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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
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 INCORPORATION OR ORGANIZATION) | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
P.O. BOX 990, RIPON, WISCONSIN 54971-0990
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(920) 748-3121
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
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 ¨ No x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Not Applicable.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The number of shares of Alliance Laundry Corporation’s common stock outstanding as of March 10, 2008: 1,000 shares.
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Alliance Laundry Corporation
Alliance Laundry Holdings LLC
Index to Annual Report on Form 10-K
Year Ended December 31, 2007
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
This Annual Report includes “forward-looking statements” which appear in a number of places and includes statements regarding the intent, belief or current expectations with respect to, among other things, the ability to borrow funds under the Senior Credit Facility, the ability to successfully implement operating strategies, and trends affecting the business, financial condition and results of operations. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and located elsewhere herein regarding industry prospects and the Company’s financial position are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and we undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to have been correct and actual results could differ materially from those we expect, depending on the outcome of various factors, including, but not limited to, those set forth in this Form 10-K under the section headings noted above, in Item 1A hereof under “Risk Factors.”
| ITEM 1. | BUSINESS |
General
Throughout this annual report, we refer to Alliance Laundry Holdings LLC, a Delaware limited liability company, as “Alliance Holdings,” and, together with its consolidated operations, as “Company,” “Alliance,” “we,” “our,” “Predecessor,” “Successor,” and, “us,” unless otherwise indicated. Any reference to “Alliance Laundry” refers to our wholly-owned subsidiary, Alliance Laundry Systems LLC, a Delaware limited liability company, and its consolidated operations, unless otherwise indicated. Any reference to “ALH” refers to ALH Holding Inc., a Delaware corporation and Alliance Holdings’ parent entity. Throughout this annual report the term “stand-alone commercial laundry equipment” refers to commercial laundry equipment excluding the consumer laundry market, drycleaning equipment and custom engineered, continuous process laundry systems and the term “stand-alone commercial laundry equipment industry” includes laundromats, multi-housing laundries and on-premise laundries and excludes consumer laundry, drycleaners and continuous process laundries.
Our business began in 1908 when we introduced a hand-operated washer to the marketplace. Industry leading features were introduced under the Speed Queen® brand with the introduction of stainless steel wash tubs in 1938 and automatic washers and dryers in 1952. On May 5, 1998, Bain Capital Partners, LLC, (“Bain”), and members of our management, acquired 93% common equity interest in us with our then parent, Raytheon Company (“Raytheon”), continuing to own 7% of the common interests. In January 2005 Ontario Teachers’ Pension Plan Board, (“OTPP”), indirectly acquired the majority of the equity interests of Alliance Laundry through ALH Holding Inc. (“ALH”), and our management indirectly owned the remainder of Alliance Laundry’s equity interests through ALH. ALH owns 100% of the equity interests of Alliance Holdings. As of March 10, 2008 OTPP indirectly owns 90.7% of the equity interests of Alliance Laundry through ALH and current management owns 9.2% of the equity interests. On July 14, 2006 we completed the acquisition of substantially all of Laundry System Group NV’s (“LSG”) commercial laundry division (“CLD”) operations which manufacturers and markets commercial laundry products similar to Alliance Laundry. CLD’s European
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headquarters is in Wevelgem, Belgium, and it has manufacturing facilities in Belgium and sales offices in Belgium, Norway and Spain (“European Operations”). CLD also had manufacturing facilities and sales offices in the United States which have been consolidated into Alliance Laundry’s operations. See Note 3 “CLD Acquisition and Related Activity” for further discussion.
We refer to the 2005 acquisition of Alliance Holdings by ALH, including the related management investments in ALH, as the “Alliance Acquisition.” In connection with the closing of the Alliance Acquisition, we issued $150.0 million of 8 1/2% senior subordinated notes due January 15, 2013 (the “Senior Subordinated Notes”), established a $250.0 million senior secured credit facility (the “Senior Credit Facility”) and repaid the $110.0 million aggregate principal amount of our then outstanding 9 5/8% senior subordinated notes due 2008 (the “1998 Senior Subordinated Notes”). We refer to the above financing transactions (the “Financing Transactions”), taken together with the Alliance Acquisition, as the “Transactions.” For additional information about the Alliance Acquisition, see the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Alliance Acquisition.”
Alliance Laundry Corporation (“ ALC”) is a wholly-owned subsidiary of Alliance Laundry that was incorporated in 1998 for the sole purpose of serving as a co-issuer of the 1998 Senior Subordinated Notes. ALC also served as the co-issuer of the Senior Subordinated Notes. ALC does not have any substantial operations or assets of any kind and will not have any revenue.
As a result of the Alliance Acquisition, the Consolidated Financial Statements present our results of operations, financial position and cash flows prior to the date of the Alliance Acquisition transaction under “Predecessor.” The financial effects of the Alliance Acquisition transaction and our results of operations, financial position and cash flows following the closing of the Alliance Acquisition are presented under “Successor.” In accordance with generally accepted accounting principles in the United States, or GAAP, our Predecessor results have not been aggregated with our Successor results and, accordingly, our Consolidated Financial Statements do not show results of operations or cash flows for the twelve months ended December 31, 2005. However, in order to facilitate an understanding of our results of operations for the twelve months ended December 31, 2005 in comparison with the twelve months ended December 31, 2007 and December 31, 2006, we have presented certain financial measurements such as international revenues, total revenues and EBITDA on an unaudited combined basis. The combined results represent the January 1, 2005 through January 27, 2005 Predecessor period added to the January 28, 2005 through December 31, 2005 Successor period. The combined results of operations are non-GAAP financial measures and should not be considered in isolation or as a substitute for the Predecessor and Successor results.
We believe that we are a leading designer, manufacturer and marketer in North America of commercial laundry equipment used in laundromats, multi-housing laundries and on-premise laundries. Under the well-known brand names of Speed Queen®, UniMac®, Huebsch®, IPSO®, and Cissell®, we produce a full line of commercial washing machines and dryers with load capacities from 12 to 200 pounds. We have been a leader in the North American stand-alone commercial laundry equipment industry for more than ten years. With the addition of our European Operations and Alliance Laundry’s export sales to Europe, we are also a leader in the European stand-alone commercial laundry equipment industry.
We attribute our success in this industry to: (i) the quality, reliability and functionality of our products; (ii) the breadth of our product offerings; (iii) our extensive distributor network and strategic alliances with key customers; (iv) our investment in new product development and manufacturing
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capabilities and (v) selective acquisitions. As a result of our industry position, we generate significant recurring sales of replacement equipment and service parts. In addition to stand-alone commercial laundry equipment in North America, we also offer commercial laundry equipment and service parts internationally through our U.S. operations and through our European Operations. Internationally, through our U.S. operations, we generated revenue of $68.3 million, $57.4 million, and $52.0 million and in 2007, 2006 and 2005, respectively. Internationally, through our European Operations, we generated revenue of $85.4 million in 2007 and $36.5 million for the period July 14, 2006 through December 31, 2006. For 2007, 2006 and 2005 we generated net revenues of $443.3 million, $366.1 million and $317.3 million and EBITDA (as defined in “ITEM 7 – Liquidity and Capital Resources underEBITDA and Adjusted EBITDA”) of $68.5 million, $44.7 million and $13.6 million, respectively.
In North America, we serve three distinct commercial laundry end-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 in hotels, hospitals, nursing homes and prisons. Our primary means of serving these end-customers is through distributors and route operators through our U.S. operations. We reach laundromat and on-premise laundry end-customers through a network of over 400 North American distributors and over 240 international distributors served through our U.S. operations. Over 70 distributors are also served through our European Operations. Our distributors purchase equipment from us, then re-sell and install it for laundromat and on-premise end-customers. We serve multi-housing end-customers in North America through a network of over 100 route operators. Route operators purchase equipment from us, and then obtain leases from multi-housing property managers to place it into common laundry rooms.
We believe that we have the most extensive distribution network in North America which gives us a significant competitive advantage. We estimate that our distributors and route operators have either the number one or number two market position in over 80% of North American markets. We believe that the superior quality and loyalty of our distribution network has been a significant factor in achieving this market position in each of our three commercial laundry end-customer groups.
We estimate that the North American stand-alone commercial laundry equipment industry generated approximately $542 million in revenue in 2007. The industry’s revenues are primarily driven by population growth and the replacement cycle of laundry equipment. North American consumers view clean clothes as a necessity, with economic conditions having limited effect on the frequency of use, and therefore the useful life, of laundry equipment. As a result, the industry’s revenues have been relatively stable over time and through economic downturns.
With capital investments totaling $26.7 million since 2003, we have developed many new products, redesigned existing products and modernized our manufacturing facilities in Ripon, Wisconsin, and since July 2006 we have begun similar programs for our products and facilities in Wevelgem, Belgium and Deinze, Belgium. We believe our considerable investment in our product lines and manufacturing capabilities have strengthened and will continue to enhance our market leadership position. For information about the financial results of our operating segments, see Note 19 to the Financial Statements – Segment Information.
Company Strengths
Market Leader with Significant Installed Base. We believe that we are a market leader in the overall North American stand-alone commercial laundry equipment industry. In addition to being a
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market leader in North America, we believe that we are a leader in sales to each of our three primary commercial laundry end-customer groups. As a result of being a market leader for over ten years, we believe that we have one of the largest installed bases of equipment in North America, comprised of approximately two million machines. A significant majority of our revenue is attributable to replacement sales which are driven by our large installed base combined with an average ten year estimated life per machine.
Extensive and Loyal Distribution Networks. We believe we have developed an extensive distribution network in North America, with over 400 distributors and over 100 route operators. We estimate that our laundromat and on-premise laundry distributors and multi-housing route operators have either the number one or number two market position in over 80% of North American markets. These leading distributors and route operators are attracted by our industry-leading brand equity, broad product array, significant installed base and our comprehensive value-added support, which includes training, extensive electronic support of installation and service and joint promotion efforts. These factors lead to high costs for distributors and route operators to switch manufacturers, especially when combined with their substantial investments in service parts inventories and in training their sales and installation personnel with respect to our highly engineered products. Our end-customers place great value on the proven reliability of our products, backed by years of demonstrated experience in the field, as this significantly impacts their long-term repair and maintenance expenses. We have not historically experienced any significant turnover of our distributors and route operators, of which a significant number have been customers for over ten years.
Comprehensive and Innovative Product Offering. We believe our product lines lead the industry in reliability, breadth of offerings, functionality and advanced features. In addition, we believe we are the only manufacturer in North America to produce a full commercial product line (including topload washers, dryers, frontload washers, washer-extractors and tumbler dryers for all commercial customer groups), thereby providing customers with a single source solution for most of their stand-alone commercial laundry equipment needs. At December 31, 2007 our engineering organization was staffed with over 80 engineers, designers, technicians and support staff, who along with our marketing and sales personnel, and with input from our major customers, work to redesign and enhance our products to better meet customer needs. Many of our new products place an emphasis on energy efficiency and feature new electronic controls, facilitating ease of use as well as improving performance and reliability. In 2003 we introduced an upgraded Micro-electronic Display Control on the topload washer that conserves water and energy. In 2003 we introduced our Wash Alert system which allows students to view the availability of equipment in their common laundry areas and to view the status of their laundry from the convenience of their dorm rooms. In 2005 we introduced a variable frequency drive for certain of our washer-extractors which uses approximately 50 percent of the electricity of our regular models. In 2006 we introduced the commercial laundry industry’s first 45 lb. per pocket stacked tumbler, which provides greater capacity per square foot of floor space than any other tumbler on the market.
Leading North American Brands. We market and sell our products under the widely recognized brand names Speed Queen, UniMac, Huebsch, IPSO, and Cissell. We believe that we have industry-leading brand equity and brand recognition, based upon historical customer survey results.
Strong and Incentivized Management Team.Led by Chief Executive Officer Thomas L’Esperance, we have assembled a strong and experienced management team. Our eight executive officers average over 15 years of experience in the commercial laundry equipment and appliance industries. This management team has executed numerous strategic initiatives, including: (i) developing strategic alliances with key customers; (ii) acquiring and successfully integrating the commercial laundry
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businesses of UniMac, IPSO, and Cissell; (iii) implementing manufacturing cost reduction and quality improvement programs and (iv) implementing ongoing refinements to our product offerings. In addition, management currently owns approximately 9.2% of the Company’s common equity, and could own up to 16.9% of the Company’s common equity if management’s service and performance stock options, outstanding as of March 10, 2008 become exercisable (as defined in the ALH stock option plan).
Business Strategy
Our strategy is to continue our strong financial performance and selectively pursue growth opportunities by offering to our customers a full line of the most reliable and functional stand-alone commercial laundry equipment, together with industry-leading, comprehensive value-added services. The key elements of our strategy are as follows:
Develop and Strengthen Relationships with Key Customers. We have developed and will continue to pursue long-term relationships with key customers and will pursue supply agreements where appropriate. The relationships that we establish with our customers are comprehensive and include training, extensive technical support and promotional activities. In addition, we model our product development efforts to meet evolving customer preferences by working with key customers to develop new products, features and value-added services.
We have not experienced any significant customer turnover. Our top ten customers have been our customers for more than ten years. Coinmach Corporation, which is the largest operator of multi-housing laundries in North America, has been a significant customer of ours for over two decades.
Continue to Improve Manufacturing Operations. We seek to continuously enhance our product quality and reduce costs through ongoing refinements to our manufacturing processes. We have achieved such improvements in our Ripon, Wisconsin facilities, and intend to continue doing so at Ripon and at our Belgium facilities, through collaboration among key customers, suppliers and our engineering and marketing personnel. We have progressively reduced our manufacturing costs through improvements in raw material usage and labor efficiency, as well as through plant consolidations completed in 2000, 2006 and 2007. Since 2000, we have been using a demand flow production system on our higher volume product lines. These process changes have resulted in significant improvements in assembly efficiency, inventory levels, customer order lead times and production quality.
Continue to Pursue Strategic Acquisitions.Our present management team has successfully negotiated and integrated acquisitions since 1994 that, taken as a whole, have significantly increased our sales. We recently acquired LSG’s CLD operations in July 2006. Following the completion of additional integration tasks for the CLD acquisition and planned de-leveraging in 2008, we intend to continue our consideration of strategic acquisitions, both domestically and internationally. Our acquisition strategy will enhance and expand our international presence in the stand-alone commercial laundry equipment industry. We will focus on opportunities that provide or enhance the supply of full product lines to our customers. By doing this, we can improve our already strong market positions as well as achieve significant acquisition synergies.
Expand into the U.S. Consumer Laundry Market.We re-entered the U.S. consumer laundry market in October 2004, after the expiration of a non-compete agreement. This non-compete agreement was a result of the divestiture of a sister division in 1997. We are leveraging the strong brand equity of our Speed Queen name in order to recapture a portion of our historic market share, and are targeting the mid to high-end U.S. consumer laundry markets with products which are designed to have useful lives
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approximately twice that of typical consumer laundry equipment. We believe that our push into the mid to high-end U.S. consumer laundry markets will continue to allow us to expand our sales and diversify our customer base with minimal incremental capital expenditures since these products will be produced in our current facilities and are effectively our commercial units without vending capability.
Industry Overview
We estimate that North American stand-alone commercial laundry equipment sales were approximately $542 million in 2007. We believe that the North American market for stand-alone commercial laundry equipment has grown at a compound annual rate of approximately 0.9% since 1997. North American commercial laundry equipment sales historically have been relatively insulated from business and economic cycles, given that economic conditions tend not to affect the frequency of use or replacement of laundry equipment. We believe steady industry growth will be sustained by continued population expansion and by customers increasingly “trading up” to equipment with enhanced functionality and therefore higher average selling prices.
Manufacturers of stand-alone commercial laundry equipment compete on their ability to satisfy several customer criteria, including: (i) equipment reliability and durability; (ii) performance criteria such as water and energy efficiency, load capacity and ease of use; (iii) the availability of innovative technologies such as cashless payment systems and advanced electronic controls, which improve ease of use and management audit capabilities; (iv) the ability to swiftly and reliably provide servicing for their equipment; and (v) the supply of value-added services such as rapid spare parts delivery, equipment financing and computer-aided assistance in the design of commercial laundries.
Trends and Characteristics
North American Growth Drivers. We believe that continued population expansion in North America will continue to drive steady demand for garment and textile laundering by all customer groups. We believe population growth has historically supported replacement sales and modest growth in the installed base of commercial laundry equipment. According to the U.S. Census Bureau, the United States population has grown at a compound annual rate of 1.2% since 1997 and is projected to grow at approximately 0.8% per year, on average, over the next ten years.
In addition, customers are increasingly trading up to equipment with enhanced functionality, at higher average selling prices. For example, the larger national and regional customers in the laundromat and multi-housing customer groups are more likely to take advantage of recently available electronic features, such as cashless payment systems and advanced electronic controls which we believe provide these customers with a competitive advantage. Customers continue to move towards equipment with improved water and energy efficiency as the result of escalating energy costs, government and consumer pressure and a focus on containing operating costs.
Limited End Use Cyclicality.North American commercial laundry equipment sales historically have been relatively insulated from business and economic cycles because economic conditions tend not to dramatically affect the frequency of use, or replacement, of laundry equipment. The useful life of commercial laundry equipment, and thus the timing of replacement of the equipment, are also generally unaffected by economic conditions. The useful life of stand-alone commercial laundry equipment is generally 7 to 14 years. Under all economic conditions, owners of commercial laundries typically continue to use their equipment until it can no longer be economically repaired or until competition forces the owner to upgrade their equipment in order to improve its appearance or functionality.
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International Growth.We anticipate growth in demand for commercial laundry equipment in international markets. We also believe this is particularly true in developing countries where laundry needs are currently less fully developed than in North America. We believe that continued development and growth of disposable income in these countries will cultivate an increased need and demand for laundry services addressable by our products. We believe we have positioned the Company to benefit from this growth through our 2006 acquisition of CLD’s European Operations.
Reducing Customer Operating Costs.The time required to wash and dry a given load of laundry, which we refer to as cycle time, has a significant impact on the economics of a commercial laundry operation. Accordingly, commercial laundry equipment manufacturers produce equipment that provides progressively shorter cycle times through improved technology and product innovation. This shorter cycle time decreases labor costs and increases the volume of laundry that can be processed in a given time period. Examples of methods for reducing cycle time are: (i) shortening fill, drain and wash times; and (ii) decreasing water extraction time by increasing spin speed. Product enhancements that we implemented in 2000 increased our topload washer’s spin speed to the fastest in the commercial laundry equipment industry. The higher spin speed substantially increases water extraction and thereby lowers moisture retention. For laundromat and multi-housing laundry owners, the lower moisture retention results in reduced energy bills for clothes drying operations. Overall, this improvement provides faster drying times, lower energy costs and the potential for increased revenue-generating cycles per day.
Customer Categories
Stand-alone Commercial Laundry Equipment.Each of the stand-alone commercial laundry equipment industry’s three primary customer groups—laundromat operators, multi-housing laundry operators and on-premise laundry operators—is served through a different distribution channel and has different requirements with respect to equipment load capacity, performance and operating features. Vended equipment purchased by multi-housing route operators is most similar to consumer machines sold to retail customers and is generally purchased directly from us. Equipment purchased by laundromats and on-premise laundries has greater durability, delivers increased capacity, provides more sophisticated cleaning and faster drying capabilities and is generally purchased through distributors.
Laundromats.We estimate that laundromats accounted for approximately 47% of the sales for the North American stand-alone commercial laundry equipment industry in 2007. There are an estimated 35,000 laundromats in North America. These laundromats typically provide walk-in, self-service washing and drying and primarily purchase commercial topload washers, washer-extractors and tumblers. Washer-extractors and tumblers are larger-capacity, higher-performance washing machines and matching large capacity dryers, respectively. Laundromats have historically been owned and operated by sole proprietors who typically rely on distributors to find locations for stores, design the laundromat, provide and install equipment and provide technical and repair support and broader business services. For example, distributors frequently host seminars for potential laundromat proprietors to explain laundromat investment opportunities. Independent laundromat proprietors also look to distributors and manufacturers for equipment financing. Given the laundromat owner’s reliance on the services of its local distributor, we believe that a strong distributor network in local markets differentiates manufacturers which serve this customer group.
In addition to distributor relationships, we believe that laundromat owners choose among different manufacturers’ products based on, among other things: (i) reputation, reliability and ease and cost of repair; (ii) availability of equipment financing; (iii) the water and energy efficiency of the
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products (approximately 25% of annual gross wash and dry revenue of Laundromats is consumed by utility costs, according to the Coin Laundry Association, or CLA); and (iv) the efficient use of physical space in the store (approximately 31% of annual gross revenue of laundromats is expended on rent, according to the CLA’s “2007 Coin Laundry Industry Survey”).
Multi-Housing Laundries.We estimate that multi-housing laundries accounted for approximately 27% of North American stand-alone commercial laundry equipment sales in 2007. These laundries include common laundry facilities in multi-family apartment and condominium complexes, universities and military installations, as well as equipment for in-unit hook ups.
Most products sold to multi-housing laundries are small-chassis topload and frontload washers and small-chassis dryers that are vended, but similar in appearance to those sold to the retail consumer market and offer a variety of enhanced durability and performance features such as audit functions that keep track of the number of cycles and the amount of money that has been collected. We estimate that topload washers sold to multi-housing laundries typically last 10,000 cycles, approximately twice as long as the expected life of a consumer machine.
Multi-housing laundries are managed primarily by route operators who purchase, install and service the equipment under contracts with building management. Route operators pay rent (which may include a portion of the laundry’s revenue) to building management. Route operators are typically direct customers of commercial laundry equipment manufacturers such as ours and tend to maintain their own service and technical staffs. Route operators compete for long-term contracts on the basis of, among other things: (i) the reputation and durability of their equipment; (ii) the level of maintenance and quality of their repair service; (iii) the ability of building management to audit laundry equipment revenue; and (iv) the water and energy efficiency of products.
We believe reliability and durability are key criteria for route operators and their property management customers in selecting equipment, because these criteria help to minimize equipment down time and repair costs. We also believe route operators prefer water and energy efficient equipment that offers enhanced electronic monitoring and tracking features demanded by building management companies. Route operators are reluctant to change equipment suppliers given their investments in spare parts inventories and in sales and repair technician training, particularly as laundry equipment becomes more technically sophisticated. Therefore, we believe a large installed base of laundry equipment gives a commercial laundry equipment manufacturer a significant competitive advantage and a high likelihood of substantial, recurring and predictable replacement sales.
