving such
reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, of the Outstanding Voting
Units; or
(iii) Approval by the requisite vote of the
shareholders of E-Wash of (A) a complete liquidation or dissolution of
Limited or (B) the sale or other disposition of all or substantially
all of the assets of Limited other than to a corporation, with respect
to which following such sale or other disposition, more than 50% of the
then outstanding shares of common stock of such company and the
combined voting power for the then outstanding voting securities of
such company entitled to vote is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners of the Outstanding Voting Units
immediately prior to such sale or other disposition in substantially
the same proportion as their ownership, immediately prior to such sale
or other disposition, of the Outstanding Voting Units.
(e) For the purpose of this Section 4, a transfer of
employment from the Company to E-Wash or Limited shall not be deemed a
termination of employment with the Company.
1. Custody of Restricted Units; Tax Withholding; Voting and Dividends.
2.
3. (a) Restricted Units. The Restricted Units will be registered in the name of
the Employee. All indicia of ownership representing Restricted Units shall be
retained by the Company.
4.
5. (b) Voting Rights. The Employee will have all rights of a member of Limited
with respect to voting of the Restricted Units.
6. (c) Distributions. All distributions of profits and losses, cash flow and
capital interests made with respect to the Restricted Units shall, with respect
to record dates on or after the Award Date, be distributed to the Employee in
accordance with the Limited Liability Company Agreement of E-Wash, LLC, as
amended from time to time (the "Operating Agreement").
7.
3
<PAGE> 4
8. Piggyback Registration Rights. In the event that as a result of a merger or
other reorganization of Limited such that the Employee's Units are exchanged for
shares of stock of E-Wash, E-Wash grants to the Employee the following
registration rights with respect to such E-Wash shares:
9.
(a) (i) Incidental Rights. If at any time after six months
after the completion of an underwritten initial public offering by
E-Wash on a firm commitment basis, E-Wash proposes to register, on any
form which may be used for the registration of its common stock, other
than Forms S-4 or S-8 (or any successor or similar forms then in
effect), any of its securities under the Securities Act of 1933, as
amended (the "Securities Act"), whether or not pursuant to registration
rights granted to other holders of its securities and whether or not
for sale for its own account, in a manner which would permit
registration of common stock for sale to the public under the
Securities Act, E-Wash will each such time give written notice to the
Employee of its intention to do so and of Employee's rights under this
Section 6; such notice to be given to Employee at least twenty (20)
days prior to the initial filing of such proposed registration
statement. Upon the written request of the Employee made within fifteen
(15) days after the giving of any such notice (which request shall
specify the number of shares intended to be disposed of by the Employee
and the intended method or methods of disposition thereof), E-Wash will
use its reasonable efforts to effect the registration under the
Securities Act of the "Registerable Amount" (as defined in 6(b) hereof)
of Common Stock which E-Wash has been so requested to register by the
Employee, to the extent necessary to permit the disposition (in
accordance with the intended methods thereof as aforesaid) of the
common stock so to be registered. Promptly upon notification to E-Wash
from the managing underwriter of the price at which the shares of
common stock requested to be registered pursuant to this Section 6 are
to be sold, E-Wash shall advise the Employee of such price, and if such
price is below the price which Employee shall have indicated to be
acceptable to the Employee, the Employee shall then have the right to
withdraw its request to have its shares included in such registration
statement.
(ii) Not Deemed a Demand Registration. No
registration effected pursuant to this Section 6 shall be deemed to be
a demand registration right. Any registration rights granted hereunder
shall be subordinate to any demand registration rights hereafter
granted by E-Wash to others.
(iii) Holdback. If E-Wash previously shall have
received a request for registration from a shareholder having demand
registration rights or under this Section 6, and if such previous
registration shall not have been withdrawn or abandoned, E-Wash will
not be required to effect any registration of any of its securities
under the Securities Act, whether or not for sale for its own account,
until a period of ninety (90) days shall have elapsed from the
effective date of such previous registration.
(iv) Discontinuance. Notwithstanding anything to the
contrary in this Section 6, E-Wash shall have the right to discontinue
any registration under this Section 6 at any time prior to the
effective date of such registration, if the registration of other
securities giving rise to such registration under this Section 6 is
discontinued; but no such
4
<PAGE> 5
discontinuation shall preclude an immediate or subsequent request for
registration pursuant to this Section 6.
