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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to______________
COMMISSION FILE NUMBER 333-56857
333-56857-01
333-56857-02
ALLIANCE LAUNDRY SYSTEMS LLC
ALLIANCE LAUNDRY CORPORATION
ALLIANCE LAUNDRY HOLDINGS LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-1927923
DELAWARE 39-1928505
DELAWARE 52-2055893
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. BOX 990
RIPON, WISCONSIN 54971-0990
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(920) 748-3121
(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 [ ]
On November 3, 1999, all of the voting units of Alliance Laundry Systems LLC
were held by Alliance Laundry Holdings LLC and all of the common stock of
Alliance Laundry Corporation were held by Alliance Laundry Systems LLC.
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Alliance Laundry Systems LLC
Form 10-Q
For The Periods Ended September 30, 1999
Table of Contents
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Page No.
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PART I Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1999 and December 31, 1998 3
Condensed Statements of Income for the periods ended September 30, 1999
and September 30, 1998 4
Condensed Statements of Cash Flows for the periods ended September 30, 1999
and September 30, 1998 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 14
PART II Other Information 24
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIANCE LAUNDRY HOLDINGS LLC
CONDENSED BALANCE SHEETS
(in thousands)
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<CAPTION>
September 30, December 3l,
1999 1998
------------ -----------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash........................................ $ 1,218 $ 4,839
Cash-restricted............................. 821 2,084
Accounts receivable, net.................... 42,884 21,421
Inventories, net............................ 30,404 30,443
Prepaid expenses and other.................. 7,455 8,900
----------- ----------
Total current assets................... 82,782 67,687
Notes receivable................................. 14,823 10,036
Property, plant and equipment, net............... 59,360 62,264
Goodwill, net.................................... 48,694 49,819
Debt issuance costs, net......................... 13,690 14,940
Other assets..................................... 9,361 9,458
----------- ----------
Total assets........................... $ 228,710 $ 214,204
=========== ==========
Liabilities and Members' Deficit
Current liabilities:
Accounts payable............................ $ 15,968 $ 8,617
Finance program obligation.................. 3,374 5,154
Other current liabilities................... 25,708 24,538
----------- ----------
Total current liabilities.............. 45,050 38,309
Long-term debt:
Senior credit facility...................... 200,000 200,000
Senior subordinated notes................... 110,000 110,000
Junior subordinated note.................... 11,535 10,124
Other long-term liabilities...................... 1,131 1,083
----------- ----------
Total liabilities...................... 367,716 359,516
Commitments and contingencies (See Note 6).......
Mandatorily redeemable preferred equity.......... 6,000 6,000
Members' deficit................................. (145,006) (151,312)
----------- ----------
Total liabilities and members' deficit.. $ 228,710 $ 214,204
=========== ==========
</TABLE>
3
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ALLIANCE LAUNDRY HOLDINGS LLC
STATEMENTS OF INCOME
(in thousands)
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Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net sales:
<S> <C> <C> <C> <C>
Commercial laundry................................ $ 57,432 $ 55,053 $ 167,975 $ 168,315
Appliance Co. consumer laundry.................... 14,582 17,377 54,682 61,186
Service parts..................................... 7,836 8,570 24,626 24,838
---------- --------- ----------- -----------
79,850 81,000 247,283 254,339
Cost of sales.......................................... 59,234 60,523 183,338 194,191
---------- --------- ----------- -----------
Gross profit........................................... 20,616 20,477 63,945 60,148
---------- --------- ----------- -----------
Selling, general and administrative expense............ 10,309 10,716 31,434 33,436
Nonrecurring costs..................................... 730 464 1,624 1,705
---------- --------- ----------- -----------
Total operating expenses............................... 11,039 11,180 33,058 35,141
---------- --------- ----------- -----------
Operating income.................................. 9,577 9,297 30,887 25,007
Interest expense....................................... 7,898 8,416 23,945 13,308
Other income (expense), net............................ (78) (50) (222) 308
---------- --------- ----------- -----------
Income before taxes............................... 1,601 831 6,720 12,007
Provision (benefit) for income taxes................... - - 29 2,391
---------- --------- ----------- -----------
Net income....................................... $ 1,601 $ 831 $ 6,691 $ 9,616
========== ========= =========== ===========
</TABLE>
4
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ALLIANCE LAUNDRY HOLDINGS LLC
STATEMENTS OF CASH FLOWS
(in thousands)
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<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1999 1998
-------------- ---------------
(Unaudited)
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Cash flows from operating activities:
Net income...................................................... $ 6,691 $ 9,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................ 12,692 12,233
Non-cash Junior subordinated note interest................... 1,411 693
(Gain) loss on sale of property, plant and equipment......... 222 (308)
Deferred income taxes........................................ - 180
Changes in assets and liabilities:
Accounts and notes receivable............................ (26,250) (1,278)
Inventories.............................................. 39 (3,842)
Other assets............................................. 827 (9,964)
Accounts payable......................................... 7,351 (947)
Finance program obligation............................... (517) (10,283)
Other liabilities........................................ 2,917 7,368
-------- ---------
Net cash provided by (used in) operating activities.......... 5,383 3,468
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment...................... (8,875) (5,895)
Proceeds on disposal of property, plant and equipment........... 557 2,192
-------- ---------
Net cash provided by (used in) investing activities.......... (8,318) (3,703)
-------- ---------
Cash flows from financing activities:
Transfers to Parent............................................. - (15,553)
Proceeds from senior term loan.................................. - 200,000
Proceeds from senior subordinated notes......................... - 110,000
Proceeds from junior subordinated note.......................... - 9,000
Issuance of mandatorily redeemable preferred equity............. - 6,000
Issuance of common units........................................ - 48,882
Debt financing costs............................................ (686) (16,272)
Distribution to Parent and related transaction costs............ - (339,452)
-------- ---------
Net cash provided by (used in) financing activities.......... (686) 2,605
-------- ---------
Increase (decrease) in cash......................................... (3,621) 2,370
Cash at beginning of period......................................... 4,839 1,208
-------- ---------
Cash at end of period............................................... $ 1,218 $ 3,578
======== =========
</TABLE>
5
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Notes to Unaudited Condensed Financial Statements
NOTE 1. BASIS OF PRESENTATION
The unaudited financial statements as of September 30, 1999 and
September 30, 1998, and for the periods ended September 30, 1999 present the
financial position and results of operations of Alliance Laundry Holdings LLC
(the "Company") following the May 1998 recapitalization (the "Recapitalization")
and merger discussed in Note 2. The merger has been accounted for as a
recapitalization and accordingly, the historical accounting basis of the assets
and liabilities is unchanged. The financial statements as of September 30, 1999
and September 30, 1998, and for the periods ended September 30, 1999 represent
the consolidated financial position and results of operations of the Company,
including its wholly-owned direct and indirect subsidiaries, Alliance Laundry
Systems LLC and Alliance Laundry Corporation which were formed in connection
with the Recapitalization.