On-Premise Laundries. We estimate that on-premise laundries (“OPL”) accounted for approximately 26% of North American stand-alone commercial laundry equipment sales in 2007. On-premise commercial laundries are located at a wide variety of businesses that wash or process textiles or laundry in large quantities, such as hotels and motels, hospitals, nursing homes, prisons, sports facilities, car washes and fire stations.
Products sold to on-premise laundries include washer-extractors, tumbler dryers and flatwork finishers. The washer-extractors and tumbler dryers are primarily in larger capacities, up to 200 pounds per load, and process significantly larger loads of textiles and garments in shorter times than equipment typically sold to laundromats or multi-housing customer groups. Effective and rapid washing (i.e. reduced cycle time) of hotel sheets, for example, reduces both a hotel’s linen requirements and labor costs of washing and drying linens. We believe that in a typical on-premise laundry within a hotel up to 50% of the operating cost is labor.
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On-premise laundries typically purchase equipment through a distributor who provides a range of sales, installation and repair services on behalf of manufacturers. As with laundromats, we believe a strong distributor network is a critical element of sales success. On-premise laundries select their equipment based on the availability of specified product features, including, among other things: (i) reputation and reliability of products; (ii) load capacity and cycle time; (iii) water and energy efficiency; and (iv) ease of use. In addition, the availability of technical support and service is important when an on-premise laundry operator selects an equipment supplier.
Consumer Laundry.We re-entered the U.S. consumer laundry market in October 2004 after the expiration of a non-compete agreement. Products sold in this segment include topload washers, frontload washers and standard dryers, which we sell through distributors. Within this new sales segment we are leveraging the strong brand equity of our Speed Queen name in order to recapture a portion of our historic market share, and are targeting the mid to high-end U.S. consumer laundry markets with products which are designed to have useful lives approximately twice that of typical consumer laundry equipment. We believe that our push into the mid to high-end consumer laundry markets has allowed us to expand our sales and continue to diversify our customer base with minimal incremental capital expenditures since these products are produced in our current facilities.
Products and Services
We offer a full line of stand-alone commercial laundry washers and dryers, with service parts and value-added services supporting our products. Our products range from small washers and dryers, primarily for use in laundromats and multi-housing laundry rooms, to large laundry equipment with load capacities of up to 200 pounds used in on-premise laundries. Our brands include Speed Queen, UniMac, Huebsch, IPSO, and Cissell and are sold throughout North America and in over 90 foreign countries. We also benefit from domestic and international sales of service parts for our large installed base of commercial laundry equipment. We also sell laundry equipment under private label brands in order to take advantage of distribution networks of other companies as they fill their need to round out their product offerings.
Washers
Washers include washer-extractors, topload washers and frontload washers.
Washer-Extractors.We manufacture washer-extractors, our largest washer products, to process from 12 to 200 pounds of laundry per load. After cleaning, washer-extractors extract water from laundry with spin speeds that produce over 400 G-force, thereby reducing water retention and the time and energy costs for the drying cycle. These products are primarily sold under the Speed Queen, UniMac, Huebsch, IPSO, and Cissell brands. Washer-extractors that process up to 80 pounds of laundry per load are sold to laundromats, and washer-extractors that process up to 200 pounds of laundry per load are sold to on-premises laundries. Washer-extractors are built to be extremely durable in order to handle the enormous G-force generated by spinning several hundred pounds of water-soaked laundry. Also, the equipment is in constant use and must be durable enough to avoid frequent breakdowns, which would increase operating costs and downtime for the user.
In 2005 we introduced a larger capacity 150 pound washer-extractor which provides many productivity advantages for the on-premise laundry segment. The washer’s cylinder is the largest in the industry, within its category, equating to more laundry done in less time. This additional capacity also
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reduces the number of wash cycles per day, saving as much as 10% in water usage over other models. A door opening of nearly 25 inches makes it easier and faster to load and unload linens, saving operation time.
In 2005 we introduced a variation of our current Huebsch washer-extractor product line by adding models with 50% higher extract speed which removes more water from clothes at the end of the wash cycle and significantly shortens the drying cycle, thereby reducing utility costs.
In 2007 we introduced UniLinc™ an advanced graphical programmable washer control with operating software under the UniMac brand. The system uses advanced operating reports to assist our customers in lowering their laundry operating expenses. UniLinc reports more than 100 time and date stamped events used to reduce troubleshooting time, manage water consumption and record machine usage by the date and minute.
In 2007 the IPSO brand introduced an inverter-driven cabinet hardmount washer-extractor line with flexible energy programming options and up to 165 G-force. This product line provides energy and water efficient solutions for on-premise laundries as well as the energy conscious coin store owner.
Topload Washers.Topload washers are small-chassis washers with the capability to process up to 16 pounds of laundry per load with spin speeds that produce up to 150 G-force. These products are sold primarily to multi-housing laundries, laundromats and consumers under the Speed Queen and Huebsch brands.
In 2006 we modified our energy efficient commercial topload washer offerings by introducing models that comply with the new 2007 U.S. Department of Energy regulatory standards for energy and water usage.
Frontload Washers.Frontload washers are sold under the Speed Queen, UniMac, and Huebsch brands to laundromat and multi-housing customers. Our frontload washer’s advanced design uses 22% to 57% less water than our topload washers and can process up to 18 pounds of laundry per load. Furthermore, decreased usage of hot water and superior water extraction in the high G-force spin cycle reduce energy consumption. Our frontload washer is available with front controls (front accessibility complies with Americans with Disabilities Act regulations) or rear controls and can be purchased with a matching small-chassis dryer (single or stacked, front or rear controls).
Our frontload washers display the U.S. federal government’s ENERGY STAR mark. The ENERGY STAR label was designed by the U.S. federal government to denote products that use less energy, thereby saving money on utility bills while helping to protect the environment. Along with our 18 pound wash load capacity, our frontload washer has a spin speed of up to 1,000 revolutions per minute, providing significant dryer energy savings.
In 2007 we introduced a new door opening on our consumer and commercial frontload washer that is 131% larger, making loading and unloading significantly more convenient.
Dryers
Dryers include tumbler dryers, standard dryers and stacked dryers. We also sell a line of stacked combination frontload washers and dryers.
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Tumbler Dryers.Tumblers are very large dryers with the capability of drying up to 170 pounds of laundry per load. Tumblers are sold primarily to laundromats and on-premise laundries under all five of our brands. In 2003 we upgraded our 50 and 75 pound tumbler designs by enlarging the doors to facilitate easier loading and unloading. These new doors are also reversible which allows for a broader array of installation arrangements. In addition, in 2003 we introduced the CARE® fire suppression system option for 50, 75, 120 and 170 pound tumblers. This system detects and diminishes spontaneous combustion fires which can be started when drying chemically saturated fabrics.
In 2006 we introduced the commercial laundry industry’s first 45 lb. per pocket stacked tumbler. The new tumbler provides greater capacity per square foot of floor space than any other tumbler on the market. This tumbler is also the most energy efficient commercial tumbler dryer Alliance Laundry Systems has ever built. The combination of increased capacity per square foot, fast throughput and energy savings results in greater profits for our customers.
In 2007 Alliance Laundry Systems received a patent on their design for oval perforations on tumbler dryers. The new perforations were designed to reduce clothing and machine damage by allowing foreign objects such as drywall screws to pass while maintaining air flow, strength and efficient drying performance.
Standard Dryers.Standard dryers are small capacity dryers with the capability to process up to 18 pounds of laundry per load. Standard dryers, including stacked dryers, are primarily sold under the Speed Queen, UniMac, and Huebsch brands. Our standard dryer’s capacity, measuring 7.1 cubic feet, is among the largest in the industry.
Stacked Dryers and Stacked Frontload Washers and Dryers.To enable our multi-housing customers to conserve valuable floor space, we offer a stacked unit consisting of two 18 pound standard dryers and offer a stacked combination unit consisting of an 18 pound frontload washer paired with an 18 pound standard dryer.
Service Parts
We benefit from the recurring sales of service parts used to support our large installed base of equipment. The expected field service life of our equipment is 7 to 14 years. We offer immediate response service whereby many of our parts are available on a 24-hour turnaround basis for emergency repair parts orders. The significant demand for service parts generated by the large installed base provides us with a source of higher margin revenue which is recurring and predictable.
Our websites enable authorized distributors and route operators to register products, process warranty claims and order parts online. These online services offer customers flexibility, short processing time and reduced order processing errors.
Other Value-Added Services
Management believes we offer an unmatched range of complementary customer services and support, including technical support and on-call installation and repair service through our highly trained distributors. We believe our customers attach significant importance to these value-added services. We offer services that we believe are significant drivers of high customer satisfaction and retention, such as equipment financing (which accounted for approximately 2% of our 2007 net revenues), laundromat site selection assistance, investment seminar training materials, computer-aided commercial laundry room
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design and sales and service training for distributors. We offer our customers a CD-ROM based parts look up program called SearchIt, which is continually updated to include service manuals, troubleshooting guides, parts pricing information and a parts ordering pick list. Our laundry design service provides construction drawings and 3-dimensional layouts of proposed laundry facilities, and provides a cost analysis for new or updated laundry facilities.
Our public websites provide information on all of our products and services, including equipment sizing and cost analysis tools, and include the ability to download product literature, installation and operating instructions, programming manuals, technical bulletins and warranty information. They also provide product selection assistance, education centers, an online consumer magazine, distributor locators, dealer locators, servicer locators, product comparison guides and energy and water consumption guides. In 2006 we launched new IPSO and Cissell domestic websites, and new eight language UniMac and Speed Queen websites targeted at worldwide visitors.
We also have a password-protected website for our distributors and route operators. In 2004 we added an E-Business section to our website that allows authorized distributors and route operators to check the status of their equipment and parts orders online as well as parts inventory availability. In 2005 our technical communications department created product service training videos and online electronic control training for use by authorized distributors and route operators. In 2007 a new finance site was launched for our existing coin store finance customers allowing them to manage their accounts online.
We believe our extensive services, in addition to the dependability and functionality of our products, will continue to differentiate our products from the competition.
Customers
Our customers include more than: (i) 150 distributors to laundromats; (ii) 250 distributors to on-premise laundries; (iii) 100 route operators serving multi-housing laundries; (iv) 240 international distributors served through our U.S. operations; and (v) more than 70 distributors served through our European Operations.
Our top ten customers accounted for approximately 23.1% of our 2007 net revenues. Our top ten customers have been customers for more than ten years. In 2007 Coinmach Corporation, the largest multi-housing route operator in the United States, PWS Investments, Inc. and Metropolitan Laundry Machinery Co., Inc. were our largest customers. Coinmach and its subsidiary, Super Laundry Equipment Corp., was our largest customer, accounting for 8.8% of our 2007 net revenues.
Sales and Marketing
Sales Force
Our global sales force of more than 40 as of December 31, 2007 is structured to serve the specific needs of each of our customer groups. In addition, through a marketing staff of more than 50 professionals as of December 31, 2007, we provide customers and distributors with a wide range of value-added services such as advertising materials, training materials, computer-aided commercial laundry room design, product development and technical service support.
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Marketing Programs
We support our sales force and distributors through a balanced marketing program of advertising and industry trade shows. Advertising expenses totaled $4.1 million in 2007 and included a variety of forms, including internet websites, multi-media projects, print literature, direct mail and public relations activities. In addition, our representatives attended over 90 trade shows in 2007 to introduce new products, maintain contact with customers, develop new customer relationships and generate sales leads for our products.
Off-Balance Sheet Equipment Financing
Through our special-purpose financing subsidiaries, we offer an extensive off-balance sheet equipment financing program to end-users, primarily laundromat owners, to assist in their purchases of new equipment. Typical terms include two to nine year loans with an average principal amount of approximately $70,000. We believe that our off-balance sheet equipment financing program is among the industry’s most comprehensive and that the program is an important component of our marketing activities. In addition, this service provides us with an additional source of recurring income.
The financing program is structured to minimize our risk of loss. We adhere to strict underwriting procedures, including comprehensive applicant credit analysis (generally including credit bureau, bank, trade and landlord references, site analysis including demographics of the location and multiple year pro-forma cash flow projections), security in the form of collateral and distributor assistance in remarketing collateral in the event of default. As a result of these risk management tools, losses from the program have been minimal. Net write-offs for equipment loans have averaged less than 1% for the five year period ended December 31, 2007, and were less than 1% for the year ended December 31, 2007. For additional information about the financing program, see the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” Note 4 to the Financial Statements – “Significant Accounting Policies” and Note 6 to the Financial Statements – “Equipment Financing and Sales of Notes Receivable.”
Research and Development
As of December 31, 2007 our engineering organization is staffed with over 80 engineers, designers, and technicians, who have developed numerous proprietary innovations that we utilize in select products. Our recent research and development efforts have focused primarily on continuous improvement in the reliability, performance, capacity, energy and water conservation, sound levels and regulatory compliance of our commercial laundry equipment. Our engineers and technical personnel, together with our marketing and sales personnel, collaborate with our major customers to redesign and enhance our products to better meet customer needs. Our cumulative research and development spending exceeded $39.0 million for the period 2003 through 2007.
Competition
Within the North American stand-alone commercial laundry equipment industry, we have several large competitors. However, we believe that we are the only participant in the North American stand-alone commercial laundry equipment industry to serve significantly all three customer groups (laundromats, multi-housing laundries and on-premise laundries) with a full line of topload washers, washer-extractors, frontload washers, tumbler dryers and standard dryers. With respect to laundromats, our principal competitors include Wascomat (the exclusive North American distributor of AB Electrolux products), Whirlpool Corporation and The Dexter Company. In multi-housing, our principal competitor is Whirlpool Corporation. In on-premise laundry, we compete primarily with Pellerin Milnor
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Corporation, American Dryer Corporation, Wascomat and Continental Girbau Inc. We do not believe that a significant new competitor has entered the North American stand-alone commercial laundry equipment industry during the last ten years.
Within the European stand-alone commercial laundry equipment industry, we have several large competitors. The largest manufacturer and marketer of stand-alone commercial laundry equipment in Europe is AB Electrolux. The other large European manufacturer and marketers of stand-alone commercial laundry equipment are Miele, Girbau, S.A. and Primus N.V.
Manufacturing
We operate manufacturing facilities located in Ripon, Wisconsin; Wevelgem, Belgium and Deinze, Belgium with an aggregate footprint of more than 900,000 square feet. The facilities are organized to focus on specific product groups, although each facility serves multiple customer groups. The Ripon plant produces our small-chassis topload washers, large-chassis washer-extractors, frontload washers, small chassis dryers and tumbler dryers. Our Wevelgem and Deinze plants produce primarily large-chassis washer-extractors and ironers. Our manufacturing plants primarily engage in fabricating, machining, painting, assembling and finishing operations. We also operate our equipment distribution center and service parts distribution center in Ripon, Wisconsin. In 2006 we completed the consolidation of our Marianna, Florida facility product lines into our existing Ripon, Wisconsin operations. For additional information about the Marianna, Florida facility closure, see the discussion under Note 5 to the Financial Statements – “Infrequently Occurring Items.” Additionally, in November of 2005 we entered into a lease agreement related to production space in Ripon, Wisconsin. This production space is primarily used for the manufacture of product lines which were transitioned from the Marianna, Florida facility. We believe that existing manufacturing facilities provide adequate production capacity to meet expected product demand.
In 2006 we discontinued the Louisville, Kentucky operations and closed the Portland, Tennessee facility. For additional information regarding the Louisville and Portland facilities, see the discussion under Note 3 to the Financial Statements – “CLD Acquisition and Related Activity.” Substantially all of CLD’s Louisville and Portland operations were consolidated into Ripon, Wisconsin.
We purchase substantially all raw materials and components from a variety of independent suppliers. Key material inputs for manufacturing processes include motors, stainless and carbon steels, aluminum castings, electronic controls, corrugated boxes and plastics. For the majority of raw materials and components, we believe there are readily available alternative sources of raw materials from other suppliers. We have developed long-term relationships with many of our suppliers and have sourced materials from six of our ten largest suppliers for at least five years.
We are committed to achieving continuous improvement in all aspects of our business in order to maintain our industry leading position. All of our manufacturing facilities, Ripon, Wisconsin and Wevelgem and Deinze, Belgium, are ISO 9001 certified. ISO 9001 is a set of standards dealing with quality management systems for quality assurance in design/development, production, installation and servicing that are published by the International Standardization Organization.
Intellectual Property and Licenses
We have approximately 29 trademarks, certain of which are registered in the United States and a number of foreign jurisdictions as of December 2007. Our widely recognized brand names Speed Queen,
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UniMac, Huebsch, IPSO, and Cissell are identified with and important to the sale of our products. Generally, registered trademarks have a perpetual life, provided that they are renewed on a timely basis and continue to be used properly as trademarks, subject only to the rights of third parties to seek cancellation of the marks. In 2005 and 2006 we recorded reductions in the value of the Ajax® trademark. In 2006 we recorded a reduction in the value of the LSG customer agreement. For additional information regarding the Ajax trademark and LSG customer agreement, see the discussion under Note 5 to the Financial Statements – “Infrequently Occurring Items” and Note 8 to the Financial Statements – “Goodwill and Other Intangibles.”
We currently have 47 patents. Our business is not dependent to any significant extent upon any single or related group of patents. We believe that our most significant patents are the “Suspension System for Automatic Washing Machine,” which will expire in 2009 and the “Laundry Dryer with Improved Tumbler Airflow Passage Openings,” which will expire in 2025. The Company does not believe that the expiration of either of these patents will have a material adverse effect on the Company’s financial condition or its results of operations.
Our business is not dependent to a material degree on copyrights or trade secrets although we consider the CustomerOne™, NetMaster®, CardMate®, Wash Alert™, CARE®, and SearchIt® systems and our upgraded Micro-electronic Display Control™ to be developments that are important to our business. Other than licenses to commercially available third-party software, we do not believe our licenses to third-party intellectual property are significant to the business.
Regulations and Laws
Environmental, Health and Safety Matters
Our Company and its operations are subject to comprehensive and frequently changing federal, state and local environmental and occupational health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of waste and storm water and the transportation, storage and disposal of wastes, including solid and hazardous wastes. We are also subject to potential liability for non-compliance with other environmental laws and for the investigation and remediation of environmental contamination (including contamination caused by other parties) at the properties we own or operate (or formerly owned or operated) and at other properties where the Company or predecessors have carried on business or have arranged for the disposal of hazardous substances. As a result, we are involved, from time to time, in administrative and judicial proceedings and inquiries relating to environmental matters. There can be no assurance that we will not be involved in such proceedings in the future and that the aggregate amount of future clean-up costs and other environmental liabilities (including potential fines and civil damages) will not have a material adverse effect on our business, financial condition and results of operations. We believe that our facilities and operations are in material compliance with all environmental, health and safety laws. In our opinion, any liability related to matters presently pending will not have a material effect on our financial position, liquidity or results of operations after considering provisions already recorded.
Federal, state and local governments could enact laws or regulations concerning environmental matters that affect our operations or facilities or increase the cost of producing, or otherwise adversely affect the demand for, our products. We cannot predict the environmental liabilities that may result from legislation or regulations adopted in the future, the effect of which could be retroactive. Nor can we predict how existing or future laws and regulations will be administered or interpreted or what environmental conditions may be found to exist at our facilities or at other properties where we or our predecessors have arranged for the disposal of hazardous substances.
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Certain environmental investigatory and remedial work is underway at our Ripon, Wisconsin manufacturing facility. With respect to the Ripon facility, this work is being conducted by us with the support of an environmental consultant. In furtherance thereof, during 2005 the Wisconsin Department of Natural Resources requested the installation and monitoring of a ground well at the Ripon facility. The first ground well has been monitored in accordance with a work plan set up between Alliance Laundry and the Wisconsin Department of Natural Resources. The results of the first monitoring well will require further action including additional monitoring wells within the general area of the first well. A work plan for the additional monitoring wells is also being set up between Alliance Laundry and the Wisconsin Department of Natural Resources. We currently expect to incur costs of less than $100,000 through 2008. There can be no assurance, however, that we will not incur additional remedial costs in the future with respect to the Ripon facility.
Other Regulation
In addition to environmental regulation, our operations are also subject to other federal, state and local laws, including those relating to protection of public health and worker safety.
Employees
We are dependent on the continued services of our senior management team and certain other key employees. We currently have an employment agreement in place with Thomas F. L’Esperance, Chief Executive Officer, and entered into new severance protection agreements in January of 2005 with several other members of our senior management team as discussed more fully in “ITEM 11. Executive Compensation-Severance Benefits.” We do not maintain life insurance policies with any key employees.
As of December 31, 2007 we had 1,653 employees of which 260 were associated with our European Operations. The United Steel Workers of America union represented approximately 923 employees at our Wisconsin facilities. In addition, approximately 234 employees at our Belgium facilities are represented by a works council and a union delegation. We believe that current labor relations are good, and no labor disruptions are anticipated in the foreseeable future.
On September 28, 2005 the United Steel Workers of America entered into an amendment (the “Amendment”) to their existing labor contract, dated March 1, 2004 (the “Labor Contract”). The Amendment allowed changes to the tiered wage system, pension benefits and medical coverage for employees hired after January 1, 2006. The Amendment also extends the contract from February 28, 2009 through February 28, 2013 contingent upon the Company maintaining a certain level of employment, and contains amendments to provisions that are customary for an agreement of this type, including, among others, those related to overtime and severance pay; pension and savings plans; and life, disability, medical and dental plan coverage. There have been no work stoppages at any of our Wisconsin facilities for more than 30 years.
We are a party to certain federal and sector collective bargaining agreements in Belgium which are mandatory and regulate items such as working hours, pay premiums, vacation, early retirement age and social fund contributions. These agreements are negotiated at a national, sector and local level, and can be unlimited in duration.
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| ITEM 1A. | RISK FACTORS |
The business, prospects and value of the Company are subject to a number of risk factors, which are identified in this filing and have been identified by us in a number of our filings with the SEC.
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the agreements governing our debt.
We are highly leveraged. As of December 31, 2007 we had $341.8 million of consolidated indebtedness, excluding unused commitments under our revolving credit facility and letters of credit.