(v) Termination of Piggyback Rights. The provisions
of this Section 6 shall expire as to any shares at such time as the
Employee may sell shares in E-Wash without the need for registration
under the federal securities laws.
(b) Registerable Amount. For the purpose of this Section 6,
the "Registerable Amount" means the maximum number of shares of common stock of
E-Wash issued to the Employee in exchange for the Units granted under this
Agreement which the Employee is eligible to sell in any registration covered by
this Section 6. The Registerable Amount is expressed as a fraction, the
numerator of which will be the number of shares issued to Employee in exchange
for the Units granted under this Agreement and held by the Employee at the time
of the public registration and the denominator of which shall be the number of
shares of such common stock held by other holders of common stock having
registration rights pari passu with the Employee's rights. If the registration
is an underwritten registration, and the managing underwriter gives written
notice to E-Wash that in its reasonable opinion the number of shares of common
stock of E-Wash to be included in the registration should be less than the
aggregate number of shares of common stock that E-Wash, the Employee and all
other eligible holders of such common stock have proposed to include in such
registration, then E-Wash shall have first priority to include in such
registration all shares of common stock it proposes to register. If such amount
does not exceed the maximum number of shares which the underwriter has
reasonably determined can be registered in the offering, then the remaining
number of shares (the "Available Amount") shall be allocated among the Employee
and the other holders of common stock proposing to register securities in the
offering by multiplying the Available Amount by a fraction, the numerator of
which shall be the number of shares each of the eligible participants owns and
the denominator of which is the total number of shares owned by all eligible
participants. E-Wash shall have the exclusive right to select the managing
underwriters in such registration. For the purposes of this paragraph (b), if
there is no underwriter for an offering, then the determinations to be
reasonably made by the managing underwriter hereunder shall be made by the
E-Wash board of directors.
(c) Hold-back Agreements. The Employee agrees, if so required
by the managing underwriter, not to effect any public sale or distribution of
securities of E-Wash of the same class as the securities included in such
registration statement, during the seven (7) days prior to the date on which any
underwritten registration has become effective and the one-hundred eighty (180)
days (or such longer period as shall have been agreed to by E-Wash and the
managing underwriters with respect to such registration statement) thereafter,
except as part of such underwritten registration. E-Wash agrees not to effect
any public sale or distribution of its equity securities or securities
convertible into or exchangeable or exercisable for any of such securities
during the seven (7) days prior to and ninety (90) days after any underwritten
registration has become effective, except as part of such underwritten
registration.
(d) Public Offering by Limited. All rights granted to Employee
in this Section 6 shall be effective with respect to Limited in the event that
Limited becomes a publicly traded company rather than E-Wash.
5
<PAGE> 6
1. Bring-Along Right. For so long as the Company owns at least 33.33% of E-Wash
or Limited, if the Company or E-Wash proposes to make a bona fide sale in a
private offering of all of its E-Wash shares or of Limited units, the Company
and/or E-Wash shall have the right (the "Bring-Along Right"), but not the
obligation, exercisable upon 15 days' prior written notice, to require the
Employee to sell his Units to such third party upon terms no less favorable to
the Employee than those that apply to the Company or E-Wash with respect to such
third party sale. In such case, so long as the Employee has not been terminated
immediately prior to the closing of the proposed sale, all restrictions
contained in Sections 2 and 4 applicable to any Restricted Units shall lapse.
The Employee hereby agrees to cooperate with the Company or E-Wash and to take
any and all action reasonably required in connection with the consummation of
such third party sale. Without limiting the foregoing, at the closing of any
sale under this Section, the Employee shall represent and warrant that he is the
beneficial owner of such Units free and clear of any liens or encumbrances with
full power and authority to transfer such shares.
2.