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments necessary (consisting only of normal
recurring adjustments) to present fairly the financial position and operating
results of the Company for the periods presented. The results of operations for
such interim periods are not necessarily indicative of results of operations to
be expected for the full year.
These financial statements have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such regulations, although the Company believes the
disclosures provided are adequate to prevent the information presented from
being misleading. Certain amounts in the September 30, 1998 financial statements
have been reclassified to conform to the current year financial presentation.
This report on Form 10-Q for the periods ended September 30, 1999 should be
read in conjunction with the audited financial statements presented in the
Company's Registration Statement on Form S-4 (file no. 333-56857) filed with the
Securities and Exchange Commission, which includes the audited financial
statements of the Company as of and for the year ended December 31, 1998.
NOTE 2. MERGER OF BUSINESS
OVERVIEW
On May 5, 1998, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") among Bain/RCL, L.L.C., a Delaware limited liability company
("Bain LLC"), RCL Acquisitions LLC ("MergeCo"), Raytheon Commercial Laundry LLC
and Raytheon Company ("Raytheon"), MergeCo was merged with and into Raytheon
Commercial Laundry LLC (the "Merger") with Raytheon Commercial Laundry LLC being
the surviving entity. Immediately following the merger Raytheon Commercial
Laundry LLC was renamed to "Alliance Laundry Holdings LLC". Prior to the Merger,
Raytheon owned 100% of the equity securities of Raytheon Commercial Laundry LLC,
and Bain LLC, the BRS Investors (as defined), and certain members of management
owned 100% of the equity securities of MergeCo. As a result of the Merger (i)
Raytheon's limited liability company interest in Raytheon Commercial Laundry LLC
was converted into the right to receive (a) an aggregate amount of cash equal to
$339.5 million, subject to pre-closing and post-closing adjustments (b) a junior
6
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subordinated promissory note from the Company in the original principal amount
of $9.0 million which matures in 2009 (c) preferred membership interests of the
Company with a liquidation value of approximately $6.0 million which are
mandatorily redeemable in 2009 and (d) common membership units of the Company
representing 7% of the total common membership interests of the Company and (ii)
Bain LLC's, the BRS Investors' and certain management members' limited liability
company interests in MergeCo were converted into the right to receive up to 93%
of the total common membership interests of the Company.
Simultaneous with the consummation of the Merger and each of the other
related transactions (the "Closing"), the Company contributed substantially all
of its assets and liabilities to Alliance Laundry Systems LLC, a newly formed
limited liability company ("Alliance Laundry"). Immediately after the
consummation of the transactions, Alliance Laundry became the only direct
subsidiary of the Company and succeeded to substantially all of the assets and
liabilities of the Company. Subsequent to May 4, 1998, Alliance Laundry
comprises all of the operating activities of the Company.
The transactions contemplated by the Merger Agreement (the "Transactions")
were funded by: (i) $200.0 million of term loan borrowings by Alliance Laundry;
(ii) $110.0 million of senior subordinated notes of Alliance Laundry and
Alliance Laundry Corporation due in 2008 (substantially all of the amounts in
clauses (i) and (ii) were distributed by Alliance Laundry to the Company to fund
the Merger and to fund related fees and expenses); (iii) the issuance by the
Company of a junior subordinated promissory note in the original principal
amount of $9.0 million; (iv) the issuance by the Company of the mandatorily
redeemable preferred membership interests with a liquidation value of $6.0
million; (v) the investors' equity contributions by Bain LLC, the BRS Investors
and certain members of management of $47.1 million and (vi) retained equity of
Raytheon of $3.5 million. Each of the transactions was conditioned upon
consummation of each of the others, and consummation of each of the transactions
occurred simultaneously.
SENIOR CREDIT FACILITY
In connection with the Transactions, Alliance Laundry entered into a credit
agreement (the "Senior Credit Facility") with a syndicate of financial
institutions (the "Lenders") for which Lehman Brothers Inc. acted as arranger
and Lehman Commercial Paper Inc. acted as syndication agent. The Senior Credit
Facility is comprised of a term loan facility aggregating $200.0 million (the
"Term Loan Facility") and a $75.0 million revolving credit facility (the
"Revolving Credit Facility"), which was made available in conjunction with the
issuance of Alliance Laundry's senior subordinated notes. The Term Loan Facility
requires no principal payments during the first two years and amortizes at the
rate of $1.0 million per year for years three through five, $40.0 million for
year six and $157.0 million for year seven. Alliance Laundry is required to make
prepayments with the proceeds from the disposition of certain assets and from
excess cash flow, as defined. No excess cash flow payment was required for the
period ended September 30, 1999.
Effective March 10, 1999, the Company entered into a $67 million interest
rate swap agreement with a financial institution to hedge a portion of its
interest rate risk related to its term loan borrowings under the Senior Credit
Facility. Under the swap, which has a term of three years, the Company pays a
fixed rate of 4.962% and receives quarterly interest payments based upon LIBOR.
The differential between the fixed and floating interest rates under the swap is
accrued as interest rates change and is recorded as an adjustment of interest
expense. The fair value of the interest rate swap is the amount which the
Company would receive or pay to terminate the instrument at the reporting date.
7
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At September 30, 1999, the amount required to settle the swap would not have had
a material adverse effect on the Company's business, financial condition and
results of operations.
SENIOR SUBORDINATED NOTES
Also on May 5, 1998, Alliance Laundry and its wholly owned subsidiary,
Alliance Laundry Corporation, issued $110.0 million of Series A 9 5/8% senior
subordinated notes due in 2008 (the "Notes") to Lehman Brothers Inc. and Credit
Suisse First Boston Corporation (the "Initial Purchasers"). The Initial
Purchasers subsequently resold the Notes to qualified institutional buyers
pursuant to Rule 144A of the Securities and Exchange Act and to a limited number
of institutional accredited investors that agreed to comply with certain
transfer restrictions and other conditions. Following the Rule 144A resale,
Alliance Laundry and Alliance Laundry Corporation conducted an exchange offer
(the "Exchange Offer") pursuant to which they offered to exchange the Notes for
a like principal amount of their Series B 9 5/8% Senior Subordinated Notes due
2008, which have been registered under the Securities Act of 1933, as amended.
The Exchange Offer expired by its terms on June 18, 1999 with all of the
outstanding $110.0 million aggregate principal amount of Notes validly tendered.
JUNIOR SUBORDINATED PROMISSORY NOTE
Upon the consummation of the Merger, the Company issued a junior
subordinated promissory note (the "Junior Note") in the principal amount of $9.0
million due August 21, 2009, to Raytheon. Pursuant to the terms of the Junior
Note, interest accrues at the rate of 19.0% per annum until the eighth
anniversary of the date of issuance of the Junior Note and at a rate of 13.0%
thereafter. The Junior Note is subordinated in priority and subject in right and
priority of payment to certain indebtedness described therein. Interest which
accrues on the Junior Note is payable in-kind.