Our substantial indebtedness could have important consequences to noteholders and creditors. For example, it could:
| • | make it more difficult for us to satisfy our obligations with respect to our indebtedness; |
| • | increase our vulnerability to general adverse economic and industry conditions; |
| • | require us to dedicate a substantial portion of cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts, our planned expansion into the U.S. consumer laundry market and other general corporate needs; |
| • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| • | place us at a competitive disadvantage compared to our competitors with less debt; |
| • | subject us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including our borrowings under our Senior Credit Facility; and |
| • | limit our ability to borrow additional funds. |
Our credit facilities contain representations, warranties and covenants which if breached could lead to an event of default and could, thereby, accelerate payment of our debt. In addition, our ability to access borrowing under the revolving portion of our Senior Credit Facility is subject to our compliance with the covenants and other provisions of the facility. The financial and other restrictive covenants contained in our Senior Credit Facility could also generally limit our ability to engage in activities that may be in our long-term best interests, and our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make scheduled payments of principal and interest with respect to our indebtedness, and to fund our planned capital expenditures, our expansion into the U.S. consumer laundry market and our research and development efforts, will depend on our ability to generate cash and on future financial results. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
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We cannot assure that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under the Senior Credit Facility or otherwise to enable us to pay our indebtedness, including the Senior Subordinated Notes, or to fund other liquidity needs. If we fail to make any required payment under the agreements governing our indebtedness or fail to comply with the financial and operating covenants contained in them, we would be in default, and our lenders would have the ability to require that we immediately repay our outstanding indebtedness. If the lenders required immediate payment, we may not have sufficient assets to satisfy our obligations under our indebtedness.
We also could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. The agreements governing our debt limit our ability to sell assets and restrict the use of proceeds from any such sale. Furthermore, the Senior Credit Facility is secured by substantially all of our assets. Therefore, we may not be able to sell our assets quickly enough or for sufficient amounts to enable us to meet our debt service obligations.
In addition, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure that we will be able to refinance any of our indebtedness, including the Senior Credit Facility and the Senior Subordinated Notes, on commercially reasonable terms or at all.
Our net revenues depend on a limited number of significant customers.
Our top ten equipment customers accounted for approximately 23.1% of our 2007 net revenues, of which one customer, Coinmach Corporation and its subsidiary, Super Laundry Equipment Corp., accounted for approximately 8.8% of such net revenues for the period. Many arrangements are by purchase order and are terminable at will at the option of either party. Our business also depends upon the financial viability of our customers. A significant decrease or interruption in business from our significant customers could result in loss of future business and could have a material adverse effect on our business, financial condition and results of operations.
Our inability to fund our financing programs to end-customers could result in the loss of sales and adversely affect our operations.
We offer an extensive financing program to end-customers, primarily laundromat owners, to assist them in their purchases of new equipment from our distributors or, in the case of route operators, from us. Typical terms include two to nine year loans with an average principal amount of approximately $70,000. We provide these financing programs through our asset backed facility, which is a four year $330.0 million revolving facility entered into by Alliance Laundry Equipment Receivables Trust 2005-A, a trust formed by Alliance Laundry Equipment Receivables 2005 LLC, our special purpose bankruptcy remote subsidiary, and backed by equipment loans and trade receivables originated by us. The trust is utilized to finance both equipment loans and trade receivables. If certain limits in size of the asset backed facility are reached (either overall size or certain sublimits), additional indebtedness may be required to fund the financing programs. Our inability to incur such indebtedness to fund the financing programs or our inability to securitize such assets through our off-balance sheet bankruptcy remote subsidiary could limit our ability to provide our end-customers with financing which could result in the loss of sales and have a material adverse effect on our business, financial condition and results of operations. In addition, a significant increase in the cost of funding our financing subsidiaries could have a material adverse effect on our business, financial condition and results of operations.
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Price fluctuations or shortages of raw materials and the possible loss of suppliers could adversely affect our operations.
The major raw materials and components we purchase for our production process are motors, stainless and carbon steel, aluminum castings, electronic controls, corrugated boxes and plastics. The price and availability of these raw materials and components are subject to market conditions affecting supply and demand. Recently, market prices of some of our key raw materials and components have increased significantly. In particular, we have experienced significant increases in steel, aluminum and electronic controls in recent periods, which have increased our expenses. There can be no assurance that increases in raw material or component costs (to the extent we are unable to pass on such higher costs to customers) or future price fluctuations in raw materials will not have a material adverse effect on our business, financial condition and results of operations. We also purchase a portion of these raw materials and component parts from foreign suppliers using foreign currency. As a result, we are subject to exchange rate fluctuations that could have a material adverse effect on our business, financial condition and results of operations. In addition, because we maintain limited raw material and component inventories, even brief unanticipated delays in delivery by suppliers including those due to capacity constraints, labor disputes, impaired financial condition of suppliers, weather emergencies or natural disasters, may impair our ability to satisfy our customers and could adversely affect our financial performance.
We operate in a competitive market.
Within the North American stand-alone commercial laundry equipment industry, we have several large competitors. With respect to laundromats, our principal competitors include Wascomat (the exclusive North American distributor of Electrolux AB products), Whirlpool Corporation and The Dexter Company. In multi-housing, our key competitor is Whirlpool Corporation. In on-premise laundry, we compete primarily with Pellerin Milnor Corporation, American Dryer Corporation, Wascomat and Continental Girbau Inc. Within the European stand-alone commercial laundry equipment industry, we have several large competitors which include AB Electrolux, Girbau, S.A. and Primus N.V. There can be no assurance that significant new competitors or increased competition from existing competitors will not have a material adverse effect on our business, financial condition and results of operations. Certain of our principal competitors have greater financial resources and/or are less leveraged than us and may be better able to withstand market conditions within the commercial laundry equipment industry. There can be no assurance that we will not encounter increased competition in the future, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, we may face competition from companies outside of the United States that may have lower costs of production (including labor or raw materials). These companies may pass off these lower production costs as price decreases for customers and as a result, our revenues and profits could be adversely affected.
Energy efficiency and water usage standards could adversely affect our industry.
Certain of our washer products are subject to federal and state laws and regulations which pertain to energy efficiency and/or water usage. There are federal standards for residential and commercial clothes washers. The federal government and individual U.S. states may consider and enact laws and corresponding standards which would regulate energy efficiency and water usage standards for certain of our residential and commercial washers.
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These existing laws and regulations, along with anticipated energy efficiency and water usage laws and corresponding standards, may create short term market conditions which are economically disadvantageous to us and may have a material adverse effect on our business, financial condition and results of operations.
We increasingly manufacture and sell our products outside of the United States, which may present additional risks to our business.
For the year ended December 31, 2007 approximately 28.6% of our net revenue was attributable to products sold outside of the United States. Expanding international sales is part of our growth strategy. In addition to export sales to foreign countries, we have several manufacturing facilities and sales offices located in Europe. International operations generally are subject to various risks, including political, military, religious and economic instability, local labor market conditions, the imposition of foreign tariffs, the impact of foreign government regulations, the effects of income and withholding tax, governmental expropriation, and differences in business practices. We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international manufacturing and sales that could cause loss of revenue. Unfavorable changes in the political, regulatory and business climate of various foreign jurisdictions could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to the risk of foreign currency fluctuations.
Some of our operations are or will be conducted by subsidiaries in foreign countries. The results of the operations and the financial position of these subsidiaries will be reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, which are stated in U.S. dollars. The exchange rates between many of these currencies and the U.S. dollar have fluctuated significantly in recent years and may fluctuate significantly in the future. Such fluctuations may have a material adverse effect on our results of operations and financial position and may significantly affect the comparability of our results between financial periods.
In addition, we incur currency transaction risk whenever one of our operating subsidiaries enters into a transaction using a different currency than its functional currency. We attempt to reduce currency transaction risk whenever one of our operating subsidiaries enters into a transaction using a different currency than its functional currency by:
| • | matching cash flows and payments in the same currency; and |
| • | entering into foreign exchange contracts for hedging purposes. |
We actively strive to hedge these foreign currency transaction risks, but cannot provide assurance that we will be successful in doing so. The exchange rates between the Euro and the U.S. dollar have fluctuated significantly in recent years and may fluctuate significantly in the future. Such fluctuations may have a material effect on our net sales, financial condition, profitability and/or cash flows and may significantly affect the comparability of our results between financial periods.
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We are dependent on key personnel.
We are dependent on the continued services and performance of our senior management team and certain other key employees, including Thomas L’Esperance, our CEO. Mr. L’Esperance’s employment agreement with us automatically renews for one-year periods, beginning on May 4, 2005 of each year, unless the Company or Mr. L’Esperance provides written notice not to renew the agreement. The loss of any key employee could have a material adverse effect on our business, financial condition and results of operations because of their experience and knowledge of our business and customer relationships. We do not maintain life insurance policies with respect to key employees.
Adverse relations with employees could harm our business.
As of December 31, 2007 approximately 923 of our employees at our Wisconsin facilities were represented by The United Steel Workers of America. In addition, a large majority of our European employees belong to Belgium trade unions. The current collective bargaining agreement covering employees at our Wisconsin facilities was approved March 1, 2004. A contract amendment in September 2005 extended the agreement from February 28, 2009 through February 28, 2013 contingent upon the Company maintaining a certain level of employment. However, there can be no assurance that we can successfully maintain such employment levels at our Wisconsin facilities or successfully negotiate new agreements or that work stoppages by certain employees will not occur. Any such work stoppages could have a material adverse effect on our business, financial condition and results of operations.
Beginning in June 2009 we will be unable to utilize our off-balance sheet asset backed facility. An inability to refinance or replace this facility could have an adverse impact on our business.
Beginning in June 2009 we will be unable to request new borrowings under our off-balance sheet asset backed facility and any outstanding borrowing will amortize over a period of up to nine years. Based on current market conditions, we believe that we will be able to refinance the facility. However, should market conditions change or our financial position deteriorate, we cannot assure that we will be able to refinance the facility on advantageous terms or at all. An inability to refinance or replace this facility prior to June 2009 could have a material adverse effect on our business, financial condition and results of operations, including our revenues, EBITDA and leverage. Gains on sales of notes receivable and other net finance program income in 2007 of approximately $8.1 million are included in equipment financing, net revenue. As of December 31, 2007 the amount due to investors under our off-balance sheet asset backed facility for trade receivables and equipment notes was $53.8 million and $237.0 million, respectively. If we are unable to refinance or replace the facility, among other things, our EBITDA could decrease over time due to the loss in revenue generated by new financings and our leverage could increase as a result of having to finance accounts receivables on our balance sheet.
The controlling equityholder of our parent company could exercise its influence over us to your detriment.
OTPP controls, indirectly through ALH and Alliance Holdings, approximately 90.7% of our voting securities and has significant influence over our management and is able to determine the outcome of all matters required to be submitted to the shareholders for approval, including the election of our directors and the approval of mergers, consolidations and the sale of all or substantially all of our assets. The interests of OTPP as an equity owner could be in conflict with interests of our noteholders or creditors. OTPP may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to noteholders or creditors. In addition, certain determinations that need to be made under covenants in the Senior Credit Facility and the indenture governing the Senior Subordinated Notes
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(the “Notes Indenture”) will not be made by the managing member of Alliance Laundry. Instead, these decisions will be made by the board of directors of our ultimate parent company, ALH. It is not clear under either the laws of the State of Delaware or applicable federal bankruptcy law what, if any, duties the board of directors of ALH will owe to Alliance Laundry and its equity and debt holders. In the absence of any such duties, the board of directors of ALH could make determinations under the Senior Credit Facility and the Notes Indenture that are not in the best interest of our debt holders, creditors and other shareholders.
The nature of our business exposes us to potential liability for environmental claims and we could be adversely affected by environmental, health and safety requirements.
We are subject to comprehensive and frequently changing federal, state and local environmental, health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of waste and storm water and the disposal of hazardous wastes. We cannot predict the environmental liabilities that may result from legislation or regulations adopted in the future, the effect of which could be retroactive. Nor can we predict how existing or future laws and regulations will be administered or interpreted or what environmental conditions may be found to exist at our facilities or at other properties where we or our predecessors have arranged for the disposal of hazardous substances. The enactment of more stringent laws or stricter interpretation of existing laws could require additional expenditures by us, some of which could have a material adverse effect on our business, financial condition and results of operations.
We are also subject to liability for the investigation and remediation of environmental contamination (including contamination caused by other parties) at the properties we own or operate and at other properties where we or our predecessors have arranged for the disposal of hazardous substances. As a result, we are involved, from time to time, in administrative and judicial proceedings and inquiries relating to environmental matters. There can be no assurance that we will not be involved in such proceedings in the future, and we cannot be sure that our existing insurance or additional insurance will provide adequate coverage against potential liability resulting from any such administrative and judicial proceedings and inquiries. The aggregate amount of future clean-up costs and other environmental liabilities could have a material adverse effect on our business, financial condition and results of operations.
Certain environmental investigatory and remedial work is underway at our Ripon, Wisconsin manufacturing facility. With respect to the Ripon facility, this work is being conducted by us with the support of an environmental consultant. In furtherance thereof, during 2005 the Wisconsin Department of Natural Resources requested the installation and monitoring of a ground well at the Ripon facility. The first ground well has been monitored in accordance with a work plan set up between Alliance Laundry and the Wisconsin Department of Natural Resources. The results of the first monitoring well will require further action including additional monitoring wells within the general area of the first well. A work plan for the additional monitoring wells is also being set up between Alliance Laundry and the Wisconsin Department of Natural Resources. We currently expect to incur costs of less than $100,000 through 2008. There can be no assurance, however, that we will not incur additional remedial costs in the future with respect to the Ripon facility.
Our operations are also subject to various hazards incidental to the manufacturing and transportation of commercial laundry equipment. These hazards can cause personal injury and damage to and destruction of property and equipment. There can be no assurance that as a result of past or future operations, there will not be claims of injury by employees or members of the public. Furthermore, we
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also have exposure to present and future claims with respect to worker safety, workers’ compensation and other matters. There can be no assurance as to the actual amount of these liabilities or the timing of them. Regulatory developments requiring changes in operating practices or influencing demand for, and the cost of providing, our products and services or the occurrence of material operational problems, including but not limited to the above events, may also have a material adverse effect on our business, financial condition and results of operations.
We may encounter certain risks when implementing our business strategy to expand into the U.S. consumer laundry market.
We re-entered the U.S. consumer laundry market in October 2004 after the expiration of a non-compete agreement. The continued execution of our strategy to expand in the U.S. consumer laundry market could cause us to incur unforeseen capital expenditures, divert management’s attention from our core businesses and cause us to incur losses on assets devoted to the strategy. Any failure to continue to successfully execute this strategy could adversely affect our business, financial condition and results of operations and our ability to service our indebtedness.
We may incur product liability expenses.
We are exposed to potential product liability risks that arise from the sales of our products. In addition to direct expenditures for damages, settlements and defense costs, there is a possibility of adverse publicity as a result of product liability claims. We cannot be sure that our existing insurance or any additional insurance will provide adequate coverage against potential liabilities and any such liabilities could adversely affect our business, financial condition and results of operations and our ability to service our indebtedness.
Increased or unexpected product warranty claims could adversely affect us.
We provide our customers a warranty covering workmanship, and, in some cases, materials on products we manufacture. Our warranty generally provides that products will be free from defects for periods ranging from 12 months up to 60 months. If a product fails to comply with the warranty, we may be obligated, at our expense, to correct any defect by repairing or replacing the defective product. Although we maintain warranty reserves in an amount based primarily on the number of units shipped and on historical and anticipated warranty claims, there can be no assurance that future warranty claims will follow historical patterns or that we can accurately anticipate the level of future warranty claims. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could materially and adversely affect our business, financial condition and results of operations.
We are subject to risks of future legal proceedings.
At any given time, we are a defendant in various legal proceedings and litigation arising in the ordinary course of business. Although we maintain insurance policies, we can make no assurance that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices or at all. A significant judgment against us, the loss of a significant permit or other approval or the imposition of a significant fine or penalty could have a material adverse effect on our business, financial condition and future prospects.
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Risks related to internal control deficiencies.
Management identified a material weakness in our internal control over financial reporting during 2007. Effective internal control over financial reporting is necessary for appropriate financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP. This material weakness is discussed further within Item 9A “Controls and Procedures” of this Annual Report on Form 10-K.
Interest rate fluctuations could have an adverse effect on our revenues and financial results.
We are exposed to market risk associated with adverse movements in interest rates. Specifically, we are primarily exposed to changes in the fair value of our fixed rate debt, including the notes, and to changes in earnings and related cash flows on our variable interest rate debt obligations including, upon consummation of the Transactions, obligations outstanding under the new credit facility and our retained interests related to trade accounts receivable and equipment loans sold to our special-purpose securitization entity. See ITEM 7A, Quantitative and Qualitative Disclosures About Market Risk, for an additional discussion of such market risks.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
The following table provides certain information regarding our significant facilities as of December 31, 2007:
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Location | Function/Products | Approximate Square Feet | Owned/ Leased | ||||
Production Facilities | |||||||
Ripon, WI | Manufacture small washers and dryers, and tumbler dryers | 572,900 | Owned | ||||
Ripon, WI | Manufacture washer-extractors | 149,000 | Leased | 1 | |||
Wevelgem, Belgium | Manufacture washer-extractors | 131,053 | Owned | ||||
Deinze, Belgium | Manufacture larger washer-extractors and ironers | 57,900 | Leased | 2 | |||
Subtotal | 910,853 | ||||||
Regional Distribution Centers | |||||||
Ripon, WI | Washers, washer-extractors, dryers, tumbler dryers | 147,500 | Owned | ||||
Ripon, WI | Service parts | 81,895 | Owned | ||||
Subtotal | 229,395 | ||||||
Other | |||||||
Ripon, WI | Sales and administration | 65,700 | Owned | ||||
Ripon, WI | Engineering and procurement | 56,976 | Owned | ||||
Ripon, WI | Sales and administration | 8,724 | Leased | 1 | |||
Barcelona, Spain | Sales office and distribution center | 10,000 | Leased | 3 | |||
Oslo, Norway | Sales office | 1,900 | Leased | 4 | |||
Subtotal | 143,300 | ||||||
Property Held for Disposal | |||||||
Marianna, FL | Prior manufacturing and distribution facility | 292,200 | Owned | 5, 6 | |||
Total | 1,575,748 | ||||||
| 1) | The lease term for this manufacturing facility is seven years and two months beginning on January 1, 2006 with an option to extend for five years and an additional option to extend for three years. The lease was amended in December 2007 to add 8,724 square feet of additional office space beginning January 1, 2008. The amended lease follows the term of the original lease. |
| 2) | The lease term for this manufacturing facility is nine years beginning on October 1, 2004. |
| 3) | The lease term for this sales office and distribution center expires April 30, 2011, with an option to extend for five years. |
| 4) | The lease term for this sales office expires December 31, 2008, with an option to extend for five years. |
| 5) | We own the Marianna buildings, but we lease the land from the city of Marianna through February 28, 2015 at a current annual lease cost of $14,246 per year. |
| 6) | On October 12, 2005 we announced our intention to close our Marianna, Florida facility (the “Facility”) and consolidate the manufacture and design of the Facility’s product lines into the Company’s existing Ripon, Wisconsin operations. The facility closure and transition was completed |
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in 2006. In order to accommodate the Marianna product lines and accommodate other incremental production needs, additional manufacturing space was leased in Ripon, Wisconsin in 2006. We believe existing manufacturing facilities provide adequate production capacity to meet product demand. For additional information about the Marianna, Florida facility closure, see the discussion under Note 5 to the Financial Statements – “Infrequently Occurring Items.” |
| ITEM 3. | LEGAL PROCEEDINGS |
Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened against us. While we cannot predict the outcome of these matters, in the opinion of our management, any liability arising under these claims and legal proceedings will not have a material adverse effect on our business, financial condition and results of operations after giving effect to provisions already recorded.
In September 2006 one of our foreign subsidiaries, Alliance International BVBA, was named in a lawsuit in the Belgian civil courts by a Belgian customer for having allegedly negligently designed, manufactured and assembled certain safety devices. These safety devices are not being used in our products, but were sold to a Belgian customer prior to the CLD Acquisition. The cause of the alleged defect is unknown and is being investigated by a court appointed expert. The damages claimed of EUR 1.6 million by the Belgian customer are currently unsubstantiated. No court hearing is expected before the third quarter of 2008. No injury has been reported as a consequence of the alleged defect. Although the outcome of this matter is not predictable with assurance, management believes that the amount of any potential damages resulting from this action would not exceed accruals and available indemnification recoverable from LSG pursuant to the CLD acquisition agreements.
On August 9, 2007 the audit committee of the Company’s indirect parent (the “Audit Committee”), ALH Holding Inc., commissioned an external review of certain accounting matters based upon a complaint of a former employee. This external review has been completed and no significant findings were noted as a result of this investigation.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS |
There is no established public trading market for any class of common equity of Alliance. There was one holder of record of the common equity of each of Alliance Laundry Systems LLC, Alliance Laundry Holdings LLC and Alliance Laundry Corporation as of March 10, 2008.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected historical consolidated financial data for the years ended December 31, 2007 (Successor), December 31, 2006 (Successor), the period January 28, 2005 through December 31, 2005 (Successor), the period January 1, 2005 through January 27, 2005 (Predecessor) and the years ended December 31, 2004 (Predecessor) and December 31, 2003 (Predecessor).
Alliance Laundry is a wholly-owned subsidiary of Alliance Holdings. Because Alliance Holdings is a holding company with no operating activities and provides certain guarantees, the financial information presented herein represents consolidated financial information of Alliance Holdings, rather than consolidated financial information of Alliance Laundry. The summary historical consolidated financial data for the successor and predecessor periods presented were derived from our audited consolidated financial statements. The following table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and the notes related thereto of Alliance included elsewhere in this Annual Report. The results of operations acquired in the CLD Acquisition have been included in our results since the date of the acquisition.