3. Tag-Along Right. For so long as the Company owns at least 33.33% of E-Wash or
Limited, in the event that the Company or E-Wash (the "Purchase Offer
Recipient") shall receive a bona fide offer to purchase less than all shares of
E-Wash or Limited units (a "Purchase Offer"), the Purchase Offer Recipient shall
either decline such Purchase Offer or, if the Purchase Offer Recipient
determines to accept such Purchase Offer, then, prior to accepting any Purchase
Offer, arrange for the proposed purchaser to make, in addition to the Purchase
Offer, a bona fide offer to purchase from the Employee, and all other similarly
situated persons, upon the same terms as the Purchase Offer, units of Limited
owned by such parties, including the Employee (the "Tag Along Rights") in the
proportion and otherwise as described in the second succeeding sentence (the
"Unit Purchase Offer"). In the event a Unit Purchase Offer is made, the Purchase
Offer Recipient shall give the Employee written notice thereof (the "Notice")
specifying (i) the number of Units that the Employee may sell, and (ii) the
terms (including the price and the proposed date of consummation thereof) of
such Unit Purchase Offer. Upon receipt of the Notice, the Employee shall have
the right to sell that number of Units owned by him and which are not then
Restricted Units equal to (A) the product of (a) the total number of Limited
units proposed to be purchased in the Purchase Offer, the Unit Purchase Offer
and similar offers being made to other members of Limited concurrently with the
Purchase Offer, and (b) a fraction, the numerator of which shall be the number
of Tag-Along Units (as defined below) owned by the Employee and the denominator
of which shall be the number of shares of Limited units owned by the Purchase
Offer Recipient plus the number of shares of Tag-Along Units owned by all
members electing to participate in such sale. For purposes of the foregoing,
"Tag-Along Units" shall mean all units of Limited outstanding on the date of the
Sale. The Tag-Along Right may be exercised by the Employee by delivery, not
later than 5 days after receipt of the Notice, of a written notice (the
"Tag-Along Notice") to the Purchase Offer Recipient, which shall state the
maximum number of Units which are not Restricted Units that the Employee wishes
to include in such sale to the purchaser. The Employee shall participate in any
purchase specified in the Notice on the terms set forth therein (or on terms no
less favorable to the Employee) and as provided in the Tag-Along Notice during
the 90-day period following the date of the Notice. Any purchases following such
90-day period shall require a new Notice.
6
<PAGE> 7
1. Restrictions in Operating Agreement. The rights and obligations of the
Employee as a member of Limited and the restrictions and rights as a holder of
Units, including transfer restrictions, are further governed by the terms of the
Operating Agreement.
1. Effect of Reclassification, etc., of Units. In the event of reclassification,
recapitalization, reorganization, merger, consolidation or combination such that
the holders of Units receive a different security in exchange for their Units,
then notwithstanding the provisions of Section 2, hereof, the Employee may
exchange his Units for shares of the same class of security which other holders
of Limited's Units receive, and the rights, restrictions, terms and conditions
of this Agreement shall apply to the securities received by the Employee to the
same extent as provided herein with respect to the Units.
2.
3. Shareholder Approval. Notwithstanding any provision of this Agreement to the
contrary, the issuance of Units contained herein is subject to the approval
within 12 months of the Award Date by the holders of the requisite majorities of
all three classes of preferred stock of the Company as required in the
agreements relating to the purchase of Series A, B and C Convertible Preferred
Stock in the Company, as those agreements have been amended to date. In the
event that such shareholder approval is not obtained, the issuance of Units
shall be forfeited on the first anniversary of the Award Date. In case of
forfeiture, the capital cash contribution paid by the Employee for the Units
shall be returned to the Employee.
4.
5. Entire Understanding. This Agreement constitutes the entire understanding
between the parties relating to the matters described herein (other than
Limited's Limited Liability Company Agreement which is incorporated herein by
this reference) and supercedes and cancels all prior written and oral
understandings and agreements with respect to such matters.
6.
7. Binding Effect. This Agreement shall be binding upon and inure to the benefit
of the employees, executors, administrators, legal representatives, heirs and
legatees of the Employee and the successors and assigns of the Company.
8.
9. Employment Rights. Nothing contained in this Agreement shall confer upon
Employee any right with respect to the continuance of employment by the Company
or any related company, nor interfere in any way with the right of the Company
or any related company to terminate the Employee's employment at any time for
any reason.
10.