PREFERRED EQUITY
Upon consummation of the Merger, the Company issued mandatorily redeemable
preferred membership interests (the "Seller Preferred Equity") with a
liquidation value of $6.0 million to Raytheon. The Seller Preferred Equity does
not accrete, accrue or pay dividends and is redeemable at the earlier of (i) a
change of control (as defined in the Amended and Restated Limited Liability
Company Agreement), (ii) any initial public offering or (iii) August 21, 2009.
The holders of the Seller Preferred Equity are entitled to receive distributions
from the Company in an amount equal to their unreturned capital (as defined
therein) prior to distributions in respect of any other membership interests of
the Company.
ASSET BACKED FACILITY
In connection with the Transactions, Alliance Laundry entered into a five
year $250.0 million revolving loan agreement (the "Asset Backed Facility")
through Alliance Laundry Receivables Warehouse LLC ("ALRW"), its special purpose
single member limited liability company, to finance trade receivables and notes
receivable related to equipment loans with Lehman Commercial Paper Inc. (the
"Facility Lender"), an affiliate of Lehman Brothers Inc. Alliance Laundry offers
equipment financing to end-users of its commercial laundry equipment to assist
in their purchases of new equipment from Alliance Laundry's distributors or, in
the case of route operators, from Alliance Laundry. Alliance Laundry, as
servicing agent retains collection and administrative responsibilities for the
accounts and notes sold.
8
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NOTE 3 NONRECURRING ITEMS
During the fourth quarter of 1998, the Company recorded a $4.5 million
restructuring charge associated with the closing of the Company's Latin American
coin laundromat operations. A decision was made to close these operations
because of continued unprofitable performance. The charge includes $1.5 million
for the estimated loss on the sale of company-owned dry-cleaning and laundry
stores representing the excess of the carrying value of assets relating to these
stores over estimated proceeds from sale, $1.4 million for the write-off of the
unamortized balance of the LaveRap tradename and franchise rights which were
purchased in 1996 for use in developing coin laundromats in Latin America, $0.9
million for severance and related benefits arising from the termination of 41
employees and $0.7 million for certain other expenses associated with
discontinuing the Latin American operations. The carrying value of assets held
for disposal at September 30, 1999 is not material. At September 30, 1999, the
Company had one store remaining which is expected to be sold during 1999 and
remaining reserves of approximately $0.1 million are expected to be adequate to
provide for related costs.
The Company's Latin American operations generated net sales of $0.2 million
and an operating loss of $0.2 million for the nine months ended September 30,
1999.
The Company entered into retention agreements with certain key executives,
managers and commissioned sales people prior to the Recapitalization. During
1999, the Company incurred approximately $1.3 million in expense associated with
payments under these agreements. Payments under this program continue through
November of 1999.
NOTE 4. INVENTORIES
Inventories are stated at cost using the first-in, first-out method but not
in excess of net realizable value, and consist of the following (in thousands):
September 30, December 31,
1999 1998
----------- ------------
(Unaudited)
Materials and purchased parts $ 12,634 $ 14,296
Work in process 3,394 3,280
Finished goods 18,387 16,571
Less: inventory reserves (4,011) (3,704)
---------- -----------
$ 30,404 $ 30,443
========== ===========
NOTE 5. CONDENSED FINANCIAL INFORMATION OF ALLIANCE LAUNDRY SYSTEMS LLC
As discussed more fully in Note 2, substantially all of the assets and
liabilities of the Company were transferred to Alliance Laundry, a wholly owned
subsidiary of the Company, in connection with the Merger. Therefore, the
historical financial statements of Alliance Laundry are the same as the
historical financial statements of the Company prior to the Merger inasmuch as
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Alliance Laundry did not exist prior to that time. Subsequent to the Merger,
Alliance Laundry is the only direct subsidiary of the Company and comprises all
of the Company's operating activities.
In connection with the Merger, Alliance Laundry and its wholly owned
subsidiary, Alliance Laundry Corporation, issued the $110 million of senior
subordinated notes. Alliance Laundry Corporation was incorporated for the sole
purpose of serving as a co-issuer of the Notes in order to facilitate their
issuance. Although summarized financial information normally would be provided
for Alliance Laundry Corporation, as a co-issuer of the senior subordinated
notes, Alliance Laundry Corporation does not have any substantial operations or
assets of any kind. Alliance Laundry Holdings LLC has provided a full and
unconditional guarantee of the Notes and has no operating activities independent
of Alliance Laundry. Separate financial statements of Alliance Laundry are not
presented because Company management has determined that they would not be
material to investors. Summarized unaudited financial information of Alliance
Laundry as of September 30, 1999 and for the three months and nine months then
ended is presented below.
September 30,
1999
-------------
(Unaudited)
Current assets............................... $ 82,782
Noncurrent assets............................ 145,928
-------------
$ 228,710
=============
Current liabilities.......................... $ 45,050
Long-term debt............................... 310,000
Other long-term obligations.................. 1,131
Member's deficit............................. (127,471)
-------------
$ 228,710
=============
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1999
------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales.................................... $ 79,850 $ 247,283
Gross profit................................. 20,616 63,945
Selling, general and administrative expense.. 10,309 31,434
Nonrecurring costs........................... 730 1,624
------------- -------------
Operating income............................. 9,577 30,887
Interest expense............................. 7,385 22,534
Other income (expense), net.................. (78) (222)
------------- -------------
Income before taxes.......................... $ 2,114 $ 8,131
============= =============
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
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On April 17, 1998, Amana Company, L.P. ("Appliance Co.") filed suit in
the United States District Court for the Southern District of New York against
Raytheon and Alliance Laundry seeking (i) declaratory relief that Alliance
Laundry is bound by a non-compete agreement between Appliance Co. and Raytheon
that prohibits the participation by Raytheon and corporate affiliates of
Raytheon in the U.S. consumer retail distribution laundry market, (ii)
unspecified damages from Raytheon for breach of the non-compete agreement, and
(iii) an injunction against the Company and Alliance Laundry prohibiting them
from competing in the U.S. consumer retail distribution laundry market. On June
2, 1998, Appliance Co. filed an amended complaint reiterating the allegations of
the original complaint and also asserting that, by virtue of the manner in which
they consummated the sale of Alliance Laundry by Raytheon, both Alliance Laundry
and Bain Capital, Inc. ("Bain") tortiously interfered with the non-compete
agreement between Appliance Co. and Raytheon. Appliance Co. now claims to be
entitled to damages in excess of $100 million. The defendants dispute all of
Appliance Co.'s allegations and deny that Appliance Co. is entitled to any
damages. On August 30, 1999, the Court denied defendants' motion to dismiss the
non-compete claims and the tortious interference claim against Bain. The Court
granted defendants' motion to dismiss plaintiffs' claim for declaratory
judgment, which would have allowed plaintiffs to compete in the commercial
laundry market in the event defendants prevail and are able to compete in the
U.S. consumer retail distribution laundry market. Raytheon has agreed to pay
the attorneys' fees and costs incurred by the Company, Alliance Laundry and Bain
in contesting this lawsuit. There can be no assurance, however, that Alliance
Laundry will prevail in the lawsuit and, accordingly, Alliance Laundry may be
prohibited for some period of time from participating in the U.S. consumer
retail distribution laundry market. Alliance Laundry does not currently
participate in this market. In addition, although the Company and Alliance
Laundry do not believe that it is reasonably likely that Appliance Co. will
prevail in the lawsuit, if Appliance Co. did prevail, the Company and/or
Alliance Laundry could conceivably be required to pay some portion of the
claimed damages in excess of $100 million. If so, such a payment could have a
material adverse effect on the business, financial condition and results of
operations of the Company and Alliance Laundry.