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| Year Ended December 31, | Year Ended December 31, | January 28, 2005 through December 31, | January 1, 2005 through January 27, | Years Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||||||
| Successor | Successor | Successor | Predecessor | Predecessor | Predecessor | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
Statements of income (loss) data: | ||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Equipment and service parts | $ | 435,229 | $ | 359,755 | $ | 287,705 | $ | 20,303 | $ | 274,887 | $ | 261,265 | ||||||||||||
Equipment financing, net | 8,079 | 6,313 | 8,940 | 380 | 6,100 | 6,342 | ||||||||||||||||||
Net revenues | 443,308 | 366,068 | 296,645 | 20,683 | 280,987 | 267,607 | ||||||||||||||||||
Cost of sales | 332,592 | 282,279 | 225,706 | 15,585 | 199,010 | 188,979 | ||||||||||||||||||
Gross profit | 110,716 | 83,789 | 70,939 | 5,098 | 81,977 | 78,628 | ||||||||||||||||||
Selling, general and administrative expenses | 59,965 | 50,995 | 38,632 | 3,829 | 39,879 | 33,599 | ||||||||||||||||||
Securitization, impairment and other (income) costs, net | (750 | ) | 7,150 | 10,009 | — | — | — | |||||||||||||||||
Transaction costs associated with sale of business | — | — | — | 18,790 | — | — | ||||||||||||||||||
Total operating expenses | 59,215 | 58,145 | 48,641 | 22,619 | 39,879 | 33,599 | ||||||||||||||||||
Operating income (loss) | 51,501 | 25,644 | 22,298 | (17,521 | ) | 42,098 | 45,029 | |||||||||||||||||
Interest expense | 34,747 | 31,177 | 24,117 | 995 | 25,439 | 28,258 | ||||||||||||||||||
Loss from early extinguishment of debt | — | — | — | 9,867 | — | — | ||||||||||||||||||
Costs related to abandoned public offerings | — | — | — | — | 4,823 | — | ||||||||||||||||||
Other expense, net | — | 417 | — | — | — | 797 | ||||||||||||||||||
Income (loss) before taxes | 16,754 | (5,950 | ) | (1,819 | ) | (28,383 | ) | 11,836 | 15,974 | |||||||||||||||
Provision (benefit) for income taxes | 6,885 | (2,540 | ) | (1,158 | ) | 9 | 71 | 55 | ||||||||||||||||
Net income (loss) | $ | 9,869 | $ | (3,410 | ) | $ | (661 | ) | $ | (28,392 | ) | $ | 11,765 | $ | 15,919 | |||||||||
Cash flow data: | ||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 31,735 | $ | 22,906 | $ | 6,628 | $ | (6,619 | ) | $ | 34,880 | $ | 30,393 | |||||||||||
Net cash (used in) investing activities | (7,127 | ) | (87,037 | ) | (4,225 | ) | (188 | ) | (4,101 | ) | (3,590 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (25,188 | ) | 69,985 | (1,922 | ) | (70 | ) | (27,245 | ) | (26,205 | ) | |||||||||||||
Other data: | ||||||||||||||||||||||||
Capital expenditures | $ | 8,338 | $ | 6,150 | $ | 4,229 | $ | 188 | $ | 4,166 | $ | 3,600 | ||||||||||||
Ratio of earnings to fixed charges(1) | 1.5 | — | — | — | 1.5 | 1.6 | ||||||||||||||||||
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| December 31, | December 31, | |||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||
| Successor | Successor | Successor | Predecessor | Predecessor | ||||||||||||
| (in thousands) | ||||||||||||||||
Balance sheet data: | ||||||||||||||||
Total current assets | $ | 115,770 | $ | 124,306 | $ | 68,080 | $ | 64,260 | $ | 60,881 | ||||||
Total current liabilities | 65,475 | 65,463 | 34,366 | 48,372 | 42,977 | |||||||||||
Working capital(2) | 50,295 | 58,843 | 33,714 | 15,888 | 17,904 | |||||||||||
Total assets | 560,287 | 574,322 | 463,459 | 184,016 | 190,639 | |||||||||||
Long-term debt and capital lease obligations (including current portion) | 341,788 | 376,115 | 326,336 | 269,559 | 292,199 | |||||||||||
Long-term obligations(3) | 354,175 | 392,994 | 335,260 | 282,777 | 304,690 | |||||||||||
| (1) | For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income (loss) before income taxes and cumulative effect of change in accounting principle plus fixed charges. Fixed charges include interest expense on all indebtedness, amortization of deferred financing costs and one-third of rental expense on operating leases, representing that portion of rental expense deemed to be attributable to interest. In 2006 the Successor earnings were inadequate to cover fixed charges. The amount of incremental earnings required to attain an earnings to fixed charges ratio of 1.0 to 1.0 in 2006 would have been $5.9 million. In 2005 the Successor earnings were inadequate to cover fixed charges. The amount of incremental earnings required to attain an earnings to fixed charges ratio of 1.0 to 1.0 in 2005 would have been $1.8 million. In 2005 the Predecessor earnings were inadequate to cover fixed charges. The amount of incremental earnings required to attain an earnings to fixed charges ratio of 1.0 to 1.0 in 2005 would have been $28.4 million. The ratio of earnings to fixed charges is not shown for the combined period as the information would not be meaningful. |
| (2) | Working capital represents total current assets less total current liabilities. |
| (3) | Long-term obligations includes long-term debt, current portion of long-term debt, other long-term liabilities and the Predecessor mandatorily redeemable preferred units. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We believe we are the leading designer, manufacturer and marketer of stand-alone commercial laundry equipment in North America and that we are similarly a leader worldwide. Under the well-known brand names of Speed Queen, UniMac, Huebsch, IPSO, and Cissell, we produce a full line of commercial washing machines and dryers with load capacities from 12 to 200 pounds as well as presses and finishing equipment. Our 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.
The North American stand-alone commercial laundry equipment industry’s revenues are primarily driven by population growth and the replacement cycle of laundry equipment. With economic conditions having limited effect on the frequency of use, and therefore the useful life of laundry equipment, industry revenues have been relatively stable over time. Similarly, with a majority of our revenues generated by recurring sales of replacement equipment and service parts, we have experienced stable revenues even during economic slowdowns.
Sales of stand-alone commercial laundry equipment are the single most important driver of our revenues. In 2007 net revenues from the sale of commercial laundry equipment and equipment financing through our U.S. operations were approximately $317.4 million, which comprised 72% of our total net revenues. The other main components of our revenues are sales of stand-alone commercial laundry equipment through our European Operations, sales of consumer laundry products, and the sale of service parts. In 2007 our net revenues from our European Operations were approximately $85.4 million, which comprised 19% of our total net revenues. In 2007 net revenues from the sale of service parts were approximately $51.8 million, which comprised almost 12% of our total net revenues. We offer immediate response service whereby many of our parts are available on a 24-hour turnaround for emergency repair parts orders. In addition to sales of stand-alone commercial laundry equipment and service parts, we re-entered the U.S. consumer laundry market in October 2004, after the expiration of a non-compete agreement. In 2007 our net revenues from the sale of consumer laundry equipment were approximately $19.4 million, which comprised approximately 4% of our total net revenues.
We have achieved steady revenues by building an extensive and loyal distribution network for our products, establishing a significant installed base of units and developing and offering a full innovative product line. As a result of our large installed base, a significant majority of our revenue is attributable to replacement sales of equipment and service parts.
We believe that continued population expansion in North America and Europe will continue to drive steady demand for garment and textile laundering by all customer groups that purchase commercial laundry equipment. We anticipate growth in demand for commercial laundry equipment in international markets as well, especially in developing countries where laundry processing has historically been far less sophisticated than in North America and Western Europe. In addition, customers are increasingly trading up to equipment with enhanced functionality, thereby raising average selling prices. Customers are also moving towards equipment with increased water and energy efficiency as the result of government and consumer pressure and a focus on operating costs.
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We are subject to a number of challenges that may adversely affect our business. These challenges are discussed above under Item 1A “Risk Factors” and below under Item 7A “Quantitative and Qualitative Disclosures About Market Risk.”
The following discussion should be read in conjunction with the Financial Statements and Notes thereto included in this report.
Recent Developments
Restatement of Financial Information.As previously disclosed on August 15, 2007, we were unable to file our Form 10-Q for the period ended June 30, 2007 on a timely basis due to the continuance of procedures required to reconcile unvouched payables related to inventory and efforts to complete our assessment of our internal control over financial reporting. Our review and evaluation of disclosure controls and procedures concluded that disclosure controls and procedures were not effective as of December 31, 2006 due to a material weakness in internal control over financial reporting. For additional information regarding our assessment of internal controls, see Item 9A “Controls and Procedures” of this Annual Report on Form 10-K.
As a result of management’s investigations, we identified errors in our reconciliation of unvouched payables related to inventory which resulted in the understatement of the Company’s accounts payable, inventory and cost of sales in previously reported financial statements. Consequently, management determined that our previously issued consolidated financial statements as of and for the year ended December 31, 2006 and the first quarter ended March 31, 2007, should be restated to correct for such errors and departures from generally accepted accounting principles (GAAP). The restated financial statements as of and for the year ended December 31, 2006, included in the 2006 Annual Report on Form 10-K/A and for the quarter ended March 31, 2007 included on the quarterly report on Form 10-Q/A, contain a number of adjustments associated with the correction of these errors, including accounting for the Company’s income taxes and non-cash incentive compensation related to the Company’s stock option plan. The adjustment to non-cash incentive compensation is due to a change in the value of the options which is calculated based upon financial measurements which changed as a result of the restatements. Additionally, an adjustment related to the purchase accounting for intangible assets acquired in the CLD Acquisition was recorded in the restated financial statements at December 31, 2006. This adjustment decreased goodwill, intangible assets and non-current deferred income tax liabilities in the Consolidated Balance Sheet.
The CLD Acquisition.On July 14, 2006 Alliance Laundry completed the acquisition of substantially all of Laundry System Group NV’s (“LSG”) commercial laundry division (“CLD”) operations pursuant to a share purchase agreement, dated May 23, 2006 (the “Share Purchase Agreement”), between Alliance Laundry and LSG, and a purchase agreement, dated May 23, 2006 (the “Purchase Agreement”), among Alliance Laundry, LSG, Cissell Manufacturing Company, Jensen USA Inc. and LSG North America, Inc. (together referred to as the “CLD Acquisition”). CLD markets commercial washer-extractors, tumbler dryers, and ironers worldwide under the IPSO and Cissell brand names. CLD’s European headquarters is in Wevelgem, Belgium, and it has manufacturing facilities in Belgium and sales offices in Belgium, Norway and Spain. CLD also had manufacturing facilities and sales offices in the United States which have been consolidated into Alliance Laundry’s operations. The aggregate consideration paid for the CLD Acquisition, net of cash acquired, was $87.2 million, including acquisition costs of approximately $6.0 million and costs to exit or dispose of certain CLD U.S. activities and assets of approximately $5.2 million. The CLD Acquisition resulted in approximately $40.4 million of goodwill, of which approximately $7.4 million is tax deductible, and $16.5 million of
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other intangible assets being recognized by the Company. See further detail related to the goodwill and other intangible assets of the CLD Acquisition at Note 8, “Goodwill and Other Intangibles.” Prior to July 14, 2006, CLD was a significant customer of and a significant supplier to Alliance Laundry.
The CLD Acquisition was funded with a $60.0 million increase in term loans under Alliance Laundry’s Senior Credit Facility, $3.2 million of incremental equity contributions from management investors and a $20.3 million equity contribution from OTPP.
The Company believes the addition of CLD’s IPSO and Cissell brands, the addition of CLD’s soft mount washer-extractor product line and having production facilities in Europe will significantly strengthen its ability to participate in the global laundry marketplace.
The sources and uses of funds in connection with the CLD Acquisition are summarized below:
Sources: | ||||
Cash from operations | $ | 3,752 | ||
Proceeds from Senior Term Loan | 60,000 | |||
Proceeds from equity investors | 23,493 | |||
Total sources | $ | 87,245 | ||
Uses: | ||||
Stated purchase price | $ | 75,700 | ||
Less: Cash acquired | (1,623 | ) | ||
Working capital adjustment | 1,988 | |||
Fees and expenses | 5,959 | |||
Facility closure reserve | 5,221 | |||
Total uses | $ | 87,245 | ||
Our allocation of the purchase price to the assets acquired and the liabilities assumed in the CLD Acquisition was finalized in the quarter ended June 30, 2007. The final purchase accounting adjustments were not material to the consolidated financial position of the Company. The allocation of the purchase price to the fair value of net assets acquired is summarized below:
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| Amount | |||
Current assets, net of cash acquired | $ | 44,117 | |
Property, plant and equipment | 14,477 | ||
Goodwill | 40,403 | ||
Other intangible assets | 16,458 | ||
Debt issuance costs | 1,335 | ||
Other noncurrent assets | 1,574 | ||
Total assets | 118,364 | ||
Current liabilities | 19,010 | ||
Noncurrent liabilities | 12,109 | ||
Total liabilities | 31,119 | ||
Net assets acquired | $ | 87,245 | |
The incremental goodwill recognized in the CLD Acquisition is attributable to North American commercial laundry operations in the amount of $10.0 million and European Operations in the amount of $30.4 million. As a result of the CLD Acquisition we capitalized additional debt issuance costs in 2006 totaling $1.3 million.
In connection with the CLD Acquisition, the Company has undertaken certain restructurings of the acquired business. The restructuring activities include reductions in staffing levels, elimination of facilities and other costs associated with exiting certain activities of the acquired business. The estimated costs of these restructuring activities were recorded as costs of the CLD Acquisition and were provided for in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”
Louisville, Kentucky Discontinuation and Portland Tennessee Closure. On August 8, 2006 the Board of Directors of ALH resolved to discontinue the Louisville, Kentucky operations (the “Discontinuation”) and close the Portland, Tennessee facility (the “Closure”). The decision was based on an analysis of each location’s manufacturing capabilities as well as the continuing investment requirements for each of the locations. The Company substantially completed the Discontinuation and Closure as of December 31, 2006.
The following table summarizes the restructuring reserve of $5.0 million, which is included within other current liabilities in the Condensed Consolidated Balance Sheets:
| Balance at July 14, 2006 | Utilized Cash | Balance at December 31, 2006 | ||||||||
One-time termination benefits | $ | 3,102 | $ | (824 | ) | $ | 2,278 | |||
Other labor related costs | 224 | (108 | ) | 116 | ||||||
Relocation of tooling and equipment | 967 | (261 | ) | 706 | ||||||
Other related expenses | 708 | (623 | ) | 85 | ||||||
| $ | 5,001 | $ | (1,816 | ) | $ | 3,185 | ||||
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| Balance at December 31, 2006 | Additions | Adjustments | Utilized Cash | Balance at December 31, 2007 | |||||||||||||
One-time termination benefits | $ | 2,278 | $ | 44 | $ | — | $ | (683 | ) | $ | 1,639 | ||||||
Other labor related costs | 116 | 429 | — | (418 | ) | 127 | |||||||||||
Relocation of tooling and equipment | 706 | — | (389 | ) | (317 | ) | — | ||||||||||
Other related expenses | 85 | 136 | — | (221 | ) | — | |||||||||||
| $ | 3,185 | $ | 609 | $ | (389 | ) | $ | (1,639 | ) | $ | 1,766 | ||||||
On October 31, 2006 the Company signed an agreement for the sale of its Portland facility for approximately $0.8 million, which approximates its carrying value. This transaction was completed in January 2007 and was subject to customary closing conditions.
Credit Agreement Amendment.On July 14, 2006 Alliance Laundry, Alliance Holdings, Lehman Commercial Paper Inc., as administrative agent and lender, and the other parties named therein as lenders, entered into an amendment (the “Amendment”) to the credit agreement, dated as of January 27, 2005 (the “Credit Agreement”), among Alliance Laundry, Alliance Holdings, ALH Finance LLC, Lehman Commercial Paper Inc., as administrative agent, and the several banks and other financial institutions party thereto. The Amendment amends the Credit Agreement to (i) provide for an additional $60.0 million of term loans under the Credit Agreement term loan facility; (ii) increase the revolving credit commitments to $55.0 million from $50.0 million under the Credit Agreement revolving credit facility; (iii) permit the acquisition of CLD; (iv) modify certain negative covenants in the Credit Agreement, including (a) adjusting the calculation of the consolidated leverage ratio, (b) adjusting the calculation of the consolidated interest coverage ratio, (c) increasing the annual ordinary course capital expenditures permitted by Alliance Laundry and its subsidiaries to $13.0 million from $10.0 million, effective 2007, and (d) increasing the maximum permitted debt Alliance Laundry’s non-U.S. subsidiaries may incur without restriction to $5.0 million from $2.5 million; (v) revising the procedure for term loan borrowing; (vi) revising the term loan repayment schedule to require repayment in 22 quarterly installments of $0.6 million which commenced on September 30, 2006, and one installment of $222.1 million, or such lesser amount then outstanding, on January 27, 2012; and (vii) making conforming changes to the definitions contained therein. This Amendment did not affect interest rates charged under the Credit Agreement.
Marianna Facility Consolidation.On October 12, 2005 we announced our intention to close our Marianna, Florida facility (the “Facility”) and consolidate the manufacture and design of the Facility’s product lines into the Company’s existing Ripon, Wisconsin operations. The facility closure and transition was completed in 2006. The decision was based on an analysis of each facility’s manufacturing capabilities as well as the continuing investment requirements for each of the locations. We believe that efficiencies will be gained with the consolidation of the design and manufacturing of all of our product lines within our Ripon, Wisconsin operations. For additional information about the Marianna, Florida facility closure, see the discussion under Note 5 to the Financial Statements – “Infrequently Occurring Items.”
The Alliance Acquisition
On January 27, 2005 ALH Holding Inc. (“ALH”), an entity formed by Teachers’ Private Capital, the private equity arm of Ontario Teachers’ Pension Plan Board (“OTPP”) acquired 100% of the
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outstanding equity interests in Alliance Holdings for aggregate consideration of approximately $466.3 million. In connection with such acquisition, the members of our senior management acquired approximately $7.6 million of newly issued shares of common stock of ALH, and our other management employees acquired approximately $2.0 million of newly issued shares of ALH common stock in exchange for equity interests in Alliance Holdings and cash pursuant to a management share offering. A portion of the aggregate acquisition consideration was used to repay our then existing indebtedness, redeem our then outstanding preferred equity interests and pay certain fees and expenses payable in connection with the consummation of the acquisition and the financing transactions described below, and the balance was paid to Alliance Holdings’ former equity holders. The Alliance Acquisition was financed with approximately $350.0 million of debt financing described below, the management equity, approximately $107.4 million of new equity capital from OTPP and available cash.
As a result of the Alliance Acquisition, all of the outstanding equity interests of Alliance Laundry are owned by Alliance Holdings and all of the equity interests of Alliance Holdings are owned by ALH. As of March 10, 2008 approximately 90.7% of the capital stock of ALH is owned by OTPP. Approximately 9.2% of the capital stock of ALH is owned by our management.
In connection with the closing of the Alliance Acquisition, we consummated the following financing transactions:
• | the closing of the issuance of $150.0 million of 8 1/2% senior subordinated notes due January 15, 2013. The proceeds from the Senior Subordinated Notes offering were $149.3 million; |
| • | the closing of Alliance Laundry’s new $250.0 million senior secured credit facility, which we refer to as the “Senior Credit Facility,” consisting of a six-year $50.0 million revolving credit facility and a seven-year $200.0 million term loan facility (which Senior Credit Facility was amended and restated on July 14, 2006 in conjunction with the CLD Acquisition); and |
| • | the settlement of the tender offer and consent solicitation, or the tender offer, initiated by us on January 4, 2005 for the $110.0 million aggregate principal amount of our then outstanding 1998 Senior Subordinated Notes. |
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenues and expenses, including amounts that are susceptible to change. Our critical accounting policies include accounting methods and estimates underlying such financial statement preparation, as well as judgments around uncertainties affecting the application of those policies. In applying critical accounting policies, materially different amounts or results could be reported under different conditions or using different assumptions. We believe that our critical accounting policies, involving significant estimates, uncertainties and susceptibility to change, include the following:
Revenue Recognition. Revenue from product sales is recognized by us when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and ownership has transferred to the customer; (iii) the price to the customer is fixed or determinable; and
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(iv) collectability is reasonably assured. With the exception of certain sales to international customers, which are recognized upon receipt or acceptance by the customer, these criteria are satisfied, and accordingly, revenue is recognized upon shipment by us. In addition, warranty and sales incentive costs are estimated and accrued at the time of sale, as appropriate.
We sell notes receivable and accounts receivable through our special-purpose bankruptcy remote entity. Servicing revenue, interest income on beneficial interests retained, and gains on the sale of notes receivable are included in equipment financing, net revenue. In determining the gain on sales of notes receivable, the investment in the sold receivable pool is allocated between the portion sold and the portion retained, based on their relative fair values. We generally estimate the fair values of our retained interests based on the present value of expected future cash flows to be received, using our best estimate of key assumptions, including credit losses, prepayment rates, interest rates and discount rates commensurate with the risks involved.
Inventories. We value inventories at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Valuing inventories at the lower of cost or market requires the use of estimates and judgment. Our policy is to evaluate all inventory quantities for amounts on-hand that are potentially in excess of estimated usage requirements, and to write-down any excess quantities to estimated net realizable value. Inherent in the estimates of net realizable value are our estimates related to our future manufacturing schedules, customer demand, possible alternative uses and ultimate realization of potentially excess inventory.
Notes and Accounts Receivable. We value notes receivable not sold and accounts receivable net of allowances for uncollectible accounts. These allowances are based on estimates of the portion of the receivables that will not be collected in the future, and in the case of notes receivable, also considers estimated collateral liquidation proceeds. However, the ultimate collectability of a receivable is significantly dependent upon the financial condition of the individual customer, which can change rapidly and without advance warning. Balances are written off after all collection efforts have been exhausted.
Retained Interests in Securitized Notes Receivable. We value retained beneficial interests in notes receivable sold to our off-balance sheet special-purpose entity based upon the present value of expected future cash flows to be received on the residual portion of cash flows on the notes, using our best estimate of key assumptions, including credit losses, prepayment rates, interest rates and discount rates commensurate with the risks inherent in such estimates. Unrealized gains and losses resulting from changes in the estimated fair value of retained interests are recorded as other comprehensive income (loss). Impairment losses are recognized when the estimated fair value is less than the carrying amount of the retained interest. Note 6 to the financial statements discloses the sensitivity of current fair value estimates to immediate adverse changes in certain valuation assumptions.