11. Governing Law. This Agreement shall be governed by, and interpreted,
construed and enforced in accordance with the laws of the State of Arizona.
12.
13.
14. IN WITNESS WHEREOF, the Company, E-Wash, Limited, and the Employee have
caused this Restricted Unit Agreement to be executed as of the day and year
first above written.
15.
16.
17. SPINCYCLE, INC.
18.
7
<PAGE> 8
19. By /s/ Peter Ax
20.
21.
22. E-WASH, INC.
23.
24. By /s/ Peter Ax
25.
26.
27. E-WASH, LLC
28.
29. By /s/ Peter Ax
30.
31.
32. EMPLOYEE:
33.
34.
35. Print Name:
36.
37. 263777.5
8
<PAGE> 1
Exhibit 10.2
RESTRICTED UNIT AGREEMENT
This Restricted Unit Agreement (the "Agreement"), made this 28th day of
February, 2000, by and among SpinCycle, Inc., a Delaware corporation (the
"Company"), E-Wash, Inc., a Delaware corporation, and its successors and assigns
("E-Wash"), E-Wash, LLC, a Delaware limited liability company, and its
successors and assigns ("Limited"), and Peter Ax, an employee of the Company
(hereinafter called the "Employee");
W I T N E S S E T H:
WHEREAS, E-Wash, as of the date hereof, is a wholly-owned subsidiary of
the Company; and
WHEREAS, Limited, as of the date hereof, is a wholly-owned subsidiary
of E-Wash; and
WHEREAS, the Board of Directors of the Company has determined it to be
in the best interest of the Company to issue restricted units in Limited to
certain key executives of the Company in order to provide such executives which
an additional stake in the growth and prosperity of Limited and to encourage
them to continue serving the Company; and
WHEREAS, the issuance of such units is subject to the terms and
conditions as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto, it is agreed as follows:
1. Issuance of Units. Subject to the provisions of Section 11 hereof, Limited
hereby issues to the Employee and the Employee accepts One Million Two Hundred
Seventy-five Thousand (1,275,000) Units (the "Units") of Limited, subject to the
restrictions, terms and conditions set forth in this Agreement. In exchange for
such Units, the Employee shall or has contributed to the capital of Limited the
amount set forth on Exhibit A of the Limited Liability Company Agreement of
Limited opposite the Employee's name.
2.
3. Restrictions. Notwithstanding any provisions of the Limited Liability Company
Agreement of Limited while any Units are subject to the forfeiture provisions
described in Section 4 below (the "Restricted Units"), the Employee may not
directly or indirectly, by operation of law or otherwise, voluntarily or
involuntarily, anticipate, alienate, attach, sell, assign, pledge, encumber,
charge or otherwise transfer any Restricted Units.
4.
5. Award Date. The effective date of issuance of the Units to the Employee (the
"Award Date") shall be February 28, 2000.
<PAGE> 2
1. Restrictions and Restricted Period.
2.
(a) Units shall be issued in the name of the Employee upon the
execution by the Employee of this Agreement, and shall be evidenced on the books
and records of Limited. One-third of the Units issued herein shall be free of
any transfer or forfeiture restrictions set forth in Sections 2 and 4 of this
Agreement as of the Award Date.
(b) If the Employee voluntarily resigns his employment with
the Company, or the Company terminates the service of the Employee for "Cause"
(as hereafter defined) prior to the first anniversary of the Award Date, the
remaining two-thirds of the Units issued to the Employee herein shall be
forfeited and void, and the cash capital contribution paid by the Employee in
respect of such forfeited Restricted Units shall be returned to the Employee. If
the Employee is in the employ of the Company on the first anniversary of the
award date, an additional one-third of the Units granted to the Employee herein
shall be free of all restrictions contained in this Agreement.
(c) If the Employee voluntarily resigns his employment with
the Company, or the Company terminates the service of the Employee for Cause
after the first anniversary of the Award Date but prior to the second
anniversary of the Award Date, the final one-third of the Units constituting
Restricted Units shall be forfeited and void, and the cash capital contribution
paid by the Employee in respect of such forfeited Restricted Units shall be
returned to the Employee. If the Employee is in the employ of the Company on the
second anniversary of the Award Date, all restrictions with respect to all Units
covered by this Agreement shall lapse.