In late January 1999, Appliance Co. filed another amended complaint to add
claims against Raytheon and the Company in connection with the Horizon washing
machine, a "single-pocket" frontload washing machine that was being readied for
volume production as of the time when Raytheon (the former parent of the
Company) was completing the sale of its consumer appliances business to
Appliance Co. (the "Appliance Co. Transaction"). Appliance Co. alleges that
both Raytheon and the Company breached the acquisition agreement between
Appliance Co. and Raytheon and negligently misrepresented the readiness of
Horizon for volume production. On August 30, 1999, the Court dismissed
plaintiffs' claims against Raytheon and the Company for breach of contract and
negligent misrepresentation relating to the Horizon issues. Appliance Co. also
alleges that the Company subsequently breached its contractual obligations to
provide engineering services in connection with preparing Horizon for volume
production and also breached its alleged duty of due care in the course of
providing Appliance Co. with these engineering services. Appliance Co. seeks
damages for (i) the profits it claims to have lost by virtue of not being able
to sell Horizons, (ii) the damage to its commercial standing that is allegedly
attributable to its sale of defective washers to critical customers, and (iii)
the expenses it incurred in preparing for volume production of Horizon.
Raytheon has agreed to hold the Company harmless against the claims pertaining
to Horizon and to reimburse the Company for any fees incurred in defending these
claims.
11
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On January 28, 1999 Alliance Laundry filed a counterclaim against Appliance
Co. seeking payment of $0.6 million owed for Libra top-load washing machines and
parts sold pursuant to a Supply Agreement between the companies. Appliance Co.
has withheld payment of this amount based on its claim that Alliance Laundry had
violated the "Epidemic Failure" provision of the Supply Agreement and therefore
owed Appliance Co. for excess warranty costs. On May 5, 1999 Appliance Co.
filed a Reply Counterclaim for breach of the Supply Agreement, claiming that
Alliance Laundry had violated the Epidemic Failure provision and breached the
representation that it would sell top-load Libra washing machines that were
merchantable and fit for the use for which they were intended. Alliance Laundry
has denied all allegations. In September 1999, Appliance Co. stopped making
substantially all payments to Alliance Laundry on outstanding invoices for Libra
washing machines and parts, claiming that it is entitled to offset the damages
claimed in the Reply Counterclaim. Appliance Co. currently owes approximately
$12.0 million on these outstanding invoices and claims to be entitled to damages
of at least this amount. In October 1999, Appliance Co. was granted leave to
file another claim that seeks to revise the cross-license agreement between the
two companies to restrict the degree to which the Company can use intellectual
property whose ownership was retained by the Company as part of the 1997
transaction between Appliance Co. and Raytheon to compete against Appliance Co.
in the U.S. consumer retail distribution laundry market. The defendants deny
that there are any grounds for such a reformation of the cross-license
agreement.
All of the above claims are now set to begin jury trial on February 7,
2000.
On February 8, 1999, Raytheon commenced an arbitration under the Commercial
Arbitration Rules of the American Arbitration Association in Boston,
Massachusetts against the Company, seeking damages of $12.2 million plus
interest thereon and attorney's fees for breach of the Merger Agreement based on
Raytheon's claim for indemnification for a payment made to a third party
allegedly on behalf of the Company and Alliance Laundry following the Closing.
Raytheon also filed suit that same day in Massachusetts Superior Court for the
county of Middlesex seeking the same relief; the suit was dismissed by Raytheon
without prejudice in March 1999. The Company believes that Raytheon owed the
$12.2 million to the third party and that neither the Company nor Alliance
Laundry is liable for such amount. In addition, the Company and Bain LLC have
filed counterclaims and claims, respectively, seeking damages in excess of $30
million from Raytheon.
Pursuant to the Merger Agreement, Bain LLC, the Company and Raytheon have
agreed on a post-closing price adjustment of $2.8 million due to the Company
from Raytheon, as a result of a dispute regarding working capital levels as of
the Closing. The parties have agreed this amount will not be paid to the
Company until the resolution of the arbitration discussed above or this amount
will be offset against any amounts due to Raytheon from the Company as a result
of such arbitration, and as such, this amount has not been reflected in the
accompanying financial statements.
Various claims and legal proceedings generally incidental to the normal
course of business are pending or threatened against the Company. While the
ultimate liability from these proceedings is difficult to determine, in the
opinion of management, any additional liability will not have a material effect
on the Company's financial position, liquidity or results of operations.
NOTE 7. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The standard requires that certain items recognized under
accounting principles as components of comprehensive income be reported in an
annual financial statement that is displayed with the same prominence as other
financial statements.
Total Comprehensive Income totaled $6,306,000 and $12,416,000 for the nine
months ended September 30, 1999 and September 30, 1998, respectively. Total
Comprehensive Income for the nine months ended September 30, 1999 is comprised
of net income of $6,691,000 and Other Comprehensive Income (Loss) of ($385,000).
Total Comprehensive Income for the nine months ended September 30, 1998 is
comprised of net income of $9,616,000 and Other Comprehensive Income (Loss) of
$2,800,000. Other Comprehensive Income (Loss) is comprised entirely of
unrealized holding gains and losses on available-for-sale securities.
12
<PAGE>
NOTE 8. SEGMENT INFORMATION
Based upon the information used by management for making operating
decisions and assessing performance, the Company has organized its business into
categories based upon products and services broken down primarily by markets.