Intangibles.We account for goodwill and other intangible assets under the guidance of SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill is no longer amortized; however, it is tested for impairment at least annually and more frequently if an event occurs which indicates that the asset might be impaired. Impairment of goodwill is measured according to a two-step approach. In the first step, the fair value of a reporting unit, as defined by the statement, is compared to the carrying value of the reporting unit, including goodwill. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. In the second step the implied value of the goodwill is estimated as the fair value of the reporting unit less the fair value of all other tangible and intangible assets of the reporting unit. If
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the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. We have completed the analysis required by SFAS No. 142 and have concluded that no impairment of recorded goodwill exists at December 31, 2007.
Other intangible assets with finite lives continue to be amortized over their estimated useful lives and are tested for impairment when events or changes in circumstances indicate that the asset might be impaired. Indefinite lived intangibles, which are not amortized, are also subject to annual impairment testing. We have completed the analysis required by SFAS No. 142 and have concluded that no impairment of our indefinite lived assets exists at December 31, 2007.
A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of our reporting unit and the respective indefinite lived intangible assets. While we believe our judgments and assumptions were reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required in the future.
Employee Pensions. We have defined benefit pension plans covering the majority of our U.S. employees. Our long term funding policy is to accumulate gradually plan assets equal to our projected benefit obligations. The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans, which exceed the amounts required by statute. During 2007 we made voluntary contributions to our pension plans of $1.8 million compared with $1.0 million in 2006. Changes in interest rates and the market value of the securities held by the plans could materially change, positively or negatively, the under funded status of the plans and affect the level of pension expense and required contributions in 2008 and beyond.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires, among other things, the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans and post employment benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The initial impact of the standard due to unrecognized prior service costs or credits and net actuarial gains or losses as well as subsequent changes in the funded status is recognized as a component of accumulated comprehensive income in shareholders’ equity. The company has adopted SFAS No. 158 as of December 31, 2007 which resulted in a $0.1 million loss, net of tax, recorded to accumulated other comprehensive income account within member(s)’ equity.
Actuarial valuations at December 31, 2007 used a discount rate of 5.90% and an expected rate of return on plan assets of 8.50%. A 1.0% decrease in our discount rate would decrease our annual pension expense by approximately $30 thousand. Similarly, a 1.0% decrease in the expected return on plan assets would increase our annual pension expense by approximately $0.6 million.
In August 2006 the Pension Protection Act of 2006 was signed into law. The major provisions of the statute will take effect January 1, 2008. Among other things, the statute is designed to ensure timely and adequate funding of qualified pension plans by shortening the time period within which employers must fully fund pension benefits. The effect of the new law is estimated to increase future pension contributions by approximately $700,000 annually. During 2007 we amended our U.S. pension plan to freeze benefit accruals effective January 1, 2009 for all salaried employees which will lower contribution requirements starting in 2009.
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The following discussion should be read in conjunction with the Financial Statements and Notes thereto included in this report.
RESULTS OF OPERATIONS
As a result of the Alliance Acquisition, the Consolidated Financial Statements present our results of operations, financial position and cash flows prior to the date of the Alliance Acquisition transaction under “Predecessor.” The financial effects of the Alliance Acquisition transaction and our results of operations, financial position and cash flows following the closing of the Alliance Acquisition are presented under “Successor.” In accordance with GAAP, our Predecessor results have not been aggregated with our Successor results and, accordingly, our Consolidated Financial Statements do not show results of operations or cash flows for the twelve months ended December 31, 2005. However, in order to facilitate an understanding of our results of operations for the twelve months ended December 31, 2007 and 2006 in comparison with the twelve months ended December 31, 2005, we have presented and discussed below our Predecessor results and our Successor results on an unaudited, combined basis under “Combined.” The Combined results represent the January 1, 2005 through January 27, 2005 Predecessor period added to the January 28, 2005 through December 31, 2005 Successor period. The combined results of operations are unaudited non-GAAP financial measures and should not be considered in isolation or as a substitute for the Predecessor and Successor results.
| Years Ended December 31 | January 28, 2005 through December 31, | January 1, 2005 through January 27, | Year Ended December 31, | |||||||||||||||||
| 2007 | 2006 | 2005 | 2005 | 2005 | ||||||||||||||||
| Successor | Successor | Successor | Predecessor | Combined | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Net revenues: | ||||||||||||||||||||
Equipment and service parts | $ | 435,229 | $ | 359,755 | $ | 287,705 | $ | 20,303 | $ | 308,008 | ||||||||||
Equipment financing, net | 8,079 | 6,313 | 8,940 | 380 | 9,320 | |||||||||||||||
Net revenues | 443,308 | 366,068 | 296,645 | 20,683 | 317,328 | |||||||||||||||
Cost of sales | 332,592 | 282,279 | 225,706 | 15,585 | 241,291 | |||||||||||||||
Gross profit | 110,716 | 83,789 | 70,939 | 5,098 | 76,037 | |||||||||||||||
Selling, general and administrative expenses | 59,965 | 50,995 | 38,632 | 3,829 | 42,461 | |||||||||||||||
Securitization, impairment and other (income) costs, net | (750 | ) | 7,150 | 10,009 | — | 10,009 | ||||||||||||||
Transaction costs associated with sale of business | — | — | — | 18,790 | 18,790 | |||||||||||||||
Total operating expenses | 59,215 | 58,145 | 48,641 | 22,619 | 71,260 | |||||||||||||||
Operating income (loss) | 51,501 | 25,644 | 22,298 | (17,521 | ) | 4,777 | ||||||||||||||
Interest expense | 34,747 | 31,177 | 24,117 | 995 | 25,112 | |||||||||||||||
Loss from early extinguishment of debt | — | — | — | 9,867 | 9,867 | |||||||||||||||
Other expense, net | — | 417 | — | — | — | |||||||||||||||
Income (loss) before taxes | 16,754 | (5,950 | ) | (1,819 | ) | (28,383 | ) | (30,202 | ) | |||||||||||
Provision (benefit) for income taxes | 6,885 | (2,540 | ) | (1,158 | ) | 9 | (1,149 | ) | ||||||||||||
Net income (loss) | $ | 9,869 | $ | (3,410 | ) | $ | (661 | ) | $ | (28,392 | ) | $ | (29,053 | ) | ||||||
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The following table provides our historical net revenues for the periods indicated:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | Year Ended December 31, 2005 | ||||||||||||||
| Successor | Successor | Successor | Predecessor | Combined | ||||||||||||||
| (unaudited) | ||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||
Net revenues: | ||||||||||||||||||
Commercial laundry | $ | 317.4 | $ | 282.9 | $ | 249.5 | $ | 17.3 | $ | 266.8 | ||||||||
Consumer laundry | 19.4 | 14.4 | 9.8 | 0.2 | 10.0 | |||||||||||||
Service parts | 51.8 | 45.7 | 37.3 | 3.2 | 40.5 | |||||||||||||
European operations | 85.4 | 36.5 | — | — | — | |||||||||||||
Worldwide eliminations | (30.7 | ) | (13.4 | ) | — | — | — | |||||||||||
| $ | 443.3 | $ | 366.1 | $ | 296.6 | $ | 20.7 | $ | 317.3 | |||||||||
The following table provides certain condensed historical financial data expressed as a percentage of net revenues for each of the periods indicated:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | Year Ended December 31, 2005 | |||||||||||
| Successor | Successor | Successor | Predecessor | Combined | |||||||||||
| (unaudited) | |||||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
Cost of sales | 75.0 | % | 77.1 | % | 76.1 | % | 75.4 | % | 76.0 | % | |||||
Gross profit | 25.0 | % | 22.9 | % | 23.9 | % | 24.6 | % | 24.0 | % | |||||
Selling, general and administrative expense | 13.5 | % | 13.9 | % | 13.0 | % | 18.5 | % | 13.4 | % | |||||
Securitization, impairment and other costs | (0.2 | )% | 2.0 | % | 3.4 | % | 0.0 | % | 3.2 | % | |||||
Transaction costs associated with sale of business | 0.0 | % | 0.0 | % | 0.0 | % | 90.8 | % | 5.9 | % | |||||
Operating income (loss) | 11.7 | % | 7.0 | % | 7.5 | % | (84.7 | )% | 1.5 | % | |||||
Net income (loss) | 2.2 | % | (0.9 | )% | (0.2 | )% | (137.3 | )% | (9.2 | )% |
Below is a reconciliation of certain items of the consolidated statements of cash flows for the periods presented:
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| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | Year Ended December 31, 2005 | ||||||||||||||||
| Successor | Successor | Successor | Predecessor | Combined | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operations | $ | 35,677 | $ | 20,668 | $ | 26,616 | $ | (20,675 | ) | $ | 5,941 | |||||||||
Net cash (used for) provided by working capital | (3,942 | ) | 2,238 | (19,988 | ) | 14,056 | (5,932 | ) | ||||||||||||
Net cash provided by (used in) operating activities | $ | 31,735 | $ | 22,906 | $ | 6,628 | $ | (6,619 | ) | $ | 9 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Additions to property, plant and equipment | $ | (8,338 | ) | $ | (6,150 | ) | $ | (4,229 | ) | $ | (188 | ) | $ | (4,417 | ) | |||||
Acquisition of businesses, net of cash received | — | (82,308 | ) | — | — | — | ||||||||||||||
Proceeds on disposition of assets | 1,211 | 1,421 | 4 | — | 4 | |||||||||||||||
Net cash used in investing activities | $ | (7,127 | ) | $ | (87,037 | ) | $ | (4,225 | ) | $ | (188 | ) | $ | (4,413 | ) | |||||
Cash flows from financing activities: | ||||||||||||||||||||
Principal payments on long-term debt | $ | (34,573 | ) | $ | (13,123 | ) | $ | (23,000 | ) | $ | 1 | $ | (22,999 | ) | ||||||
Net increase in revolving line of credit borrowings | — | — | — | — | — | |||||||||||||||
Proceeds from promissory notes | — | 1,000 | — | — | — | |||||||||||||||
Proceeds from senior term loan | — | 60,000 | 200,000 | — | 200,000 | |||||||||||||||
Proceeds from senior subordinated notes | — | — | 149,250 | — | 149,250 | |||||||||||||||
Repayment of long-term debt | — | — | (275,920 | ) | — | (275,920 | ) | |||||||||||||
Issuance of common stock | 9,385 | 23,493 | 117,000 | — | 117,000 | |||||||||||||||
Repurchase of common stock | — | (50 | ) | — | — | — | ||||||||||||||
Distribution to old unitholders | — | — | (154,658 | ) | — | (154,658 | ) | |||||||||||||
Debt financing costs | — | (1,335 | ) | (13,230 | ) | — | (13,230 | ) | ||||||||||||
Cash paid for capitalized offering related costs | — | — | (1,364 | ) | — | (1,364 | ) | |||||||||||||
Net proceeds - management note | — | — | — | (71 | ) | (71 | ) | |||||||||||||
Net cash (used in) provided by financing activities | $ | (25,188 | ) | $ | 69,985 | $ | (1,922 | ) | $ | (70 | ) | $ | (1,992 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | $ | (47 | ) | $ | 292 | $ | — | $ | — | $ | — | |||||||||
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Revenues.Net revenues for the year ended December 31, 2007 increased $77.2 million, or 21.1%, to $443.3 million from $366.1 million for the year ended December 31, 2006. This increase was attributable to $34.5 million of higher commercial laundry revenues, $5.0 million of higher consumer laundry revenue, $6.1 million of higher service parts revenue and $48.9 million of full year sales from the European Operations acquired in the CLD Acquisition on July 14, 2006, which were partially offset by higher worldwide sales eliminations of $17.3 million. The increase in commercial laundry revenues includes $19.7 million of higher North American commercial equipment revenue, $10.9 million of higher international revenue, $2.1 million of net revenue resulting from the CLD Acquisition’s U.S. operations and $1.8 million of higher earnings from our off-balance sheet equipment financing program. Revenue for North America was higher for coin-operated and on-premise laundry customers as well as for multi-housing laundries. Revenue for international customers was higher in Europe, Asia, Latin America and the Middle East. The increase in consumer laundry revenue was due to continued growth in the number of retailers and sales per retailer. The higher service parts revenue includes approximately $4.4 million
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of net sales resulting from the acquisition of CLD’s U.S. operations. The net revenue increases stated above include price increases of approximately $13.1 million. Our off-balance sheet equipment financing program earnings were higher due to adjustments of beneficial interests to their respective fair market values. The fair market value adjustments were primarily due to lower LIBOR rates and lower average loan prepayments.
Gross Profit.Gross profit for the year ended December 31, 2007 increased $26.9 million, or 32.1%, to $110.7 million from $83.8 million for the year ended December 31, 2006. This increase was primarily attributable to approximately $13.6 million of increased gross profit from the European Operations acquired in the CLD Acquisition, $13.1 million of price increases in the U.S. Operations, $6.9 million of gross profit from increased sales volume, $3.0 million of increased gross profit resulting from CLD’s U.S. operations, $1.8 million of higher earnings from our off-balance sheet equipment financing program and $4.5 million of lower depreciation expense in the U.S. operations. The reduction in depreciation expense related to the closure of the Marianna facility in 2006. Additionally, the prior year included $3.2 million of expense related to an inventory step-up to fair market value recorded as part of the CLD Acquisition. These increases in gross profit were partially offset by approximately $19.0 million of higher raw material costs, net product distribution costs and medical and workers compensation costs within the base business. Gross profit as a percentage of net revenues was 25.0% for the year ended December 31, 2007 and was 22.9% for the year ended December 31, 2006.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for the year ended December 31, 2007 increased $9.0 million, or 17.6%, to $60.0 million from $51.0 million for the year ended December 31, 2006. The increase in selling, general and administrative expenses was primarily due to approximately $8.7 million of selling, general and administrative expenses resulting from the CLD Acquisition, $2.0 million of selling and marketing costs to support the increased base business sales, $1.6 million of increased base business engineering to support new and improved products, $1.4 million of investigatory and audit costs related to the restatement of the financial statements and $0.7 million of higher non-cash incentive compensation relating to incentive units and stock option programs. These increases were partially offset by a decrease of $2.9 million in costs associated with the transition of Marianna, Florida products to Ripon, Wisconsin, $1.3 million of lower management bonus costs and $1.1 million in lower costs for a periodic accrual under the one time retention bonus agreement with certain management employees. Selling, general and administrative expenses as a percentage of net revenues decreased to 13.5% for the year ended December 31, 2007 from 13.9% for the year ended December 31, 2006.
Securitization, Impairment and Other (Income) Costs.Securitization, impairment and other (income) costs for the year ended December 31, 2007 decreased $7.9 million, with income of $0.8 million for the year ended December 31, 2007 as compared to expense of $7.2 million for the year ended December 31, 2006. The income in 2007 was comprised of a $1.6 million non-cash pension curtailment credit, partially offset by $0.8 million related to Marianna plant closure costs. These costs in 2006 were comprised of $4.7 million related to Marianna plant closure costs, a $1.4 million non-cash impairment charge related to the Ajax trademark and a $1.0 million non-cash impairment charge related to the LSG customer agreements. Securitization, impairment and other (income) costs as a percentage of net revenues decreased to a negative 0.2% for the year ended December 31, 2007 from a positive 2.0% for the year ended December 31, 2006.
Operating Income.As a result of the aforementioned, operating income for the year ended December 31, 2007 increased $25.9 million to $51.5 million from $25.6 million for the year ended December 31, 2006. Operating income as a percentage of net revenues increased to 11.7% for the year ended December 31, 2007 from 7.0% for the year ended December 31, 2006.
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Interest Expense.Interest expense for the year ended December 31, 2007 increased $3.5 million, or 11.5%, to $34.7 million from $31.2 million for the year ended December 31, 2006. This increase includes approximately $1.7 million of higher costs related to the term loan, $0.7 million related to a Senior Credit Facility waiver fee and $1.2 million of higher non-cash costs related to changes in fair values of interest rate swap agreements. The higher term loan interest is comprised of approximately $0.7 million related to higher interest rates and approximately $1.0 million higher interest costs due to higher amounts outstanding under our Senior Credit Facility beginning July 14, 2006 to partially fund the CLD Acquisition.
Income Tax Provision (Benefit).The provision for income taxes for the year ended December 31, 2007 was $6.9 million as compared to an income tax benefit of $2.5 million for the year ended December 31, 2006. The effective income tax rate was 41.1% for the year ended December 31, 2007 as compared to 42.7% for the year ended December 31, 2006.
Net Income (Loss).As a result of the aforementioned factors, our net income for the year ended December 31, 2007 was $9.9 million as compared to a net loss of $3.4 million for the year ended December 31, 2006. Net income as a percentage of net revenues was positive 2.2% for the year ended December 31, 2007 as compared to a negative 0.9% for the year ended December 31, 2006.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net Revenues.Net revenues for the year ended December 31, 2006 increased $48.8 million, or 15.4%, to $366.1 million from $317.3 million for the year ended December 31, 2005. This increase was attributable to $16.1 million of higher commercial laundry revenues, $4.4 million of higher consumer laundry revenue, $5.2 million of higher service parts revenue and CLD Acquisition related sales of $36.5 million from the European Operations, partly offset by $13.4 million of worldwide sales eliminations. The increase in commercial laundry revenues includes $13.3 million of net sales resulting from the CLD Acquisition’s U.S. operations and $8.6 million of higher international revenue which were partly offset by $2.8 million of lower North American commercial equipment revenue and $3.0 million of lower earnings from our off-balance sheet equipment financing program. Revenue for North America was lower for coin-operated and on-premise laundry customers and higher for multi-housing laundries. Revenue for international customers was higher in South Africa, Europe, Asia and Latin America. The increase in consumer laundry revenue was due to continued growth in the number of retailers and sales per retailer. The higher service parts revenue includes approximately $3.2 million of net sales resulting from the acquisition of CLD’s U.S. operations. The net revenue increases stated above include price increases of approximately $5.8 million. Our off-balance sheet equipment financing program earnings were lower due to lower overall interest rate spreads on notes sold and due to adjustments of beneficial interests to their respective fair market values.
Gross Profit.Gross profit for the year ended December 31, 2006 increased $7.8 million, or 10.2%, to $83.8 million from $76.0 million for the year ended December 31, 2005. This increase was primarily attributable to approximately $8.0 million of gross profit resulting from the European Operations acquired in the CLD Acquisition, in addition to price increases of $5.8 million. Additionally, gross profit in 2006 includes $3.2 million of expense related to an inventory step-up to fair market value recorded on the CLD Acquisition date, while gross profit in 2005 includes $6.2 million of expense related to an inventory step-up to fair market value recorded on the Alliance Acquisition date. Gross margins were also negatively impacted by $3.0 million of lower earnings from our off-balance sheet equipment financing program and costs related to the transfer of the Marianna, Florida product lines to
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Ripon, Wisconsin as well as other higher manufacturing costs. Gross profit as a percentage of net revenues was 22.9% for the year ended December 31, 2006 and was 24.0% for the year ended December 31, 2005.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for the year ended December 31, 2006 increased $8.5 million, or 20.1%, to $51.0 million from $42.5 million for the year ended December 31, 2005. The increase in selling, general and administrative expenses was primarily due to approximately $6.0 million of CLD Acquisition selling, general and administrative expenses, $2.6 million of increased costs associated with the transition of Marianna, Florida products to Ripon, Wisconsin, $1.6 million of increased amortization expenses driven primarily by CLD Acquisition date write-ups to fair market value for customer agreements, engineering drawings, and our distribution network and $0.9 million of higher losses on the sale of trade receivables. These increases were partially offset by a decrease in non-cash incentive compensation of $2.3 million relating to incentive units and stock option programs. Selling, general and administrative expenses as a percentage of net revenues increased to 13.9% for the year ended December 31, 2006 from 13.4% for the year ended December 31, 2005.
Securitization, Impairment and Other (Income) Costs.Securitization, impairment and other (income) costs for the year ended December 31, 2006 decreased $2.8 million, or 28.6%, to $7.2 million from $10.0 million for the year ended December 31, 2005. These costs in 2005 were comprised of $8.1 million of transaction costs incurred in establishing a new asset backed facility for the sale of equipment notes and trade receivables, a $1.7 million non-cash impairment charge related to the Ajax trademark and $0.2 million related to Marianna plant closure costs. These costs in 2006 were comprised of $4.7 million related to Marianna plant closure costs, a $1.4 million non-cash impairment charge related to the Ajax trademark and a $1.0 million non-cash impairment charge related to the LSG customer agreements. Securitization, impairment and other (income) costs as a percentage of net revenues decreased to 2.0% for the year ended December 31, 2006 from 3.2% for the year ended December 31, 2005.
Transaction Costs Associated With Sale of Business.Transaction costs associated with the sale of the business for the year ended December 31, 2005 were $18.8 million with no similar costs in 2006. These costs were comprised of seller transaction fees including transaction underwriting fees of $4.5 million, legal and professional fees of $1.3 million, a management sale bonus of $6.2 million and advisory fees to Bain Capital Partners LLC and Bruckmann, Rosser, Sherrill & Co. of $6.8 million. Transaction costs associated with sale of business as a percentage of net revenues was 5.9% for the year ended December 31, 2005.
Operating Income.As a result of the aforementioned, operating income for the year ended December 31, 2006 increased $20.8 million to $25.6 million from $4.8 million for the year ended December 31, 2005. Operating income as a percentage of net revenues increased to 7.0% for the year ended December 31, 2006 from 1.5% for the year ended December 31, 2005.
Interest Expense.Interest expense for the year ended December 31, 2006 increased $6.1 million, or 24.2%, to $31.2 million from $25.1 million for the year ended December 31, 2005. This increase includes approximately $3.0 million for higher interest costs primarily related to higher interest rates for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005, and higher interest costs beginning July 14, 2006 related to increases in the amounts outstanding under our Senior Credit Facility to partially fund the CLD Acquisition. Interest expense in 2006 includes an unfavorable non-cash adjustment of $0.3 million to reflect adjustments in the fair values of interest rate swap agreements. Interest expense in 2005 included a favorable non-cash adjustment of $1.1 million to reflect adjustments in the fair values of an interest rate swap agreement. Net interest expense in 2005 also includes $0.7 million of interest income related to pre-Acquisition investor promissory notes.
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Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt for the year ended December 31, 2005 was $9.9 million with no similar costs in 2006. The 2005 costs include the write-off of $5.8 million of unamortized deferred financing costs associated with pre-Alliance Acquisition debt, which was paid off as of the Alliance Acquisition date, and $4.1 million of tender and call premium costs associated with redeeming the 1998 Senior Subordinated Notes.