(d) Notwithstanding the foregoing provisions of this Section
4, all forfeiture and transfer restrictions with respect to the Units (other
than as provided in Section 9 hereof) shall lapse (i) upon the death or
permanent and total disability of the Employee; (ii) if the Company exercises
its "Bring-Along Rights" described in Section 7 hereof; (iii) if the Company
terminates the Employee's service without Cause; or (iv) if there is a "Change
in Control" (as hereafter defined).
(e) For the purpose of this Section 4, a transfer of
employment from the Company to and among the Company, E-Wash and Limited or from
any of the Company, E-Wash or Limited as an employee to a director's or
consultant's role shall not be deemed a termination of employment with the
Company.
(f) Definitions. For the purposes of this Section 4:
(i) A "Change in Control" shall mean:
(1) The acquisition by any individual,
entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "1934 Act") of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the 1934 Act) of 50%
or more of the combined voting power of all of the then
outstanding voting classes or series of
2
<PAGE> 3
units of Limited (the "Outstanding Voting Units"); provided,
however, that the following acquisitions shall not constitute
a Change of Control: (A) any acquisition directly from Limited
or any of its subsidiaries, (B) any acquisition by Limited or
any of its subsidiaries, (C) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by
Limited or any of its subsidiaries, (D) any acquisition by any
corporation with respect to which, following such acquisition,
more than 50% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power
of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by
individuals, entities or groups who were the beneficial
owners, respectively, of at least 50% of the Outstanding
Voting Units immediately prior to such acquisition in
substantially the same proportions as their ownership,
immediately prior to such acquisition, of the Outstanding
Voting Units, or (E) the acquisition of Outstanding Voting
Units by any individual, entity or group which on the Award
Date owned 50% or more of the Outstanding Voting Units;
(2) Approval by the holders of a majority of
the Units of Limited of a reorganization, merger or
consolidation, in each case, with respect to which all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Voting
Units immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more
than 50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election
of directors, as the case may be, of the corporation resulting
from or surviving such reorganization, merger or consolidation
in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or
consolidation, of the Outstanding Voting Units; or
(3) Approval by the requisite vote of the
shareholders of E-Wash of (A) a complete liquidation or
dissolution of Limited or (B) the sale or other disposition of
all or substantially all of the assets of Limited other than
to a corporation, with respect to which following such sale or
other disposition, more than 50% of the then outstanding
shares of common stock of such company and the combined voting
power for the then outstanding voting securities of such
company entitled to vote is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners of the Outstanding
Voting Units immediately prior to such sale or other
disposition in substantially the same proportion as their
ownership, immediately prior to such sale or other
disposition, of the Outstanding Voting Units.
(ii) "Cause" shall mean a termination of the
Employee's employment with the Company upon the determination
of the Company's Board of Directors that the Employee has
engaged in one or more of the following types of misconduct:
3
<PAGE> 4
(i) The Employee's failure or refusal,
after written notice thereof, to
perform specific directives approved
by a majority of the Board of
Directors which are consistent with
the scope and nature of the
Employee's duties and
responsibilities as Chairman and
Chief Operating Officer of the
Company;
(ii) Habitual drunkenness or use of drugs
which interferes with the
performance of the Employee's duties
and obligations under this
Agreement;
(iii) the Employee's conviction of a
felony or of any crime involving
moral turpitude, fraud, defalcation,
or misrepresentation; or
(iv) Any gross or willful misconduct of
the Employee resulting in
substantial loss to the Company or
substantial damages to the Company's
reputation.
1. Custody of Restricted Units; Tax Withholding; Voting and Dividends.
2.
3. (a) Restricted Units. The Restricted Units will be registered in the name of
the Employee. All indicia of ownership representing Restricted Units shall be
retained by the Company.
4.
5. (b) Voting Rights. The Employee will have all rights of a member of Limited
with respect to voting of the Restricted Units.
6.
7. (c) Distributions. All distributions of profits and losses, cash flow and
capital interests made with respect to the Restricted Units shall, with respect
to record dates on or after the Award Date, be distributed to the Employee in
accordance with the Limited Liability Company Agreement of E-Wash, LLC, as
amended from time to time (the "Operating Agreement").