Commercial laundry equipment and service parts, including sales to international
markets, are combined to form the commercial laundry segment. Commercial laundry
net sales include amounts related to the Company's finance program which
supports its commercial laundry operations. The Company's primary measure of
operating performance is gross profit which does not include an allocation of
any selling or product distribution expenses. Such amounts are reviewed on a
consolidated basis by management. In determining gross profit for its operating
units, the Company also does not allocate certain manufacturing costs, including
manufacturing variances and warranty and service support costs. Gross profit is
determined by subtracting cost of sales from net sales. Cost of sales is
comprised of the costs of raw materials and component parts, plus costs incurred
at the manufacturing plant level, including, but not limited to, labor and
related fringe benefits, depreciation, tools, supplies, utilities, property
taxes and insurance. The Company does not allocate assets internally in
assessing operating performance. Net sales and gross profit as determined by the
Company for its operating segments are as follows:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
September 30, 1999 September 30, 1998
----------------------- ---------------------
Net Gross Net Gross
Sales Profit Sales Profit
<S> ----------------------- ---------------------
<C> <C> <C> <C>
Commercial laundry.................... 65,268 $ 23,871 $ 63,623 $ 22,936
Appliance Co. consumer laundry........ 14,582 411 17,377 617
---------------------- ---------------------
79,850 24,282 $ 81,000 23,553
======= =========
Other manufacturing costs............. (3,666) (3,076)
--------- ---------
Gross profit as reported............ $ 20,616 $ 20,477
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------
September 30, 1999 September 30, 1998
------------------------ ---------------------
Net Gross Net Gross
Sales Profit Sales Profit
----------------------- ---------------------
<S> <C> <C> <C> <C>
Commercial laundry.................... $192,601 $ 70,570 $193,153 $ 69,015
Appliance Co. consumer laundry........ 54,682 1,523 61,186 2,119
---------------------- ---------------------
$247,283 72,093 $254,339 71,134
======== ========
Other manufacturing costs............. (8,148) (10,986)
-------- --------
Gross profit as reported............ $ 63,945 $ 60,148
======== ========
</TABLE>
NOTE 9. SUBSEQUENT EVENT
In October 1999, the Company announced a plan which calls for the closure of its
Madisonville, Kentucky manufacturing facility, and the transfer of related
13
<PAGE>
production to the Company's Ripon, Wisconsin plant. The Company expects to
record a provision for related costs and expenses in the fourth quarter of 1999
which is currently expected to total less than $2.8 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the financial condition and
results of operations covers periods before the consummation of the
Transactions. In connection with the Transactions, the Company has entered into
financing arrangements and significantly altered its capital structure. As a
result of the Transactions, the Company is operating as a stand-alone entity for
the first time, and the historical financial statements reflect management's
estimates of certain costs associated with operating as a stand-alone entity and
reflect taxes that are not applicable to the Company following the consummation
of the Transactions. Accordingly, the results of operations for the periods
subsequent to the consummation of the Transactions will not necessarily be
comparable to prior periods.
The Company believes it is the leading designer, manufacturer and marketer
of stand-alone commercial laundry equipment in North America and a leader
worldwide. Under the well-known brand names of Speed Queen, UniMac and Huebsch,
the Company produces a full line of commercial washing machines and dryers with
load capacities from 16 to 250 pounds. The Company's commercial products are
sold to three distinct customer groups: (i) laundromats; (ii) multi-housing
laundries, consisting primarily of common laundry facilities in apartment
buildings, universities and military installations; and (iii) on-premise
laundries, consisting primarily of in-house laundry facilities of hotels,
hospitals, nursing homes and prisons. In addition, pursuant to a supply
agreement with Appliance Co., the Company supplied consumer washing machines to
the consumer appliance business of Appliance Co. for sale at retail. This supply
agreement was completed and concluded on September 10, 1999.
This discussion and analysis should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Registration Statement on Form S-4 (file
no. 333-56857) filed with the Securities and Exchange Commission, which includes
the audited financial position and operating results of the Company as of and
for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
The following table sets forth the Company's historical net sales for the
periods indicated:
Quarter Ended
-----------------------------------
September 30, September 30,
1999 1998
---------------- ----------------
(Dollars in millions)
Net sales
Commercial laundry $57.5 $55.1
Appliance Co. consumer laundry 14.6 17.4
Service parts 7.8 8.5
-------- --------
$79.9 $81.0
======== ========
14
<PAGE>
The following table sets forth certain condensed historical financial data for
the Company expressed as a percentage of net sales for each of the periods
indicated:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
September 30, September 30,
1999 1998
---------------- ------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 74.2% 74.7%
Gross profit 25.8% 25.3%
Selling, general and administrative expense 12.9% 13.2%
Nonrecurring costs 0.9% 0.6%
Operating income 12.0% 11.5%
Net income 2.0% 1.0%
</TABLE>
Net sales. Net sales for the quarter ended September 30, 1999 decreased
$1.1 million, or 1.4%, to $79.9 million from $81.0 million for the quarter ended
September 30, 1998. This decrease was attributable to lower consumer laundry
equipment sales of $2.8 million and service part sales of $0.7 million partly
offset by increases in commercial laundry sales of $2.4 million. The decrease in
consumer laundry sales is due to the completion and conclusion of the two year
supply agreement with Appliance Co. as of September 10, 1999. The increase in
commercial laundry sales was primarily due to higher sales for multi-housing
laundries, $2.7 million, and for laundromats, $1.9 million, partly offset by a
decrease in sales for on-premise laundries, $2.4 million.
Gross profit. Gross profit for the quarter ended September 30, 1999
increased $0.1 million, or 0.7%, to $20.6 million from $20.5 million for the
quarter ended September 30, 1998. This increase was attributable to
manufacturing efficiencies which were partially offset by higher field service
expenses of $1.2 million related to a recent new product introduction. Gross
profit as a percentage of net sales increased to 25.8% for the quarter ended
September 30, 1999 from 25.3% for the quarter ended September 30, 1998. The
increase in gross profit as a percentage of net sales is primarily attributable
to the manufacturing efficiencies noted above.
Selling, general and administrative expense. Selling, general and
administrative expenses for the quarter ended September 30, 1999 decreased $0.4
million, or 3.8%, to $10.3 million from $10.7 million for the quarter ended
September 30, 1998. The decrease in selling, general and administrative expenses
was primarily due to lower loss recognition related to reduced sales of trade
receivables through the Company's off-balance sheet special purpose entity.
Selling, general and administrative expenses as a percentage of net sales
decreased to 12.9% for the quarter ended September 30, 1999 from 13.2% for the
quarter ended September 30, 1998 as a result of the lower expenses noted above.
Nonrecurring costs. Nonrecurring costs for the quarter ended September 30,
1999 increased $0.2 million, or 57.3%, to $0.7 million from $0.5 million for the
quarter ended September 30, 1998. The increase relates to a one-time $0.3
million pension curtailment charge associated with a recent layoff which
occurred after the completion of the Appliance Co. supply agreement. Other
nonrecurring costs for both time periods are comprised of employee retention
costs.
15
<PAGE>
Operating income. As a result of the foregoing, operating income for the
quarter ended September 30, 1999 increased $0.3 million, or 3.0%, to $9.6
million from $9.3 million for the quarter ended September 30, 1998. Operating
income as a percentage of net sales increased to 12.0% for the quarter ended
September 30, 1999 from 11.5% for the quarter ended September 30, 1998.
Interest Expense. Interest expense for the quarter ended September 30,
1999 decreased $0.5 million, or 6.2%, to $7.9 million from $8.4 million for the
quarter ended September 30, 1998. The decrease is attributable to lower interest
rates related to the Senior Credit Facility as a result of a $67.0 million
interest rate swap agreement entered into in March 1999.