Income Tax Benefit.The income tax benefit for the year ended December 31, 2006 increased $1.4 million to $2.5 million from $1.1 million for the year ended December 31, 2005. Prior to January 28, 2005 we did not provide for U.S. federal income taxes or tax benefits as the Predecessor Company was a partnership for tax reporting purposes and the payment of federal and most state taxes were the responsibility of the partners.
Net Loss.As a result of the aforementioned, the net loss for the year ended December 31, 2006 decreased to a loss of $3.4 million as compared to a loss of $29.1 million for the year ended December 31, 2005. Net loss as a percentage of net revenues was negative 0.9% for the year ended December 31, 2006 as compared to a negative 9.2% for the year ended December 31, 2005.
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows generated from operations and potential borrowings under our $55.0 million Revolving Credit Facility. Our principal uses of liquidity are to meet debt service requirements, finance our capital expenditures and provide working capital. We expect that capital expenditures in 2008 will not exceed $11.5 million. We expect 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.
Our ability to make scheduled payments of principal or to refinance our indebtedness, or to pay the interest or liquidated damages on our indebtedness, if any thereon, or to fund planned capital expenditures, will depend upon our future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond our control. There can be no assurance that our business will continue to generate sufficient cash flows from operations in the future to service our debt and make necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our 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.
At December 31, 2007 we had outstanding debt of $190.0 million under the Senior Credit Facility and $150.0 million of Senior Subordinated Notes.
On January 25, 2006 we received $1.0 million in borrowings, evidenced by two promissory notes, pursuant to a Wisconsin Community Development Block Grant Agreement (the “Agreement”), dated January 6, 2006, between the Wisconsin Department of Commerce, Alliance Laundry and Fond du Lac County, Wisconsin. The first promissory note, in the amount of $0.5 million, bears interest at an annual rate of 2%, with monthly payments of interest and principal commencing January 1, 2007 with the final installment paid on December 1, 2010, subject to the covenants of the Agreement. The second promissory note, in the amount of $0.5 million bears interest at an annual rate of 2%, with
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monthly payments of interest and principal commencing January 1, 2009 with the final installment paid on December 1, 2010, subject to the covenants of the Agreement. A portion or the entire amount of this second promissory note may be forgiven if we meet certain job creation and retention requirements outlined in the promissory note.
The aggregate scheduled maturities of long-term debt and capitalized lease obligations in subsequent years, after giving effect to the $60.0 million of additional term loans received in July of 2006, and after giving effect to the scheduled payments and $34.0 million of voluntary prepayments made in 2007 are as follows:
| Amount Due | |||
Year | (Dollars in millions) | ||
2008 | $ | 0.6 | |
2009 | $ | 2.8 | |
2010 | $ | 2.7 | |
2011 | $ | 2.0 | |
2012 | $ | 184.2 | |
Thereafter | $ | 150.0 | |
Senior Credit Facility. The Senior Credit Facility and the indenture governing the Senior Subordinated Notes contain a number of covenants that, among other things, restrict our ability to dispose of assets, repay other indebtedness, incur liens, make capital expenditures and make certain investments or acquisitions, engage in mergers or consolidation and otherwise restrict our operating activities. In addition, under the Senior Credit Facility, the Company is required to satisfy specified financial ratios and tests, including a maximum of total debt to Adjusted EBITDA (as defined in the credit agreement governing the Senior Credit Facility) and a minimum interest coverage ratio.
The Senior Credit Facility requires us to comply with certain financial ratios and tests as specified in the agreement. The occurrence of any default of these covenants could result in acceleration of our obligations under the Senior Credit Facility ($190.0 million at December 31, 2007) and foreclosure on the collateral securing such obligations. Further, such an acceleration would constitute an event of default under the indenture governing the Senior Subordinated Notes.
On September 10, 2007 the Company entered into an amendment and waiver (the “Amendment and Waiver”) to the Company’s Senior Credit Facility. Among other things, the Amendment and Waiver waived, until November 13, 2007, the Company’s failure to timely provide its financial statements to the Administrative Agent for the quarterly period ended June 30, 2007 and provided waivers related to defaults arising from the restatement of the Company’s financial statements for the fiscal year ended December 31, 2006 and the fiscal quarters ended March 31, 2006, June 30, 2006, September 30, 2006 and March 31, 2007. The Amendment and Waiver increased the applicable interest rate under the Senior Credit Facility (subject to adjustment for certain ratings events) by 25 basis points and provides for a 1% prepayment fee in the event the term loans under the Senior Credit Facility are refinanced at a lower rate during the twelve months following the effective date of the Amendment and Waiver.
At December 31, 2007 there were no borrowings under our Revolving Credit Facility. At December 31, 2007 letters of credit issued on our behalf under the Revolving Credit Facility totaled $34.1 million. At December 31, 2007 we had $20.9 million of our existing $55.0 million Revolving Credit Facility available, subject to certain limitations under the Senior Credit Facility. After considering such limitations, which relate primarily to the maximum ratio of consolidated debt to Adjusted EBITDA, we could have borrowed $3.9 million at December 31, 2007 in additional indebtedness under the Revolving Credit Facility.
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We believe, based on currently available information, that for the foreseeable future, cash flows from operations, together with available borrowings under the Senior Credit Facility, will be adequate to meet our anticipated requirements for capital expenditures, working capital, interest payments, scheduled principal payments and other debt repayments while achieving all required covenant requirements under the Senior Credit Facility and Senior Subordinated Notes.
The Senior Credit Facility, after giving effect to the $60.0 million of additional term loans received in July of 2006 is repayable in the following aggregate annual amounts:
| Amount Due | |||
Year | (Dollars in millions) | ||
2008 | $ | 0.0 | |
2009 | $ | 1.9 | |
2010 | $ | 2.0 | |
2011 | $ | 1.9 | |
2012 | $ | 184.2 | |
Additional borrowings and the issuance of additional letters of credit under the Senior Credit Facility are subject to certain continuing representations and warranties, including the absence of any development or event which has had or could reasonably be expected to have a material adverse effect on our business or financial condition.
The Senior Credit Facility requires mandatory prepayments for 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 on January 27, 2011.
EBITDA and Adjusted EBITDA.One of our two principal sources of liquidity are potential borrowings under the $55.0 million Revolving Credit Facility under our Senior Credit Facility, and we have presented EBITDA and Adjusted EBITDA below because certain covenants in our Senior Credit Facility are tied to ratios based on these measures. “EBITDA” represents net income (loss) before interest expense, income tax (provision) benefit and depreciation and amortization (including non-cash interest income), and “Adjusted EBITDA” (as defined under the Senior Credit Facility) is EBITDA as further adjusted to exclude, among other things, certain non-recurring expenses and other non-recurring non-cash charges, which are further defined in our Senior Credit Facility. As of December 31, 2007 the Senior Credit Facility requires us to satisfy a maximum Consolidated Total Debt (as defined under the Senior Credit Facility) to Adjusted EBITDA ratio of 5.00 to 1.00 and a minimum Adjusted EBITDA to Consolidated Cash Interest Expense (as defined in the Senior Credit Facility) of 2.25 to 1.00. As of December 31, 2007 our Consolidated Total Debt to Adjusted EBITDA ratio was 4.94 to 1.00 and our Adjusted EBITDA to Consolidated Cash Interest Expense ratio was 2.31 to 1.00. To the extent that we fail to maintain either of these ratios within the limits set forth in the Senior Credit Facility, our ability to access amounts available under our Revolving Credit Facility would be limited, our liquidity would be adversely affected and our obligations under the Senior Credit Facility could be accelerated. In addition, any such acceleration would constitute an event of default under the indenture governing the Senior Subordinated Notes (the “Notes Indenture”), and such an event of default under the Notes Indenture could lead to an acceleration of our obligations under the Senior Subordinated Notes.
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EBITDA and Adjusted EBITDA do not represent, and should not be considered, an alternative to net income or cash flow from operations, as determined by GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies.
We have presented in the tables below a calculation of Consolidated Total Debt and Consolidated Cash Interest Expense, in each case, as defined in the Senior Credit Facility. The calculation of Adjusted EBITDA (as defined in the Senior Credit Facility) set forth in the tables below uses as its starting point EBITDA and, as noted in the preceding paragraph, EBITDA represents net income (loss) before interest expense, income tax (provision) benefit and depreciation and amortization (including non-cash interest income). The calculations set forth below for Adjusted EBITDA and Consolidated Cash Interest Expense are, in each case, for the four fiscal quarters ended December 31, 2007.
The following table presents a calculation of the Consolidated Total Debt to Adjusted EBITDA ratio and Adjusted EBITDA to Consolidated Cash Interest Expense ratio:
| Quarter Ended March 31, 2007 | Quarter Ended June 30, 2007 | Quarter Ended September 30, 2007 | Quarter Ended December 31, 2007 | Total | ||||||||||||||||
EBITDA | $ | 14,773 | $ | 16,335 | $ | 15,445 | $ | 21,994 | $ | 68,547 | ||||||||||
Finance program adjustments (a) | (822 | ) | (77 | ) | (595 | ) | (665 | ) | (2,159 | ) | ||||||||||
Other non-recurring charges (b) | 752 | 716 | 668 | 228 | 2,364 | |||||||||||||||
Other non-cash charges (c) | 972 | 832 | 902 | (2,928 | ) | (222 | ) | |||||||||||||
Adjusted EBITDA | $ | 15,675 | $ | 17,806 | $ | 16,420 | $ | 18,629 | $ | 68,530 | ||||||||||
| December 31, 2007 | ||||||||||||||||||||
Revolving Credit Facility | $ | — | ||||||||||||||||||
Senior Credit Facility | 190,000 | |||||||||||||||||||
Senior Subordinated Notes | 149,523 | |||||||||||||||||||
Other long-term debt and capital lease obligations | 2,265 | |||||||||||||||||||
Unrestricted cash held by foreign subsidiaries (d) | (3,000 | ) | ||||||||||||||||||
Consolidated Total Debt | $ | 338,788 | ||||||||||||||||||
Consolidated Total Debt to Adjusted EBITDA | 4.94 | |||||||||||||||||||
| Quarter Ended March 31, 2007 | Quarter Ended June 30, 2007 | Quarter Ended September 30, 2007 | Quarter Ended December 31, 2007 | Total | ||||||||||||||||
Interest expense | $ | 8,336 | $ | 8,125 | $ | 9,410 | $ | 8,876 | $ | 34,747 | ||||||||||
Non-cash interest | (816 | ) | (597 | ) | (921 | ) | (1,392 | ) | (3,726 | ) | ||||||||||
Cash interest on letters of credit and waiver fees | (227 | ) | (231 | ) | (1,102 | ) | (265 | ) | (1,825 | ) | ||||||||||
Interest income | 89 | 109 | 162 | 161 | 521 | |||||||||||||||
Consolidated Cash Interest Expense | $ | 7,382 | $ | 7,406 | $ | 7,549 | $ | 7,380 | $ | 29,717 | ||||||||||
Adjusted EBITDA to Consolidated Cash Interest Expense | 2.31 | |||||||||||||||||||
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| (a) | We currently operate an off-balance sheet commercial equipment finance program in which newly originated equipment loans are sold to a qualified special-purpose bankruptcy remote entity. In accordance with GAAP, we are required to record gains/losses on the sale of these equipment based promissory notes. In calculating Adjusted EBITDA, management determines the cash impact of net interest income on these notes. The finance program adjustments are the difference between GAAP basis revenues (as prescribed by SFAS No. 125/140) and cash basis revenues. |
| (b) | Other non-recurring charges are described as follows: |
| • | Other non-recurring charges consist of $0.8 million of costs associated with the closure of the Marianna, Florida production facility which are included in the securitization, impairment and other (income) costs line of our Consolidated Statements of Operations, $0.1 million of costs related to the transfer of the Marianna, Florida product lines to Ripon, Wisconsin, and $1.4 million of investigatory and audit costs related to the restatements, all of which are included in the selling, general and administrative expenses line of our Consolidated Statements of Operations and a periodic accrual of $0.1 million under a one time retention bonus agreement with certain management employees. |
| (c) | Other non-cash charges are described as follows: |
| • | Other non-cash charges are comprised of $0.7 million of non-cash mark to market losses relating to nickel and foreign exchange hedge agreements, which is included in the cost of sales line of our Consolidated Statements of Operations, $0.6 million of expense related to management incentive stock options, which is included in the selling, general and administrative expenses line of our Consolidated Statements of Operations, and a one-time non-cash pension curtailment gain of $1.6 million associated with the freeze of benefit accruals for all U.S. based salaried employees effective January 1, 2009. |
| (d) | As defined in the Amendment, Consolidated Total Debt is the aggregate principal amount of all funded debt for the relevant period minus the lesser of $3.0 million or the aggregate amount of unrestricted cash and cash equivalents held by the foreign subsidiaries. |
Securitization Programs.On June 28, 2005 Alliance Laundry, through a special-purpose bankruptcy remote subsidiary, Alliance Laundry Equipment Receivables 2005 LLC (“ALER 2005”), and a trust, Alliance Laundry Equipment Receivables Trust 2005-A (“ALERT 2005A”), entered into a four year $330.0 million revolving credit facility (the “Asset Backed Facility”), backed by equipment loans and trade receivables originated by us. During the first four years of the Asset Backed Facility, Alliance Laundry is permitted, from time to time, to sell its trade receivables and certain equipment loans to the special-purpose subsidiary, which in turn will sell them to the trust. The trust finances the acquisition of the trade receivables and equipment loans through borrowings under the Asset Backed Facility in the form of funding notes, which are limited to an advance rate of approximately 95% for equipment loans and 60-70% for trade receivables. Funding availability for trade receivables is limited to a maximum of $60.0 million, while funding for equipment loans is limited at $330.0 million less the amount of funding outstanding for trade receivables. Funding for the trade receivables and equipment loans is subject to certain eligibility criteria, including concentration and other limits, standard for transactions of this type. After four years from the closing date, which is June 27, 2009, (or earlier in the event of a rapid amortization event or an event of default), the trust will not be permitted to request new borrowings under the facility and the outstanding borrowings will amortize over a period of up to nine years. As of December 31, 2007 the balance of variable funding notes due to lenders under the Asset Backed Facility for equipment loans was $237.0 million.
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The variable funding notes under the Asset Backed Facility will commence amortization and borrowings thereunder will cease prior to four years after the closing date upon the occurrence of certain “rapid amortization events” which include: (i) a borrowing base shortfall exists and remains uncured, (ii) delinquency, dilution or default ratios on pledged receivables and equipment loans exceeding certain specified ratios in any given month, (iii) the days sales outstanding on receivables exceed a specified number of days, (iv) the occurrence and continuance of an event of default or servicer default under the Asset Backed Facility, including but not limited to, as servicer, a material adverse change in our business or financial condition and our compliance with certain required financial covenants, and (v) a number of other specified events.
The risk of loss to the note purchasers under the Asset Backed Facility resulting from default or dilution on the trade receivables and equipment loans is protected by credit enhancement, provided by us in the form of cash reserves, letters of credit and overcollateralization. Further, the timely payment of interest and the ultimate payment of principal on the facility are guaranteed by Ambac Assurance Corporation. All of the residual beneficial interests in the trust and cash flows remaining from the pool of receivables and loans after payment of all obligations under the Asset Backed Facility would accrue to the benefit of Alliance Laundry. Except for the retained interests and amounts of the letters of credit outstanding from time to time as credit enhancement, we provide no support or recourse for the risk of loss relating to default on the assets transferred to the trust. In addition, we are paid an annual servicing fee equal to 1.0% of the aggregate balance of such trade receivables and equipment loans.
We have structured our Asset Backed Facility, and intend to continue to structure the finance programs, 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, we will continue to act as originator and servicer of the equipment financing promissory notes and the trade receivables.
The Asset Backed Facility replaces a similar facility previously maintained with CDC Financial Products, Inc., Bear, Stearns & Co., Inc. and Altamira Funding, LLC (the “ALERT 2002A Facility”). In connection with the establishment of the Asset Backed Facility, Alliance Laundry, through its special-purpose subsidiaries, repurchased and simultaneously resold the assets held by the ALERT 2002A Facility to the Asset Backed Facility.
Senior Subordinated Notes.As part of the Financing Transactions, we offered and sold $150.0 million of Senior Subordinated Notes and received net proceeds of approximately $149.3 million. The indenture governing the Senior Subordinated Notes (the “Notes Indenture”), among other things, restricts our ability and the ability of our restricted subsidiaries to make investments, incur or guarantee additional indebtedness, pay dividends, create liens, sell assets, merge or consolidate with other entities, enter into transactions with affiliates and engage in certain business activities. The occurrence of an event of default under the Notes Indenture covenants could result in an acceleration of the principal amount of the Senior Subordinated Notes of approximately $150.0 million, plus any other amounts due under the Notes Indenture.
Off-Balance Sheet Arrangements
On June 28, 2005 Alliance Laundry Equipment Receivables Trust 2005-A (“ALERT 2005A”), entered into a $330.0 million asset backed securitization funding facility (the “Asset Backed Facility”) backed by equipment loans and trade receivables originated by Alliance Laundry. Pursuant to a Purchase Agreement, dated June 28, 2005, between Alliance Laundry, as seller, and ALER, as buyer, Alliance
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Laundry will sell or contribute all of the trade receivables and certain of the equipment loans that it originates to ALER 2005. Immediately thereafter, pursuant to a Pooling and Servicing Agreement, dated June 28, 2005, ALER 2005 will sell such trade receivables and equipment loans to ALERT 2005A. ALERT 2005A will finance the acquisition of the trade receivables and equipment loans through borrowings under variable funding notes (the “Notes”) issued to the lenders under the Asset Backed Facility (which lenders shall initially be certain affiliates of IXIS Financial Products Inc. and Lehman Brothers Holdings Inc. (collectively, the “Initial Lenders”)), pursuant to a master indenture, dated June 28, 2005 (the “Indenture”). The Bank of New York will act as indenture trustee under the Indenture. The Notes will be secured by all of the assets of ALERT 2005A. The Initial Lenders advanced $245.4 million against the maximum facility amount to ALERT 2005A on June 28, 2005 pursuant to a Note Purchase Agreement, dated June 28, 2005 (the “Note Purchase Agreement”).
Without the consent of the lenders, advances against the equipment loan Notes may be made no more than once in each calendar week and advances against the trade receivable Notes may be made no more than twice in each calendar week. Funding availability for trade receivable Notes is limited to a maximum of $60.0 million, while funding for equipment loan Notes is limited to $330.0 million less the amount of funding outstanding for trade receivable Notes. Funding of the Notes is subject to certain advance rate and eligibility criteria standard for transactions of this type. After June 27, 2009 (or earlier in the event of a rapid amortization event, an event of default or the termination of the Asset Backed Facility by Alliance Laundry), ALERT 2005A will not be permitted to request new borrowings under the Asset Backed Facility and the outstanding borrowings will amortize over a period of up to nine years thereafter.
Additional advances under the Asset Backed Facility are subject to certain continuing conditions, including but not limited to (i) the absence of a rapid amortization event or event of default, as defined in the Note Purchase Agreement, (ii) compliance by Alliance Laundry, as servicer, with certain covenants, including financial covenants and (iii) no event having occurred which materially and adversely affects the operations of Alliance Laundry. In addition, advances under the Asset Backed Facility in respect of fixed rate equipment loans are subject to limitations on the weighted average interest rate and the aggregate loan balance of all fixed rate equipment loans then held by ALERT 2005A.
The risk of loss resulting from default or dilution on the trade receivables and equipment loans is protected by credit enhancement, provided in the form of cash reserves, letters of credit and overcollateralization. The timely payment of interest and the ultimate payment of principal on the Asset Backed Facility are guaranteed by Ambac Assurance Corporation (“Ambac”) in the form of a financial guaranty insurance policy (the “Policy”). All of the residual beneficial interests in ALERT 2005A and cash flows remaining from the pool of receivables and loans after payment of all obligations under the asset backed facility will accrue to the benefit of Alliance Laundry. Except for amounts of the letters of credit outstanding from time to time as credit enhancement, Alliance Laundry will provide no support or recourse for the risk of loss relating to default on the assets transferred to ALERT 2005A. Alliance Laundry, as servicer, will be paid an annual servicing fee equal to 1.0% of the aggregate balance of such trade receivables and equipment loans.
Interest payments on the Notes are paid monthly, which began in August 2005, at an interest rate equal to 1-month LIBOR plus the applicable margin, which will be 0.5% for the four-year period after the closing date of June 28, 2005 and 0.85% thereafter (including the last day of such four-year period). If an event of default occurs the otherwise applicable interest rate will be increased by an amount equal to two percent (2%) per annum. Prior to a rapid amortization event or event of default, the lenders under the Asset Backed Facility will also earn an unused facility fee of 0.175% of the unfunded portion of each lender’s commitment amount.
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The Indenture provides that upon a written demand by the Control Party (initially, AMBAC as surety provider) after the occurrence of a rapid amortization event (including, among others, the occurrence of a shortfall in the applicable borrowing base (an amount calculated based on the value of the equipment loans or trade receivables, the value of the credit enhancements and certain other credit characteristics of the collateral) that remains unremedied for three or more business days; a draw on the reserve account; termination of or a drawing on the letters of credit providing credit enhancement for the benefit of the Notes (unless the proceeds are deposited in the reserve account); failure to maintain certain financial and other ratios; or the occurrence of an event of default or a servicer default) the Notes will amortize and borrowings under the Notes will cease. Upon written demand by the Control Party after the occurrence of a servicer default (including, among others, a failure to deposit amounts required to be deposited by the servicer, failure of the servicer or ALER 2005 to observe certain covenants, including financial covenants, which failure has a material adverse effect on the Control Party or lenders under the Asset Backed Facility, voluntary or involuntary bankruptcy of the servicer, a material adverse change in the financial condition or business of the servicer, occurrence of a cross default for indebtedness in excess of $5.0 million or failure of the equipment loans and trade receivables to meet certain performance metrics), the servicer may be replaced. The Indenture also includes usual and customary events of default for facilities of this nature (with customary grace periods and options for curing, as applicable). The Indenture provides that upon written demand by the Control Party after the occurrence of an event of default (including, among others, default in the payment of principal, interest or the premium to the surety provider when due or a draw on the Policy) the Notes may be accelerated and/or the collateral sold.