8.
9. Piggyback Registration Rights. In the event that as a result of a merger or
other reorganization of Limited such that the Employee's Units are exchanged for
shares of stock of E-Wash, E-Wash grants to the Employee the following
registration rights with respect to such E-Wash shares:
(a) (i) Incidental Rights. If at any time after six months
after the completion of an underwritten initial public offering by
E-Wash on a firm commitment basis, E-Wash proposes to register, on any
form which may be used for the registration of its common stock, other
than Forms S-4 or S-8 (or any successor or similar forms then in
effect), any of its securities under the Securities Act of 1933, as
amended (the "Securities Act"), whether or not pursuant to registration
rights granted to other holders of its securities and whether or not
for sale for its own account, in a manner which would permit
registration of common stock for sale to the public under the
Securities Act, E-
4
<PAGE> 5
Wash will each such time give written notice to the Employee of its
intention to do so and of Employee's rights under this Section 6; such
notice to be given to Employee at least twenty (20) days prior to the
initial filing of such proposed registration statement. Upon the
written request of the Employee made within fifteen (15) days after the
giving of any such notice (which request shall specify the number of
shares intended to be disposed of by the Employee and the intended
method or methods of disposition thereof), E-Wash will use its
reasonable efforts to effect the registration under the Securities Act
of the "Registerable Amount" (as defined in 6(b) hereof) of common
stock which E-Wash has been so requested to register by the Employee,
to the extent necessary to permit the disposition (in accordance with
the intended methods thereof as aforesaid) of the common stock so to be
registered. Promptly upon notification to E-Wash from the managing
underwriter of the price at which the shares of common stock requested
to be registered pursuant to this Section 6 are to be sold, E-Wash
shall advise the Employee, of such price, and if such price is below
the price which Employee shall have indicated to be acceptable to the
Employee, the Employee shall then have the right to withdraw its
request to have its shares included in such registration statement.
(ii) Not Deemed a Demand Registration. No
registration effected pursuant to this Section 6 shall be deemed to be
a demand registration right. Any registration rights granted hereunder
shall be subordinate to any demand registration rights hereafter
granted by E-Wash to others.
(iii) Holdback. If E-Wash previously shall have
received a request for registration from a shareholder having demand
registration rights or under this Section 6, and if such previous
registration shall not have been withdrawn or abandoned, E-Wash will
not be required to effect any registration of any of its securities
under the Securities Act, whether or not for sale for its own account,
until a period of ninety (90) days shall have elapsed from the
effective date of such previous registration.
(iv) Discontinuance. Notwithstanding anything to the
contrary in this Section 6, E-Wash shall have the right to discontinue
any registration under this Section 6 at any time prior to the
effective date of such registration, if the registration of other
securities giving rise to such registration under this Section 6 is
discontinued; but no such discontinuation shall preclude an immediate
or subsequent request for registration pursuant to this Section 6.
(v) Termination of Piggyback Rights. The provisions
of this Section 6 shall expire as to any shares at such time as the
Employee may sell shares in E-Wash without the need for registration
under the federal securities laws.
(b) Registerable Amount. For the purpose of this Section 6,
the "Registerable Amount" means the maximum number of shares of common stock of
E-Wash issued to the Employee in exchange for the Units granted under this
Agreement which the Employee is eligible to sell in any registration covered by
this Section 6. The Registerable Amount is expressed as a fraction, the
numerator of which will be the number of shares issued to Employee in exchange
for the Units granted under this Agreement and held by the Employee at the time
of the public registration and the denominator of which shall be the number of
shares of such
5
<PAGE> 6
common stock held by other holders of common stock having registration rights
pari passu with the Employee's rights. If the registration is an underwritten
registration, and the managing underwriter gives written notice to E-Wash that
in its reasonable opinion the number of shares of common stock of E-Wash to be
included in the registration should be less than the aggregate number of shares
of common stock that E-Wash, the Employee and all other eligible holders of such
common stock have proposed to include in such registration, then E-Wash shall
have first priority to include in such registration all shares of common stock
it proposes to register. If such amount does not exceed the maximum number of
shares which the underwriter has reasonably determined can be registered in the
offering, then the remaining number of shares (the "Available Amount") shall be
allocated among the Employee and the other holders of common stock proposing to
register securities in the offering by multiplying the Available Amount by a
fraction, the numerator of which shall be the number of shares each of the
eligible participants owns and the denominator of which is the total number of
shares owned by all eligible participants. E-Wash shall have the exclusive right
to select the managing underwriters in such registration. For purposes of this
paragraph (b), if there is no underwriter for an offering, then the
determinations to be reasonably made by the managing underwriter hereunder shall
be made by the E-Wash board of directors.