Net Income. As a result of the foregoing, net income for the quarter ended
September 30, 1999 increased $0.8 million, or 92.7%, to $1.6 million from $0.8
million for the quarter ended September 30, 1998. Net income as a percentage of
net sales increased to 2.0% for the quarter ended September 30, 1999 from 1.0%
for the quarter ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The following table sets forth the Company's historical net sales for the
periods indicated:
<TABLE>
<CAPTION>
Nine months Ended
-------------------------------------
September 30, September 30,
1999 1998
----------------- -----------------
(Dollars in millions)
<S> <C> <C>
Net sales
Commercial laundry $168.0 $168.3
Appliance Co. consumer laundry 54.7 61.2
Service parts 24.6 24.8
----------------- -----------------
$247.3 $254.3
================= =================
</TABLE>
The following table sets forth certain condensed historical financial data for
the Company expressed as a percentage of net sales for each of the periods
indicated:
<TABLE>
<CAPTION>
Nine months Ended
--------------------------------
September 30, September 30,
1999 1998
--------------- ---------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 74.1% 76.4%
Gross profit 25.9% 23.6%
Selling, general and administrative expense 12.7% 13.1%
Nonrecurring costs 0.7% 0.7%
Operating income 12.5% 9.8%
Net income 2.7% 3.8%
</TABLE>
16
<PAGE>
Net sales. Net sales for the nine months ended September 30, 1999
decreased $7.0 million, or 2.8%, to $247.3 million from $254.3 million for the
nine months ended September 30, 1998. This decrease was attributable to lower
consumer laundry equipment sales of $6.5 million, commercial laundry sales of
$0.4 million and service part sales of $0.2 million. The decrease in consumer
laundry sales was due to lower sales to Appliance Co. and due to the completion
and conclusion of the Appliance Co. supply agreement as of September 10, 1999.
The decrease in commercial laundry sales was primarily due to lower
international sales of $3.1 million and lower earnings from the Company's
equipment financing program of $0.6 million, which were partially offset by
higher North American equipment sales of $3.4 million. International sales are
affected by (i) lower sales of $1.8 million due to the closure of the Company's
Latin American coin laundromat operations and (ii) lower sales to Australia and
Europe. North American equipment sales were higher to multi-housing laundries
and for laundromats.
Gross profit. Gross profit for the nine months ended September 30, 1999
increased $3.8 million, or 6.3%, to $63.9 million from $60.1 million for the
nine months ended September 30, 1998. This increase was primarily attributable
to manufacturing efficiencies implemented during 1998 and the first nine months
of 1999 as well as margins related to the increase in North American equipment
sales. The increase was partially offset by the decreased volume of consumer
laundry sales to Appliance Co. and lower earnings related to the Company's off-
balance sheet equipment financing program. Gross profit as a percentage of net
sales increased to 25.9% for the nine months ended September 30, 1999 from 23.6%
for the nine months ended September 30, 1998. The increase in gross profit as a
percentage of net sales is primarily attributable to the manufacturing
efficiencies noted above and higher margins attributable to the increased North
American equipment sales as compared to consumer laundry sales.
Selling, general and administrative expense. Selling, general and
administrative expenses for the nine months ended September 30, 1999 decreased
$2.0 million, or 6.0%, to $31.4 million from $33.4 million for the nine months
ended September 30, 1998. The decrease in selling, general and administrative
expenses was primarily due to lower selling and distribution expenses of $1.0
million, lower loss recognition related to decreased sales of trade receivables
through the Company's off-balance sheet special purpose entity of $1.2 million,
lower expenses resulting from the closure of the Company's Latin American coin
laundromat operations of $0.9 million and lower salaried fringe benefit costs of
$0.4 million, which were partially offset by costs of being a stand-alone
business entity (resulting from the May 5, 1998 transaction). Selling, general
and administrative expenses as a percentage of net sales decreased to 12.7% for
the nine months ended September 30, 1999 from 13.1% for the nine months ended
September 30, 1998.
Nonrecurring costs. Nonrecurring costs for the nine months ended September
30, 1999 decreased $0.1 million, or 4.8%, to $1.6 million from $1.7 million for
the nine months ended September 30, 1998. Nonrecurring costs are comprised of
employee retention costs and a one-time $0.3 million pension curtailment charge
associated with a recent layoff which occurred after the completion of the
Appliance Co. supply agreement.
Operating income. As a result of the foregoing, operating income for the
nine months ended September 30, 1999 increased $5.9 million, or 23.5%, to $30.9
million from $25.0 million for the nine months ended September 30, 1998.
Operating income as a percentage of net sales increased to 12.5% for the nine
months ended September 30, 1999 from 9.8% for the nine months ended September
30, 1998.
17
<PAGE>
Interest Expense. Interest expense for the nine months ended September 30,
1999 increased $10.7 million, or 79.9%, to $24.0 million from $13.3 million for
the nine months ended September 30, 1998. The increase is attributable to
interest expense on debt issued in connection with the Recapitalization.
Income Taxes. There was no provision for income taxes for the nine months
ended September 30, 1999, as compared to a provision of $2.4 million for the
nine months ended September 30, 1998. Effective May 5, 1998 the Company is a
stand-alone limited liability company and is no longer subject to federal and
most state income taxes.
Net Income. As a result of the foregoing, net income for the nine months
ended September 30, 1999 decreased $2.9 million, or 30.4%, to $6.7 million from
$9.6 million for the nine months ended September 30, 1998. Net income as a
percentage of net sales decreased to 2.7% for the nine months ended September
30, 1999 from 3.8% for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Post-Transactions.
Following the Transactions, the Company's principal sources of liquidity
are cash flows generated from operations and borrowings under the $75.0 million
Revolving Credit Facility. The Company's principal uses of liquidity are to meet
debt service requirements, finance the Company's capital expenditures and
provide working capital. The Company expects that capital expenditures in 1999
will not exceed $13.0 million. The Company expects the ongoing requirements for
debt service, capital expenditures and working capital will be funded by
internally generated cash flow and borrowings under the Revolving Credit
Facility. The Company has incurred substantial indebtedness in connection with
the Transactions. As of September 30, 1999, the Company has $321.5 million of
combined indebtedness outstanding.
At September 30, 1999 the Company had outstanding debt of $200.0 million
under the Term Loan Facility, $110.0 million of senior subordinated notes, $11.5
million of junior subordinated notes and had $63.5 million of its $75.0 million
Revolving Credit Facility available subject to certain limitations under the
Senior Credit Facility. After considering such limitations, the Company could
have borrowed up to $52.0 million at September 30, 1999 in additional
indebtedness under the Revolving Credit Facility.
The $200.0 million Term Loan Facility amortizes quarterly and is repayable
in the following aggregate annual amounts:
<TABLE>
<CAPTION>
Amount Due
----------
Year (Dollars in
---- millions)
<S> <C>
1999....... $ 0.0
2000....... $ 0.5
2001....... $ 1.0
2002....... $ 1.0
2003....... $ 20.5
2004....... $ 98.5
2005....... $ 78.5
</TABLE>
18
<PAGE>
The Term Loan Facility is also subject to mandatory prepayment with the
proceeds of certain debt incurrences, asset sales and a portion of Excess Cash
Flow (as defined in the Senior Credit Facility). The Revolving Credit Facility
will terminate in 2003.