Pursuant to the terms of the Asset Backed Facility, we provide credit enhancement to the note purchasers (including an irrevocable letter of credit, which is an unconditional lending commitment of the lenders under the Senior Credit Facility) subject to certain limits. We are obligated under the reimbursement provisions of the Senior Credit Facility to reimburse the lenders for any drawings on the credit enhancement by the facility indenture trustee. If the credit enhancement is not replenished by us after a drawing, the trust will not be permitted to request new borrowings under the Asset Backed Facility and the Asset Backed Facility will begin to amortize. The amount of the irrevocable letter of credit related to the Asset Backed Facility at December 31, 2007 was $32.4 million.
Gains on sales of notes receivable and other net finance program income in 2007 of approximately $8.1 million are included in equipment financing, net revenue. After June 27, 2009 (or earlier in the event of a rapid amortization event or an event of default), the trust will not be permitted to request new borrowings under the facility and the outstanding borrowings will amortize over a period of up to nine years thereafter. Based on current market conditions, we believe that we will be able to refinance the facility. However, should market conditions change or our financial position deteriorate, we may not be able to refinance the facility on advantageous terms or at all. At December 31, 2007 and 2006 we recorded $21.9 million and $18.1 million, respectively, related to the estimated fair value of our beneficial interests in the promissory notes sold to the trust. For a further discussion of our off-balance sheet arrangements, including the Asset Backed Facility, reference should be made to Notes 6 and 7 to the consolidated financial statements.
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Disclosures About Contractual Obligations and Commercial Commitments
A summary of our contractual commitments under purchase and lease commitments as of December 31, 2007 and the new debt obligations in place as a result of the Transactions, and the effect such obligations are expected to have on liquidity and cash flow in future periods appears below.
| Payments due by period | |||||||||||||||
| Total | Less than 1 year | 2 - 3 years | 4 – 5 years | More than 5 years | |||||||||||
| (dollars in thousands) | |||||||||||||||
Long-term debt and capitalized lease obligations(1)(2) | $ | 342,265 | $ | 601 | $ | 5,557 | $ | 186,107 | $ | 150,000 | |||||
Projected interest on long-term debt(2) | 116,027 | 25,574 | 50,004 | 39,387 | 1,062 | ||||||||||
Operating leases | 4,360 | 1,144 | 1,765 | 1,194 | 257 | ||||||||||
Purchase commitments(3) | 27,987 | 27,987 | — | — | — | ||||||||||
Other long-term obligations(4) | 3,139 | 2,628 | 511 | — | — | ||||||||||
Total contractual cash obligations | $ | 493,778 | $ | 57,934 | $ | 57,837 | $ | 226,688 | $ | 151,319 | |||||
| (1) | Long-term debt includes the Senior Credit Facility, Senior Subordinated Notes, Wisconsin Community Development Block Grant promissory notes and capitalized lease obligations. |
| (2) | $110.0 million of our outstanding debt at December 31, 2007, is subject to floating interest rates after giving effect to an interest rate swap agreement required by the Senior Credit Facility. Interest payments are projected based on rates in effect on December 31, 2007 and after giving effect to the interest rate swap agreement assuming no variable rate fluctuations going forward. Interest payments have also been adjusted to reflect the 25 basis point increase in the applicable interest rate under the Senior Credit Facility as a result of the Amendment and Waiver. Further, we assumed that only scheduled debt payments would be made for purposes of projecting long-term debt and interest on long-term debt. |
| (3) | Purchase commitments are based on our estimate of the liability we could incur under open and blanket purchase orders for inventory related items. |
| (4) | Other long-term obligations includes $1.8 million related to a 2008 expected pension plan contribution, $1.0 million related to a 2005 purchase of a business by our European Operations and $0.3 million related to a one time retention bonus to be paid in July 2008 under a consulting agreement. |
Additionally, at December 31, 2007, we had outstanding letters of credit of $34.1 million. We do not have any significant guarantees of debt or other commitments to third parties. We have disclosed information related to guarantees in Note 15 to our consolidated financial statements. We lease various assets under operating leases. The future estimated payments under these arrangements are disclosed in Note 14 to our consolidated financial statements.
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Cash Flows
As discussed in more detail below, we believe that our operating cash flows, cash and cash equivalents, and borrowing capacity under our Senior Credit Facility are sufficient to fund our capital and liquidity needs for the foreseeable future.
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | Year Ended December 31, 2005 | ||||||||||||||||
| Successor | Successor | Successor | Predecessor | Combined | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 31,735 | $ | 22,906 | $ | 6,628 | $ | (6,619 | ) | $ | 9 | |||||||||
Net cash used in investing activities | (7,127 | ) | (87,037 | ) | (4,225 | ) | (188 | ) | (4,413 | ) | ||||||||||
Net cash (used in) provided by financing activities | (25,188 | ) | 69,985 | (1,922 | ) | (70 | ) | (1,992 | ) | |||||||||||
Impact of exchange rate | (47 | ) | 292 | — | — | — | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (627 | ) | $ | 6,146 | $ | 481 | $ | (6,877 | ) | $ | (6,396 | ) | |||||||
Cash generated from operating activities for the twelve months ended December 31, 2007 of $31.7 million was derived from earnings before depreciation, amortization and non-cash adjustments, as well as from changes in working capital. The working capital investment in accounts receivable at December 31, 2007 of $13.4 million decreased $11.1 million as compared to the balance of $24.5 million at December 31, 2006, which resulted from the timing of sales of trade receivables through the Company’s bankruptcy remote subsidiary ALER 2005. The net working capital investment in beneficial interests in securitized financial assets at December 31, 2007 of $21.9 million increased $3.8 million as compared to the balance of $18.1 million at December 31, 2006, which was primarily attributable to an increase in the beneficial interests sold to the trust. The working capital investment in inventories at December 31, 2007 of $57.6 million increased $5.7 million as compared to the balance of $51.9 million at December 31, 2006, which was primarily attributable to reductions in consigned inventory arrangements during 2007 and higher raw material costs. The working capital investment in accounts payable at December 31, 2007 of $26.1 million increased $1.5 million as compared to the balance of $27.6 million at December 31, 2006.
Cash generated from operating activities for the twelve months ended December 31, 2006 of $22.9 million was derived from earnings before depreciation, amortization and non-cash adjustments, as well as from changes in working capital. The working capital investment in accounts receivable at December 31, 2006 of $24.5 million increased $15.4 million as compared to the balance of $9.1 million at December 31, 2005, which was primarily attributable to CLD Acquisition related increases. The investment in beneficial interests in securitized accounts receivable at December 31, 2006 of $28.6 million increased $6.3 million as compared to the balance of $22.3 million at December 31, 2005, which was primarily attributable to an increase in retained interests on trade receivables sold under the Asset Backed Facility. The net working capital investment in beneficial interests in securitized financial assets at December 31, 2006 of $18.1 million increased $1.2 million as compared to the balance of $16.9 million at December 31, 2005, which was primarily attributable to an increase in the beneficial interests sold to the trust. The working capital investment in inventories at December 31, 2006 of $51.9 million increased $22.8 million as compared to the balance of $29.1 million at December 31, 2005, which was primarily attributable to CLD Acquisition related increases. The working capital investment in accounts payable at December 31, 2006 of $27.6 million increased $19.7 million as compared to the balance of $7.9 million at December 31, 2005, which was primarily attributable to CLD Acquisition related increases.
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Capital Expenditures. Our capital expenditures for the twelve months ended December 31, 2007 and December 31, 2006 were $8.3 million and $6.2 million, respectively. Capital spending in 2007 was principally oriented toward product enhancements, capacity and manufacturing process improvements. Capital spending in 2006 was principally oriented toward the transfer of the Marianna, Florida product lines to Ripon, Wisconsin, product enhancements and computer purchases. Capital expenditures are expected to increase in 2008 to address certain capacity constraints related to our significant sales growth and to support manufacturing process improvements and new product development.
Acquisition Spending.The CLD Acquisition price, net of cash acquired and including transaction costs, was approximately $87.2 million. The CLD Acquisition was funded with a $60.0 million increase in term loans under Alliance Laundry’s Senior Credit Facility, $23.5 million of incremental equity contributions and $3.7 million of operating cash. Through December 31, 2007, we have spent $85.4 million ($84.1 million in acquisition costs and $1.3 million in debt financing costs) of the $87.2 million acquisition price. We anticipate spending $1.8 million of the remaining funds, related to the Facility closure reserve, in 2008.
Equity Issuance. On December 28, 2007, ALH entered into a subscription agreement with OTPP, pursuant to which ALH sold to OTPP shares of its common stock with a value of $9.4 million. ALH contributed the proceeds of the offering to the Company, which were used to repay indebtedness outstanding under the term loan portion of our Senior Credit Facility.
Recently Issued Accounting Pronouncements
The FASB is expected to issue a statement that would amend and clarify SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 104”) (and related implementation guidance). The proposed statement will address permitted activities of qualifying special-purpose entities, including the degree of discretion allowable in determining the terms of beneficial interests issued after inception, and whether certain transfers can meet the criteria for sale accounting under SFAS No. 140 if the transferor or any consolidated affiliate provides liquidity support for the transferee’s beneficial interests. As the proposed statement has not been issued, we are unable to determine the effects of the related transition provisions, if any, on our existing securitization entity. However, in the event that transfers to our existing Asset Backed Facility would no longer qualify as sales of financial assets in the future, we may recognize additional costs for a replacement facility or it may have other material financial statement effects. An exposure draft was issued in the third quarter of 2005 and a new exposure draft is anticipated in the second quarter of 2008.
In March 2006 the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156, amends certain aspects of SFAS No. 140, by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 was effective for us on January 1, 2007. The provisions of SFAS No. 156 did not have an impact on our consolidated financial statements.
In July 2006 the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006. The initial adoption of FIN 48 did not have an impact on our financial statements at January 1, 2007. During the year, we recorded a tax provision of $0.2 million under FIN 48.
In June 2006 the FASB ratified the consensus on Emerging Issues Task Force Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-03”). The scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller
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and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on EITF 06-03 will be effective for interim and annual reporting periods beginning after December 15, 2006. We currently record gross receipts taxes and miscellaneous other taxes on a net basis in our Consolidated Statements of Operations. We have concluded that such amounts are more appropriately presented on a net basis, and as such, there was no impact to the presentation on our financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS 157 also expands financial statement disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-b which delays the effective date of SFAS 157 for one year, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FAS 157 and FSP 157-b are effective for financial statements issued for fiscal years beginning after November 15, 2007. We have elected a partial deferral of SFAS 157 under the provisions of FSP 157-b related to the measurement of fair value used when evaluating goodwill, other intangible assets and other long-lived assets for impairment and valuing asset retirement obligations and liabilities for exit or disposal activities. We are currently evaluating the impact this statement will have on our financial position and results of operations.
In September 2006 the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires the recognition of a net liability or asset to report the funded status of defined benefit pension and other postretirement benefit plans on the balance sheet. The recognition and disclosure provisions of SFAS No. 158 are effective as of December 31, 2007 as we do not have publicly traded equity securities. We adopted SFAS 158 as of December 31, 2007 which resulted in a $0.1 million loss, net of tax, recorded in accumulated other comprehensive income account within member(s)’ equity.
In December 2007 the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. SFAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the impact this statement will have on our financial position and results of operations.
In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at
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fair value that are not currently required to be measured at fair value. SFAS 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected are recognized in earnings as incurred and not deferred. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning on or after January 1, 2008. We have evaluated and determined that when we adopt SFAS No. 159, it will not have a significant impact to our financial position and results of operations.
In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently evaluating the impact this statement will have on our financial position and results of operations.
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 the “Note 14 – Commitments and Contingencies” section 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 our business to differ materially from those expressed or implied by such forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are based on reasonable assumptions, we 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 our products abroad; possible fluctuation in interest rates, which affects our earnings and cash flows; the impact of substantial leverage and debt service on us; possible loss of suppliers; risks related to our asset backed facility; dependence on key personnel; labor relations; potential liability for environmental, health and safety matters; potential future legal proceedings and litigation.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk from changes in interest rates, foreign currency exchange rate fluctuations and certain commodity prices. To reduce these risks, we selectively use financial instruments and other proactive management techniques. We do not use financial instruments for trading purposes or speculation.
Interest Rate Risk.We are exposed to market risk associated with adverse movements in interest rates. Specifically, we are primarily exposed to changes in the fair value of our $150 million Senior Subordinated Notes, and to changes in earnings and related cash flows on our variable interest rate debt obligations outstanding under the Senior Credit Facility and our retained interests related to trade accounts receivable and equipment loans sold to our special-purpose securitization entity.
The fair value of our Senior Subordinated Notes was approximately $144.0 million based upon prevailing prices in recent market transactions as of December 31, 2007. We estimate that this fair value would increase/decrease by approximately $5.7 million based upon an assumed 10% decrease/increase in interest rates compared with the effective yield on the Senior Subordinated Notes as of December 31, 2007.
Under the terms of our Senior Credit Facility, we are required to provide interest rate protection; in the form of hedge agreements for at least 331/3% of the aggregate principal amount of our term loans for a period not less than three years, as of January 27, 2005. Borrowings outstanding under the Senior Credit Facility totaled $190.0 million at December 31, 2007, $80.0 million of which is covered by interest rate swap agreements and the balance of $110.0 million is variable rate term loan borrowings. An assumed 10% increase/decrease in the variable portion of the interest rate of 7.38% in effect at December 31, 2007 related to the variable rate term loan borrowings outstanding under the Senior Credit Facility would decrease/increase annualized earnings and cash flows by approximately $0.5 million.
On January 4, 2008 we entered into a $110.0 million interest rate swap agreement with The Bank of Nova Scotia to hedge a portion of our interest rate risk related to our term loan borrowings under the Senior Credit Facility. Under the swap, which matures on December 31, 2009, we pay a fixed rate of 3.955%, and receive or pay quarterly interest payments based upon three month LIBOR. Under the swap, there was no net cash interest received during 2007. The fair value of this interest rate swap agreement, which represents the amount that we would pay if we were to settle the instrument, was $0.5 million at December 31, 2007.
On March 4, 2005 we entered into a $67.0 million interest rate swap agreement with The Bank of Nova Scotia to hedge a portion of our interest rate risk related to our term loan borrowings under the Senior Credit Facility. Under the swap, which matures on March 4, 2008, we pay a fixed rate of 3.81%, and receive or pay quarterly interest payments based upon three month LIBOR. Under the swap, net cash interest received during 2007 was $1.1 million. The fair value of this interest rate swap agreement, which represents the amount that we would receive if we were to settle the instrument, was $0.2 million at December 31, 2007.
On July 21, 2006 we entered into a $13.0 million interest rate swap agreement to hedge a portion of our interest rate risk related to our term loan borrowings under the Senior Credit Facility. Under the swap, which matures on March 4, 2009, we pay a fixed rate of 5.65%, and receive or pay quarterly interest payments based upon three month LIBOR. Under the swap, net cash interest paid during 2007 was $30 thousand. The fair value of this interest rate swap agreement, which represents the amount that we would pay if we were to settle the instrument, was $0.3 million at December 31, 2007.
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An assumed 10% increase/decrease in interest rates under our special-purpose entity at December 31, 2007 would not have a material effect on the fair value of the retained interest in sold trade accounts receivable due to the short-term nature of the underlying receivables. Finally, based upon the mix of variable and fixed rate equipment loans we have sold, a 10% increase/decrease in interest rates would decrease/increase the fair value of our retained interests at December 31, 2007 of $21.9 million by approximately $0.5 million.
Foreign Currency Risk.We have manufacturing, sales and distribution facilities in Belgium and sales and distribution facilities in Norway and Spain; and we make investments and enter into transactions denominated in foreign currencies. Although the vast majority of our international sales from our U.S. operations are denominated in U.S. dollars, with the CLD Acquisition in July 2006, we are exposed to transactional and translational foreign exchange risk related to our European Operations. In 2007 our net revenues from our European Operations were approximately $85.4 million, which represented 19% of our total net revenues.
Regarding transactional foreign exchange risk, we enter into certain forward exchange contracts to reduce the variability of the earnings and cash flow impacts of nonfunctional currency denominated receivables and payables. We do not designate these contracts as hedge transactions under SFAS No. 133. Accordingly, the mark to market impact of these contracts is recorded each period to current earnings. At December 31, 2007, we were managing $25.2 million of Euro foreign currency contracts which are not designated as accounting hedges.
Our primary translation exchange risk exposure at December 31, 2007 was the Euro. Amounts invested in non-U.S. based subsidiaries are translated into U.S. dollars at the exchange rate in effect at year end. The resulting translation adjustments are recorded in accumulated other comprehensive income as cumulative translation adjustments. The cumulative translation adjustment component of accumulated other comprehensive income at December 31, 2007 is a $5.7 million gain. The net amount invested in foreign operations at December 31, 2007 was approximately $54.8 million, for which no hedges have been established.
Commodity Risk.We are subject to the effects of changing raw material and component costs caused by movements in underlying commodity prices. We are a purchaser of certain commodities, including steel and stainless steel. In addition, we are a purchaser of raw materials and components containing various commodities, including nickel, zinc, aluminum, and copper. We generally buy these raw materials and components based upon market prices that are established with the vendor as part of the procurement process.