(c) Hold-back Agreements. The Employee agrees, if so required
by the managing underwriter, not to effect any public sale or distribution of
securities of E-Wash of the same class as the securities included in such
registration statement, during the seven (7) days prior to the date on which any
underwritten registration has become effective and the one-hundred eighty (180)
days (or such longer period as shall have been agreed to by E-Wash and the
managing underwriters with respect to such registration statement) thereafter,
except as part of such underwritten registration. E-Wash agrees not to effect
any public sale or distribution of its equity securities or securities
convertible into or exchangeable or exercisable for any of such securities
during the seven (7) days prior to and ninety (90) days after any underwritten
registration has become effective, except as part of such underwritten
registration.
(d) Public Offering by Limited. All rights granted to Employee
in this Section 6 shall be effective with respect to Limited in the event that
Limited becomes a publicly traded company rather than E-Wash.
1. Bring-Along Right. For so long as the Company owns at least 33.33% of E-Wash
or Limited, if the Company or E-Wash proposes to make a bona fide sale in a
private offering of all of its E-Wash shares or of Limited units, the Company
and/or E-Wash shall have the right (the "Bring-Along Right"), exercisable upon
15 days' prior written notice, to require the Employee to sell his Units to such
third party upon terms no less favorable to the Employee than those that apply
to the Company or E-Wash with respect to such third party sale. In such case all
restrictions contained in Sections 2 and 4 applicable to any Restricted Units
shall lapse. The Employee hereby agrees to cooperate with the Company or E-Wash
and to take any and all action reasonably required in connection with the
consummation of such third party sale. Without limiting the foregoing, at the
closing of any sale under this Section, the Employee shall represent and warrant
that he is the beneficial owner of such Units free and clear of any liens or
encumbrances with full power and authority to transfer such shares.
2.
6
<PAGE> 7
3. Tag-Along Right. For so long as the Company owns at least 33.33% of E-Wash or
Limited, in the event that the Company or E-Wash (the "Purchase Offer
Recipient") shall receive a bona fide offer to purchase less than all shares of
E-Wash or Limited units (a "Purchase Offer"), the Purchase Offer Recipient shall
either decline such Purchase Offer or, if the Purchase Offer Recipient
determines to accept such Purchase Offer, then, prior to accepting any Purchase
Offer, arrange for the proposed purchaser to make, in addition to the Purchase
Offer, a bona fide offer to purchase from the Employee, and all other similarly
situated persons, upon the same terms as the Purchase Offer, units of Limited
owned by such parties, including the Employee (the "Tag Along Rights") in the
proportion and otherwise as described in the second succeeding sentence (the
"Unit Purchase Offer"). In the event a Unit Purchase Offer is made, the Purchase
Offer Recipient shall give the Employee written notice thereof (the "Notice")
specifying (i) the number of Units that the Employee may sell, and (ii) the
terms (including the price and the proposed date of consummation thereof) of
such Unit Purchase Offer. Upon receipt of the Notice, the Employee shall have
the right to sell that number of Units owned by him and which are not then
Restricted Units equal to (A) the product of (a) the total number of Limited
units proposed to be purchased in the Purchase Offer, the Unit Purchase Offer
and similar offers being made to other members of Limited concurrently with the
Purchase Offer, and (b) a fraction, the numerator of which shall be the number
of Tag-Along Units (as defined below) owned by the Employee and the denominator
of which shall be the number of shares of Limited units owned by the Purchase
Offer Recipient plus the number of shares of Tag-Along Units owned by all
members electing to participate in such sale. For purposes of the foregoing,
"Tag-Along Units" shall mean all units of Limited outstanding on the date of the
Sale. The Tag-Along Right may be exercised by the Employee by delivery, not
later than 5 days after receipt of the Notice, of a written notice (the
"Tag-Along Notice") to the Purchase Offer Recipient, which shall state the
maximum number of Units which are not Restricted Units that the Employee wishes
to include in such sale to the purchaser. The Employee shall participate in any
purchase specified in the Notice on the terms set forth therein (or on terms no
less favorable to the Employee) and as provided in the Tag-Along Notice during
the 90-day period following the date of the Notice. Any purchases following such
90-day period shall require a new Notice.