Concurrent with the Closing of the other Transactions, the Company entered
into the Asset Backed Facility, which provides $250.0 million of off-balance
sheet financing for trade receivables and equipment loans. The finance programs
have been and will continue to be structured in a manner that qualifies for off-
balance sheet treatment in accordance with generally accepted accounting
principles. It is expected that under the Asset Backed Facility, the Company
will continue to act as originator and servicer of the equipment financing
promissory notes and the trade receivables.
The Company's ability to make scheduled payments of principal or to pay the
interest or liquidated damages, if any, or to refinance its indebtedness, or to
fund planned capital expenditures, will depend upon its future performance,
which in turn is subject to general economic, financial, competitive and other
factors that are beyond its control. Based upon the current level of operations
and anticipated growth, management believes that future cash flow from
operations, together with available borrowings under the Revolving Credit
Facility, will be adequate to meet the Company's anticipated requirements for
capital expenditures, working capital, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt and make necessary capital expenditures after satisfying
certain liabilities arising in the ordinary course of business. If unable to do
so, the Company may be required to refinance all or a portion of its existing
debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing would be available or that any such sales of
assets or additional financing could be obtained.
Historical
Cash generated from operations for the nine months ended September 30,
1999, of $5.4 million was principally derived from the Company's earnings before
depreciation and amortization partially offset by changes in working capital.
The working capital investment in accounts receivable at September 30, 1999 of
$42.9 million increased $21.5 million as compared to the balance of $21.4
million at December 31, 1998, which was primarily attributable to selling fewer
accounts receivable through Alliance Laundry Receivable Warehouse ("ALRW"), a
special-purpose single member limited liability company and also due to $7.0
million of past due Appliance Co. receivables, which were ineligible for sale.
The working capital investment in accounts payable at September 30, 1999 of
$16.0 million decreased $7.4 million as compared to the balance of $8.6 million
at December 31, 1998. The accounts payable balance at December 31, 1998
reflected lower purchases and production in December 1998 as compared to
September 1999.
Net cash provided by operating activities for the nine months ended
September 30, 1999 of $5.4 million increased by $1.9 million as compared to the
nine months ended September 30, 1998. This increase was primarily due to higher
net cash provided by changes in assets and liabilities of $3.3 million,
partially offset by lower net income, adjusted for non-cash adjustments, of $1.4
million. The net cash reduction from changes in assets and liabilities for the
nine months ended September 30, 1998 of $18.9 million was largely due to (i) a
decrease in finance program obligations resulting from the payment of $7.8
million to Raytheon Commercial Appliances Receivables Corporation ("RAYCAR") for
collections by the Company as sub-servicer of accounts receivable which had
19
<PAGE>
previously been sold (ii) an increase in the Company's retained interest in
trade receivables which had been sold of $7.3 million and (iii) an increase in
finished goods inventories of $3.8 million.
Prior to the Transactions, cash had been transferred between the Company
and Raytheon based on the Company's cash position. For the period from January
1, 1998 through May 4, 1998, the Company transferred cash to Raytheon of $17.5
million, which was generated substantially through the sale of trade receivables
during the first nine months of 1998 and from the Company's earnings before
depreciation and amortization.
Capital Expenditures
The Company's capital expenditures for the nine months ended September 30,
1999 and September 30, 1998 were $8.9 million and $5.9 million, respectively.
Capital spending in 1999 was principally oriented toward transitioning dryer
production from Appliance Co. to the Ripon manufacturing facility and reducing
manufacturing costs, while spending in 1998 was principally oriented toward
reducing manufacturing costs and transitioning frontload washer production from
Appliance Co. to the Company's Ripon manufacturing facility.
YEAR 2000
The Company has completed the evaluation of its computer operating systems
that would potentially be disrupted upon the turn of the century as a result of
the Year 2000 Issue. As of October 1999, the Company estimates that it is Year
2000 compliant on over 95% of all business-related software and hardware and
that it will be fully compliant by the end of the fourth quarter of 1999.
The Company's current status with respect to both information technology
("IT") and Non-IT systems is as follows:
IT software/hardware
The Company believes that its Infinium financial system applications,
including general ledger, accounts receivable, payroll, human resources and
accounts payable subsystems, and its Mapics manufacturing systems applications
are currently Year 2000 ready. In addition, the Company has conducted a
comprehensive analysis of its Data3 manufacturing and internally developed order
processing and warehouse location inventory systems for which Year 2000
readiness may be an issue. Impacted files within such systems and the programs
which access them have been triaged according to urgency based on critical
functionality and the time period during which readiness will become an issue.
As of October 1999, the Company estimates that all identified files and programs
are Year 2000 ready and in use in a production environment. In addition,
software suppliers have provided Year 2000 ready releases of the Company's
Strategy Loan Management and Sales Tax Reporting systems which have been
implemented, and are currently in use.
Based on the triage approach, ongoing testing in a development environment
and advanced implementation of changes to critical systems, the Company
currently anticipates that any Year 2000 vulnerability with respect to its IT
software and hardware will be encountered and corrected in advance of a crisis
situation. All effectivity date processing changes and critical date display
functions were completed and implemented by the end of the first quarter of
1999.
20
<PAGE>
The Company has completed an audit of IT hardware within the organization.
Results indicate that the AS400 processing platform is Year 2000 ready and, as
of October 1999, over 95% of the network, network software, printers and PCs in
place throughout the organization are Year 2000 compliant. The network and
network software were upgraded with Year 2000 ready releases provided by
suppliers during the third quarter of 1999. Continued phased upgrades to Company
PCs and printers will continue during the fourth quarter of 1999 with ongoing
reassessment to ensure Year 2000 readiness. The Company's phone system was
upgraded for Year 2000 readiness in the second quarter of 1999.
The Company currently believes that the worst case scenario with regard to
IT would be the malfunction of a non-critical or sporadically used application.
Although the Company believes this scenario to be unlikely, manual back-up
procedures for these types of functions currently exist and would be initiated
in the event of a Year 2000 readiness issue. Such malfunctions, if they were to
occur, would be prioritized in conjunction with other critical projects being
addressed at the time that the Year 2000 readiness issue arises.
Non-IT software/hardware
The Company began implementation of a coordinated effort in September 1998
to include every department in the challenge of ensuring Year 2000 readiness in
Non-IT areas. Areas that were assessed included office machines, security access
devices, Uninterrupted Power Sources, maintenance control chips within equipment
used throughout the organization, robotics, process control devices, HVAC and
electrical systems and Year 2000 date sensitive controlled devices. Under the
direction of each functional Vice President, the Company has begun to implement
programs to correct Year 2000 issues in Non-IT areas. In addition to such
remedial actions, the programs include the development of contingency plans
(such as additional inventory, alternate manufacturing processes,
manual/procedures, etc.) for areas where Year 2000 readiness may be an issue. As
of October 1999, the Company currently estimates that Year 2000 readiness for
Non-IT areas is 90% complete in the Ripon facility, 90% complete in the
Madisonville facility and more than 85% complete in the Marianna facility. The
Company currently anticipates that all Non-IT Year 2000 issues will be addressed
by December 1999.