1. Restrictions in Operating Agreement. The rights and obligations of the
Employee as a member of Limited and the restrictions and rights as a holder of
Units, including transfer restrictions, are further governed by the terms of the
Operating Agreement.
1. Effect of Reclassification, etc., of Units. In the event of reclassification,
recapitalization, reorganization, merger, consolidation or combination such that
the holders of Units receive a different security in exchange for their Units,
then notwithstanding the provisions of Section 2, hereof, the Employee may
exchange his Units for shares of the same class of security which other holders
of Limited's Units receive, and the rights, restrictions, terms and conditions
of this Agreement shall apply to the securities received by the Employee to the
same extent as provided herein with respect to the Units.
2.
3. Shareholder Approval. Notwithstanding any provision of this Agreement to the
contrary, the issuance of Units contained herein is subject to the approval
within 12 months of the Award Date by the holders of the requisite majorities of
all three classes of preferred stock of the Company as required in the
agreements relating to the purchase of Series A, B and C Convertible
7
<PAGE> 8
Preferred Stock in the Company, as those agreements have been amended to date.
In the event that such shareholder approval is not obtained, the issuance of
Units shall be forfeited on the first anniversary of the Award Date. In case of
forfeiture, the capital cash contribution paid by the Employee for the Units
shall be returned to the Employee.
4.
5. Entire Understanding. This Agreement constitutes the entire understanding
between the parties relating to the matters described herein (other than
Limited's Limited Liability Company Agreement which is incorporated herein by
this reference) and supercedes and cancels all prior written and oral
understandings and agreements with respect to such matters.
6.
7. Binding Effect. This Agreement shall be binding upon and inure to the benefit
of the employees, executors, administrators, legal representatives, heirs and
legatees of the Employee and the successors and assigns of the Company.
8.
9. Employment Rights. Nothing contained in this Agreement shall confer upon
Employee any right with respect to the continuance of employment by the Company
or any related company, nor interfere in any way with the right of the Company
or any related company to terminate the Employee's employment at any time for
any reason.
10.
11. Governing Law. This Agreement shall be governed by, and interpreted,
construed and enforced in accordance with the laws of the State of Arizona.
12.
13.
14.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company, E-Wash, Limited, and the Employee have
caused this Restricted Unit Agreement to be executed as of the day and year
first above written.
1.
2.
3. SPINCYCLE, INC.
4.
5. By /s/ Peter Ax
6.
7.
8. E-WASH, INC.
9.
10. By /s/ Peter Ax
11.
12.
13. E-WASH, LLC
14.
15. By /s/ Peter Ax
16.
17. EMPLOYEE:
18.
19. /s/ Peter Ax
Print Name: Peter Ax
20.
21. 264098.3
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED MARCH 19, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-19-2000
<CASH> 4,462
<SECURITIES> 0<F1>
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 306
<CURRENT-ASSETS> 7,769
<PP&E> 120,741
<DEPRECIATION> 28,139
<TOTAL-ASSETS> 116,967
<CURRENT-LIABILITIES> 4,953
<BONDS> 131,365
0<F1>
50,846
<COMMON> 0<F1>
<OTHER-SE> (73,834)
<TOTAL-LIABILITY-AND-EQUITY> 116,967
<SALES> 13,298
<TOTAL-REVENUES> 13,298
<CGS> 0<F1>
<TOTAL-COSTS> 8,836
<OTHER-EXPENSES> 5,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,012
<INCOME-PRETAX> (5,207)
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> (5,207)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (5,207)
<EPS-BASIC> (187.54)
<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>