Products, customers and suppliers
The Company, an industry leader in the use of electronic display controls,
uses micro controls, embedded chips and related software in several of its
products. The Company evaluated 100% of its products for Year 2000 readiness
between November 1997 and November 1998 and currently believes that its products
are Year 2000 ready. The Company has prepared a product-related Year 2000
readiness Field Bulletin that is distributed to customers upon request. The
Field Bulletin has been in use since the fourth quarter of 1998.
The Company sent out Year 2000 readiness questionnaires to all suppliers in
December 1998. As of October 1999, more than 95% of the Company's suppliers have
responded to the questionnaire and indicated when its products and facilities
will be Year 2000 ready. Based on the response to the initial questionnaire, the
Company will prioritize the suppliers that could potentially have Year 2000
problems which could have a material adverse effect on the Company's operations
and will formulate contingency plans to mitigate Year 2000 risk. The Company
plans to routinely follow-up with suppliers to reassess and monitor Year 2000
compliance allowing contingency plans to be modified as required. Based upon our
initial assessment, the Company does not believe there are significant Year 2000
issues that would have a material adverse effect on the Company's financial
condition or results of operations.
21
<PAGE>
Costs
In 1996, the Company utilized outside consultants to determine the scope of
the Year 2000 readiness project. This cost was commissioned by the Company's
former parent and was not incurred locally. The Company secured the services of
one consultant that was used for a period of 18 months to assist with some of
the initial code changes required for system conversions of the highest
priority. In addition, expenses incurred by the Company related to Year 2000
readiness included operating and application software upgrades, personal
computer and network computer upgrades, central computer upgrade and internal IT
resources required to upgrade in-house developed application software. During
1998, expenditures related to Year 2000 were $1.2 million ($0.6 million in
expense and $0.6 million in capital). In 1999, the Company has budgeted another
$1.5 million ($0.9 million in expense and $0.6 million in capital) to support
Year 2000 related projects. The Company estimates that $0.8 million ($0.6
million in expense and $0.2 million in capital) will be needed in 2000 for
equipment upgrades and clean-up projects for seldom used low priority
applications that have little impact on the Company's operations or performance.
Certain of the Company's other IT projects have been delayed due to the
allocation of internal IT development staff to Year 2000 readiness issues.
However, quarterly project prioritization reviews occur at which time competing
critical priorities are assessed. Up to this point, resources have been
considered adequate to maintain progress on the Year 2000 readiness project
while supporting other strategic projects. The Company believes that such
deferrals will not have a material adverse effect on the Company's financial
condition and results of operations.
While the Company believes that new software being installed into its
computer system will address the Year 2000 Issue, there can be no assurance that
all of the new software will be installed in time to remedy the Year 2000 Issue
or that the Company's computer operating systems will not be disrupted upon the
turn of the century. Any such disruption, whether caused by the Company's
systems or those of any of its suppliers or customers, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position. This Statement is effective for
fiscal years beginning after June 15, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is potentially exposed to market risk associated with changes
in interest and foreign exchange rates. The Company does not and currently does
not intend to hedge exchange rate fluctuations between United States dollars and
foreign currencies. However, from time to time, the Company may enter into
derivative financial instruments to hedge its interest rate exposures. An
instrument will be treated as a hedge if it is effective in offsetting the
22
<PAGE>
impact of volatility in the Company's underlying interest rate exposures. The
Company does not enter into derivatives for speculative purposes. There have
been no material changes in the Company's market risk exposures as compared to
those discussed in the Company's Registration Statement on Form S-4 (file no.
333-56857) except for the interest rate swap entered into by the Company as
discussed in Note 2 to the financial statements for the quarter ended September
30, 1999.
FORWARD-LOOKING STATEMENTS
With the exception of the reported actual results, the information
presented herein contains predictions, estimates or other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended, including
items specifically discussed in "Note 6 - Commitments and Contingencies" and
"Year 2000" sections of this document. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company to differ materially from
those expressed or implied by such forward-looking statements. Although the
Company believes that its plans, intentions and expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that such plans, intentions, expectations, objectives or goals will be
achieved. Important factors that could cause actual results to differ materially
from those included in forward-looking statements include: impact of
competition; continued sales to key customers; possible fluctuations in the cost
of raw materials and components; possible fluctuations in currency exchange
rates, which affect the competitiveness of the Company's products abroad; market
acceptance of new and enhanced versions of the Company's products; the impact of
substantial leverage and debt service on the Company and other risks listed from
time to time in the Company's reports, including but not limited to the
Company's Registration Statement on Form S-4 (file no. 333-56857).
23
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Legal actions relating to Appliance Co. are described in Footnote 6 to
the Financial Statements in Part I hereto and are incorporated by
reference into Part II.
Item 2. Changes in Securities. 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) List of Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K. None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Alliance Laundry Systems LLC has duly caused this quarterly report to be signed
on its behalf by the undersigned, thereto duly authorized, in the city of Ripon,
state of Wisconsin, on the 3rd day of November 1999.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman and CEO
____________________________________ _______________________
Thomas L'Esperance
Vice President and Chief Financial Officer
____________________________________ _______________________
Bruce P. Rounds
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
Alliance Laundry Corp. has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereto duly authorized, in the city of Ripon, state
of Wisconsin, on the 3rd day of November 1999.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman and CEO
____________________________________ _______________________
Thomas L'Esperance
Vice President and Chief Financial Officer
____________________________________ _______________________
Bruce P. Rounds
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
Alliance Laundry Holdings LLC has duly caused this quarterly report to be signed
on its behalf by the undersigned, thereto duly authorized, in the city of Ripon,
state of Wisconsin, on the 3rd day of November 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman and CEO
____________________________________ _______________________
Thomas L'Esperance
Vice President and Chief Financial Officer
____________________________________ _______________________
Bruce P. Rounds
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001063698
<NAME> ALLIANCE LAUNDRY HOLDINGS LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,039
<SECURITIES> 0
<RECEIVABLES> 43,256
<ALLOWANCES> (372)
<INVENTORY> 30,404
<CURRENT-ASSETS> 82,782
<PP&E> 174,439
<DEPRECIATION> (115,079)
<TOTAL-ASSETS> 228,710
<CURRENT-LIABILITIES> 45,050
<BONDS> 321,535
6,000
0
<COMMON> 50,645
<OTHER-SE> (195,651)
<TOTAL-LIABILITY-AND-EQUITY> 228,710
<SALES> 247,283
<TOTAL-REVENUES> 247,283
<CGS> 183,338
<TOTAL-COSTS> 183,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 321
<INTEREST-EXPENSE> 23,945
<INCOME-PRETAX> 6,720
<INCOME-TAX> 29
<INCOME-CONTINUING> 6,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,691
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