From time to time, we enter into contracts with our vendors to lock in commodity prices for various periods to limit our near-term exposure to fluctuations in raw material and component prices. In addition, we enter into commodity hedge contracts to hedge certain commodity prices, such as nickel, to reduce the variability on our earnings and cash flow impacts of purchasing raw materials containing such commodities. We do not designate these contracts as hedge transactions under SFAS No. 133. Accordingly, the mark to market impact of these contracts is recorded each period to current earnings. At December 31, 2007, we were managing $7.5 million of nickel hedge contracts which are not designated as accounting hedges.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to 2007 Financial Statements:
| Page | ||
| 62 | ||
Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006 | 64 | |
| 65 | ||
| 66 | ||
| 67 | ||
| 68 | ||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Sole Member
of Alliance Laundry Holdings LLC
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss), member(s)’ equity (deficit) and comprehensive income (loss) and cash flows present fairly, in all material respects, the financial position of Alliance Laundry Holdings LLC and its subsidiaries (Successor Company) at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for the years ended December 31, 2007 and December 31, 2006 and the period January 28, 2005 to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company had a change in ownership as of January 27, 2005 which resulted in a new basis of accounting.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 10, 2008.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Sole Member
of Alliance Laundry Holdings LLC
In our opinion, the accompanying consolidated statement of income (loss), member(s)’ equity (deficit) and comprehensive income (loss) and cash flows present fairly, in all material respects, the results of the operations and the cash flows of Alliance Laundry Holdings LLC and its subsidiaries (Predecessor Company) for the period January 1, 2005 to January 27, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 28, 2006
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CONSOLIDATED BALANCE SHEETS
(in thousands)
| December 31, 2007 | December 31, 2006 | |||||
| Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 10,594 | $ | 11,221 | ||
Accounts receivable (net of allowance for doubtful accounts of $1,182 and $949 at December 31, 2007 and 2006, respectively) | 13,406 | 24,523 | ||||
Inventories, net | 57,609 | 51,915 | ||||
Beneficial interests in securitized accounts receivable | 29,046 | 28,641 | ||||
Deferred income tax asset, net | 2,481 | 3,202 | ||||
Prepaid expenses and other assets | 2,634 | 4,804 | ||||
Total current assets | 115,770 | 124,306 | ||||
Notes receivable, net | 3,601 | 4,018 | ||||
Property, plant and equipment, net | 71,925 | 73,789 | ||||
Goodwill | 183,865 | 180,269 | ||||
Beneficial interests in securitized financial assets | 21,895 | 18,055 | ||||
Deferred income tax asset, net | 7,068 | 10,677 | ||||
Debt issuance costs, net | 8,146 | 10,318 | ||||
Intangible assets, net | 148,017 | 152,890 | ||||
Total assets | $ | 560,287 | $ | 574,322 | ||
| Liabilities and Member(s)’ Equity | ||||||
Current liabilities: | ||||||
Current portion of long-term debt and capital lease obligations | $ | 601 | $ | 526 | ||
Revolving credit facility | — | — | ||||
Accounts payable | 26,111 | 27,636 | ||||
Deferred income tax liability, net | — | 216 | ||||
Other current liabilities | 38,763 | 37,085 | ||||
Total current liabilities | 65,475 | 65,463 | ||||
Long-term debt and capital lease obligations: | ||||||
Senior credit facility | 190,000 | 224,000 | ||||
Senior subordinated notes | 149,523 | 149,430 | ||||
Other long-term debt and capital lease obligations | 1,664 | 2,159 | ||||
Deferred income tax liability, net | 6,044 | 6,137 | ||||
Other long-term liabilities | 6,343 | 10,742 | ||||
Total liabilities | 419,049 | 457,931 | ||||
Commitments and contingencies (see Note 14) | ||||||
Member(s)’ equity | 141,238 | 116,391 | ||||
Total liabilities and member(s)’ equity | $ | 560,287 | $ | 574,322 | ||
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands)
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | |||||||||||||
| Successor | Successor | Successor | Predecessor | |||||||||||||
Net revenues: | ||||||||||||||||
Equipment and service parts | $ | 435,229 | $ | 359,755 | $ | 287,705 | $ | 20,303 | ||||||||
Equipment financing, net | 8,079 | 6,313 | 8,940 | 380 | ||||||||||||
Net revenues | 443,308 | 366,068 | 296,645 | 20,683 | ||||||||||||
Cost of sales | 332,592 | 282,279 | 225,706 | 15,585 | ||||||||||||
Gross profit | 110,716 | 83,789 | 70,939 | 5,098 | ||||||||||||
Selling, general and administrative expenses | 59,965 | 50,995 | 38,632 | 3,829 | ||||||||||||
Securitization, impairment and other (income) costs, net | (750 | ) | 7,150 | 10,009 | — | |||||||||||
Transaction costs associated with sale of business | — | — | — | 18,790 | ||||||||||||
Total operating expenses | 59,215 | 58,145 | 48,641 | 22,619 | ||||||||||||
Operating income (loss) | 51,501 | 25,644 | 22,298 | (17,521 | ) | |||||||||||
Interest expense | 34,747 | 31,177 | 24,117 | 995 | ||||||||||||
Loss from early extinguishment of debt | — | — | — | 9,867 | ||||||||||||
Other expense, net | — | 417 | — | — | ||||||||||||
Income (loss) before taxes | 16,754 | (5,950 | ) | (1,819 | ) | (28,383 | ) | |||||||||
Provision (benefit) for income taxes | 6,885 | (2,540 | ) | (1,158 | ) | 9 | ||||||||||
Net income (loss) | $ | 9,869 | $ | (3,410 | ) | $ | (661 | ) | $ | (28,392 | ) | |||||
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENT OF MEMBER(S)’ EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Member(s)’ Equity (Deficit) | Management Loans | Pension Liability and Other Benefits | Unrealized Holding Gain on Residual Interests, Net | Foreign Currency Translation Adjustment | Total Member(s)’ Equity (Deficit) | ||||||||||||||||||
Predecessor balances at December 31, 2004 | $ | (131,227 | ) | $ | (1,380 | ) | $ | (3,619 | ) | $ | 1,129 | $ | — | $ | (135,097 | ) | |||||||
Net (loss) from January 1, 2005 through January 27, 2005 | (28,392 | ) | — | — | — | — | (28,392 | ) | |||||||||||||||
Unrealized holding gain, net | — | — | — | 203 | — | 203 | |||||||||||||||||
Total comprehensive (loss) | (28,189 | ) | |||||||||||||||||||||
Predecessor balances at January 27, 2005 | (159,619 | ) | (1,380 | ) | (3,619 | ) | 1,332 | — | (163,286 | ) | |||||||||||||
Transaction and purchase accounting | 254,863 | 1,380 | 3,619 | — | — | 259,862 | |||||||||||||||||
Successor balances at January 27, 2005 | 95,244 | — | — | 1,332 | — | 96,576 | |||||||||||||||||
Net (loss) from January 28, 2005 through December 31, 2005 | (661 | ) | — | — | — | — | (661 | ) | |||||||||||||||
Change in pension liability and other benefits, net | — | — | (751 | ) | — | — | (751 | ) | |||||||||||||||
Unrealized holding gain (loss), net | — | — | — | (1,331 | ) | — | (1,331 | ) | |||||||||||||||
Total comprehensive (loss) | (2,743 | ) | |||||||||||||||||||||
Successor balances at December 31, 2005 | 94,583 | — | (751 | ) | 1 | — | 93,833 | ||||||||||||||||
Issuance of common stock | 23,493 | — | — | — | — | 23,493 | |||||||||||||||||
Repurchased stock | (50 | ) | — | — | — | — | (50 | ) | |||||||||||||||
Net (loss) | (3,410 | ) | — | — | — | — | (3,410 | ) | |||||||||||||||
Change in pension liability and other benefits, net | — | — | 726 | — | — | 726 | |||||||||||||||||
Unrealized holding gain (loss), net | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 1,800 | 1,800 | |||||||||||||||||
Total comprehensive (loss) | (885 | ) | |||||||||||||||||||||
Successor balances at December 31, 2006 | 114,616 | — | (25 | ) | — | 1,800 | 116,391 | ||||||||||||||||
Issuance of common stock | 9,385 | — | — | — | — | 9,385 | |||||||||||||||||
Adoption of FAS 158, net | (138 | ) | (138 | ) | |||||||||||||||||||
Net income | 9,869 | — | — | — | — | 9,869 | |||||||||||||||||
Change in pension liability and other benefits, net | — | — | 25 | — | — | 25 | |||||||||||||||||
Foreign currency translation adjustment, net | — | — | — | — | 5,706 | 5,706 | |||||||||||||||||
Total comprehensive income | 15,600 | ||||||||||||||||||||||
Successor balances at December 31, 2007 | $ | 133,870 | $ | — | $ | (138 | ) | $ | — | $ | 7,506 | $ | 141,238 | ||||||||||
The accompanying notes are an integral part of the financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | |||||||||||||
| Successor | Successor | Successor | Predecessor | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 9,869 | $ | (3,410 | ) | $ | (661 | ) | $ | (28,392 | ) | |||||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 19,218 | 21,676 | 20,187 | 526 | ||||||||||||
Non-cash interest expense (income) | 1,555 | 424 | (933 | ) | 351 | |||||||||||
Non-cash loss on commodity & foreign exchange contracts, net | 752 | — | — | — | ||||||||||||
Non-cash executive unit compensation | 631 | (74 | ) | 1,120 | 1,089 | |||||||||||
Non-cash intangible asset impairment | — | 2,431 | 1,767 | — | ||||||||||||
Non-cash debt financing write-off | — | — | — | 5,751 | ||||||||||||
Non-cash inventory expense | — | 3,193 | 6,246 | — | ||||||||||||
Deferred income taxes | 3,541 | (3,747 | ) | (1,158 | ) | — | ||||||||||
Loss on sale of property, plant and equipment | 111 | 175 | 48 | — | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | 11,814 | 9,975 | (2,889 | ) | (556 | ) | ||||||||||
Inventories | (4,764 | ) | (5,065 | ) | (456 | ) | (1,833 | ) | ||||||||
Other assets | (3,038 | ) | (9,635 | ) | 246 | 101 | ||||||||||
Accounts payable | (2,455 | ) | 6,402 | (22,828 | ) | 19,076 | ||||||||||
Other liabilities | (5,499 | ) | 561 | 5,939 | (2,732 | ) | ||||||||||
Net cash provided by (used in) operating activities | 31,735 | 22,906 | 6,628 | (6,619 | ) | |||||||||||
Cash flows from investing activities: | ||||||||||||||||
Additions to property, plant and equipment | (8,338 | ) | (6,150 | ) | (4,229 | ) | (188 | ) | ||||||||
Acquisition of businesses, net of cash acquired | — | (82,308 | ) | — | — | |||||||||||
Proceeds on disposition of assets | 1,211 | 1,421 | 4 | — | ||||||||||||
Net cash used in investing activities | (7,127 | ) | (87,037 | ) | (4,225 | ) | (188 | ) | ||||||||
Cash flows used in financing activities: | ||||||||||||||||
Principal payments on long-term debt | (34,573 | ) | (13,123 | ) | (23,000 | ) | 1 | |||||||||
Net increase in revolving line of credit borrowings | — | — | — | — | ||||||||||||
Proceeds from promissory notes | — | 1,000 | — | — | ||||||||||||
Proceeds from senior term loan | — | 60,000 | 200,000 | — | ||||||||||||
Proceeds from senior subordinated notes | — | — | 149,250 | — | ||||||||||||
Repayment of long-term debt | — | — | (275,920 | ) | — | |||||||||||
Issuance of common stock | 9,385 | 23,493 | 117,000 | — | ||||||||||||
Repurchase of common stock | — | (50 | ) | — | — | |||||||||||
Distribution to old unitholders | — | — | (154,658 | ) | — | |||||||||||
Debt financing costs | — | (1,335 | ) | (13,230 | ) | — | ||||||||||
Cash paid for capitalized offering related costs | — | — | (1,364 | ) | — | |||||||||||
Net proceeds - management note | — | — | — | (71 | ) | |||||||||||
Net cash (used in) provided by financing activities | (25,188 | ) | 69,985 | (1,922 | ) | (70 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (47 | ) | 292 | — | — | |||||||||||
Net (decrease) increase in cash and cash equivalents | (627 | ) | 6,146 | 481 | (6,877 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 11,221 | 5,075 | 4,594 | 11,471 | ||||||||||||
Cash and cash equivalents at end of period | $ | 10,594 | $ | 11,221 | $ | 5,075 | $ | 4,594 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid for interest | $ | 30,069 | $ | 28,642 | $ | 19,699 | $ | 1,133 | ||||||||
Cash paid for income taxes | $ | 2,441 | $ | 687 | $ | 55 | $ | 9 | ||||||||
The accompanying notes are an integral part of the financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
(Dollar amounts in thousands unless otherwise indicated)
Note 1—Description of Business and Basis of Presentation:
Description of Business
Throughout this annual report, we refer to Alliance Laundry Holdings LLC, a Delaware limited liability company, as “Alliance Holdings,” and, together with its consolidated operations, as the “Company,” “Alliance,” “we,” “our,” “Predecessor,” “Successor,” and “us,” unless otherwise indicated. Any reference to “Alliance Laundry” refers to our wholly-owned subsidiary, Alliance Laundry Systems LLC, a Delaware limited liability company, and its consolidated operations, unless otherwise indicated. Any reference to “ALH” refers to ALH Holding Inc., a Delaware corporation and Alliance Holdings’ parent entity.
We design, manufacture and service a full line of commercial laundry equipment for sale in the U.S. and international markets. We also manufacture consumer washing machines for sale to domestic and international customers. We produce products in the U.S. at two manufacturing plants located in Ripon, Wisconsin. We also produce products at two manufacturing plants located in Belgium. Additionally, we provide equipment financing to laundromat operators and other end-users in the U.S.
Alliance originated from the acquisition of Speed Queen Company (“Speed Queen”) by Raytheon Company (“Raytheon”) in October of 1979 and it was an operating unit of Raytheon under various names, including Speed Queen and Raytheon Appliances, Inc. On May 5, 1998 a recapitalization (the “Recapitalization”) and merger transaction occurred, at which time we were renamed Alliance Laundry Holdings LLC and at which time Bain Capital Partners, LLC (“Bain”) and members of our management acquired a 93% common equity interest in Alliance Holdings. In connection with this acquisition, substantially all of our assets and liabilities were contributed to Alliance Laundry, as the only direct subsidiary of Alliance Holdings. Alliance Laundry now comprises all of our operating activities. On January 27, 2005 Ontario Teachers’ Pension Plan Board, (“OTPP”) and members of our management indirectly acquired 100% of the outstanding equity interests in Alliance Holdings through ALH (See Note 2).
Basis of Presentation
As a result of the January 27, 2005 transactions described further in Note 2, activity that occurred prior to January 27, 2005 has been reflected as the Predecessor and activity that occurred after January 27, 2005 has been reflected as the Successor. We have inserted a dark vertical or horizontal line to segregate the activities of the Predecessor and Successor. The distinction between Predecessor and Successor relates to the application of purchase accounting in accordance with Statement of Financial Standard (SFAS) No. 141, “Business Combinations.” The basis of the assets and liabilities has been reflected at fair market values in the Successor financial statements.
The consolidated financial statements as of December 31, 2007 and December 31, 2006, and for the periods ending December 31, 2007 and December 31, 2006 and for the period from January 28, 2005 through December 31, 2005 present the consolidated financial position and results of operations of Alliance Laundry Holdings LLC and its wholly and majority-owned direct and indirect subsidiaries.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
The consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The Company accounts for its 50.0% voting interest in IPSO-Rent NV and IPSO-Rent Deutschland GmbH under the equity method. Each of the joint venture partners of IPSO-Rent NV and IPSO-Rent Deutschland GmbH has identical voting, participating and protective rights and responsibilities and as such, the Company does not have voting interest control. All significant intercompany transactions have been eliminated. Gains and losses from the translation of substantially all foreign currency financial statements are recorded in the accumulated other comprehensive income account within member(s)’ equity.
Note 2—Sale of Alliance Laundry Holdings LLC:
On January 27, 2005 ALH, an entity formed by Teachers’ Private Capital, the private equity arm of Ontario Teachers’ Pension Plan Board (“OTPP”), acquired 100% of the outstanding equity interests in Alliance Holdings pursuant to a unit purchase agreement for aggregate consideration of $466.3 million. In connection with such acquisition, the executive officers of Alliance Laundry acquired $7.6 million of newly issued shares of common stock of ALH, and our other management employees acquired $2.0 million of newly issued shares of ALH common stock in exchange for equity interests in Alliance Holdings and cash pursuant to ALH’s stock purchase and rollover investment plan. A portion of the aggregate acquisition consideration was used to repay our existing indebtedness, redeem our outstanding preferred equity interests and pay certain fees and expenses payable in connection with the consummation of the acquisition and the financing transactions described below, and the balance was paid to the then current equity holders of Alliance Holdings.
We refer to the acquisition of Alliance Holdings and the related management investments in ALH as the “Alliance Acquisition.” The Alliance Acquisition was financed with $350.0 million of debt financing described below, the management equity, approximately $107.4 million of new equity capital from OTPP and available cash. As a result of the Alliance Acquisition, all of the outstanding equity interests of Alliance Laundry are owned by Alliance Holdings and all of the equity interests of Alliance Holdings are owned by ALH. As of December 31, 2007 approximately 91.6% of the capital stock of ALH is owned by OTPP. Approximately 8.3% of the remaining capital stock of ALH is owned by our current management.
In connection with the closing of the Alliance Acquisition, we consummated the following financing transactions (the “Financing Transactions,” which we refer to, together with the Alliance Acquisition, as the “Transactions”):
| • | the closing of the issuance of $150.0 million 8 1/2% senior subordinated notes due January 15, 2013, (the “Senior Subordinated Notes”). The net proceeds from the Senior Subordinated Notes offering were $149.3 million; |
| • | the closing of Alliance Laundry’s new $250.0 million senior secured credit facility, which we refer to as the “Senior Credit Facility,” consisting of a six-year $50.0 million revolving credit facility and a seven-year $200.0 million term loan facility (which Senior Credit Facility was amended and restated on July 14, 2006 in conjunction with the CLD Acquisition). On the |
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
closing date (January 27, 2005), the term loan facility was drawn in full, but the revolving credit facility remained undrawn (of which $22.2 million was available due to $27.8 million of letters of credit issued and outstanding as of the closing date); and |
• | the settlement of the tender offer and consent solicitation, or the tender offer, initiated by us on January 4, 2005 for the $110.0 million aggregate principal amount of our then outstanding 9 5/8% Senior Subordinated Notes due 2008 (the “1998 Senior Subordinated Notes”). |
In connection with the consummation of the Transactions, Alliance Laundry and Alliance Laundry Corporation became the obligors under the Senior Subordinated Notes. Alliance Laundry is the borrower and obligor under the Senior Credit Facility and Alliance Laundry Corporation became a guarantor under the Senior Credit Facility, and Alliance Holdings became a guarantor of the Senior Credit Facility and the Senior Subordinated Notes.
Alliance Laundry Corporation is a wholly-owned subsidiary of Alliance Laundry and was originally incorporated for the sole purpose of serving as a co-issuer of the 1998 Senior Subordinated Notes. Alliance Holdings is the parent of Alliance Laundry and has provided a full and unconditional guarantee of the Senior Subordinated Notes. Alliance Holdings and Alliance Laundry Corporation do not have any operations or assets independent of Alliance Laundry.
The Alliance Acquisition price including transaction costs was approximately $466.3 million. The sources and uses of funds in connection with the Alliance Acquisition are summarized below:
Sources: | |||
Proceeds from Senior Term Loan | $ | 200,000 | |
Proceeds from 8 1/2% Senior Subordinated Notes due 2013 | 149,250 | ||
Proceeds from equity investors | 108,396 | ||
Reinvestment of equity | 8,604 | ||
Total sources | $ | 466,250 | |
Uses: | |||
Stated purchase price | $ | 450,000 | |
Working capital adjustment | 791 | ||
Fees and expenses | 15,459 | ||
Total uses | $ | 466,250 | |
The Company has allocated the purchase price to the assets acquired and liabilities assumed based upon their respective fair values as determined by an independent third-party valuation firm as of the date of the acquisition. The allocation of the purchase price to the fair value of net assets acquired was finalized during the second quarter of 2005 and is summarized below:
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
| Gross | EITF 88-16 Adjustment | Adjusted Balance January 27, 2005 | ||||||||
Acquired tangible net assets | $ | 152,991 | $ | (4,153 | ) | $ | 148,838 | |||
Acquired intangible assets - trademarks and tradenames | 122,800 | (8,697 | ) | 114,103 | ||||||
Acquired intangible assets - customer agreements and distributor network | 30,400 | (2,153 | ) | 28,247 | ||||||
Acquired intangible assets - engineering and manufacturing designs and processes | 8,460 | (599 | ) | 7,861 | ||||||
Acquired intangible assets - patents | 70 | — | 70 | |||||||
Acquired intangible assets - computer software and other | 963 | (58 | ) | 905 | ||||||
Goodwill | 150,566 | (10,663 | ) | 139,903 | ||||||
Total allocation of purchase price | $ | 466,250 | $ | (26,323 | ) | $ | 439,927 | |||
In accordance with Emerging Issues Task Force (“EITF”) Issue No. 88-16, “Basis in Leveraged Buyout Transactions,” management’s continuing residual interest has been reflected at its original cost, adjusted for its share of the Company’s earnings, losses and equity adjustments since the date of original acquisition (“predecessor basis”). In accordance with EITF Issue No. 90-12, “Allocating Basis to Individual Assets and Liabilities within the Scope of Issue 88-16,” only a partial step-up of assets and liabilities to fair value has been recorded in purchase accounting. The partial step-up has resulted in the Company’s assets and liabilities being adjusted by approximately 92.92% of the difference between their fair value at the date of acquisition and their historical carrying cost.
Note 3—CLD Acquisition and Related Activity:
On July 14, 2006 Alliance Laundry completed the acquisition of substantially all of Laundry System Group NV’s (“LSG”) commercial laundry division (“CLD”) operations pursuant to a share purchase agreement, dated May 23, 2006 (the “Share Purchase Agreement”), between Alliance Laundry and LSG, and a purchase agreement, dated May 23, 2006 (the “Purchase Agreement”), among Alliance Laundry, LSG, Cissell Manufacturing Company, Jensen USA Inc. and LSG North America, Inc. (together referred to as the “CLD Acquisition”). CLD markets commercial washer-extractors, tumbler dryers, and ironers worldwide under the IPSO and Cissell brand names. CLD’s European headquarters is in Wevelgem, Belgium, and it has manufacturing facilities in Belgium and sales offices in Belgium, Norway and Spain (the “European Operations”). CLD also had manufacturing facilities and sales offices in the United States which have been consolidated into Alliance Laundry’s operations. The aggregate consideration paid for the CLD Acquisition, net of cash acquired, was $87.2 million, including acquisition costs of approximately $6.0 million and costs to exit or dispose of certain CLD U.S. activities and assets of approximately $5.2 million. The CLD Acquisition resulted in approximately $40.4 million of goodwill, of which approximately $7.4 million is tax deductible, and $16.5 million of other intangible assets being recognized by the Company. See further detail related to the goodwill and other intangible assets of the CLD Acquisition at Note 8, “Goodwill and Other Intangibles.” Prior to July 14, 2006, CLD was a significant customer of and a significant supplier to Alliance Laundry.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
The CLD Acquisition was funded with a $60.0 million increase in term loans under Alliance Laundry’s Senior Credit Facility, $3.2 million of incremental equity contributions from management investors and a $20.3 million equity contribution from OTPP.
The Company believes the addition of CLD’s IPSO and Cissell brands, the addition of CLD’s soft mount washer-extractor product line and having production facilities in Europe will significantly strengthen its ability to participate in the global laundry marketplace.
The sources and uses of funds in connection with the CLD Acquisition are summarized below:
Sources: | ||||
Cash from operations | $ | 3,752 | ||
Proceeds from Senior Term Loan | 60,000 | |||
Proceeds from equity investors | 23,493 | |||
Total sources | $ | 87,245 | ||
Uses: | ||||
Stated purchase price | $ | 75,700 | ||
Less: Cash acquired | (1,623 | ) | ||
Working capital adjustment | 1,988 | |||
Fees and expenses | 5,959 | |||
Facility closure reserve | 5,221 | |||
Total uses | $ | 87,245 | ||
The final allocation of the purchase price to the fair value of net assets acquired is summarized below:
| Amount | |||
Current assets, net of cash acquired | $ | 44,117 | |
Property, plant and equipment | 14,477 | ||
Goodwill | 40,403 | ||
Other intangible assets | 16,458 | ||
Debt issuance costs | 1,335 | ||
Other noncurrent assets | 1,574 | ||
Total assets | 118,364 | ||
Current liabilities | 19,010 | ||
Noncurrent liabilities | 12,109 | ||
Total liabilities | 31,119 | ||
Net assets acquired | $ | 87,245 | |
The final allocation of the CLD Acquisition price to intangible assets and associated lives are summarized below:
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
| Amount | Life | ||||
Intangible assets - trademarks and tradenames | $ | 2,977 | Indefinite | ||
Intangible assets - Europe customer agreements and distributor network | 3,210 | 20 Years | |||
Intangible assets - U.S. customer agreements and distributor network | 1,017 | 5 Years | |||
Intangible assets - engineering and manufacturing designs and processes | 7,454 | 6.5 Years | |||
Intangible assets - noncompete agreement | 1,723 | 2 Years | |||
Intangible assets - computer software and other | 77 | < 3 Years | |||
Total | $ | 16,458 | |||
The incremental goodwill recognized in the CLD Acquisition is attributable to North American commercial laundry operations in the amount of $10.0 million and European Operations in the amount of $30.4 million. As a result of the CLD Acquisition we capitalized additional debt issuance costs in 2006 totaling $1.3 million.
Our allocation of the purchase price to the assets acquired and the liabilities assumed in the CLD Acquisition was finalized in the quarter ended June 30, 2007. The final purchase accounting adjustments were not material to the consolidated financial position of the Company.
The division acquired from LSG on July 14, 2006 did not issue separate financial statements on an annual or interim basis prior to the acquisition by Alliance. The following condensed pro-forma unaudited disclosure of net revenues and operating income for CLD for the years ended December 31, 2006 and December 31, 2005 are based on financial information provided to the Company by LSG for periods prior to July 14, 2006, adjusted to give effect as if the CLD Acquisition had occurred on January 1, 2005, plus results of operations for CLD since the date of acquisition. The pro-forma disclosures for the year ended December 31, 2005 do not reflect amortization for the inventory step-up to fair value of $3.2 million. The 2005 pro-forma results include the combined Successor and Predecessor periods.
| Years Ended December 31, | |||||||
| 2006 | 2005 | ||||||
Net revenues | $ | 417,206 | $ | 403,605 | |||
Operating income (loss) | $ | 33,636 | $ | 10,061 | |||
Net income (loss) | $ | 457 | $ | (28,155 | ) | ||
The pro-forma CLD information is not necessarily indicative of what the results of operations would actually have been had the acquisition occurred on January 1, 2005.
In connection with the CLD Acquisition, the Company has undertaken certain restructurings of the acquired business. The restructuring activities include reductions in staffing levels, elimination of facilities and other costs associated with exiting certain activities of the acquired business. The estimated
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
costs of these restructuring activities were recorded as costs of the CLD Acquisition and were provided for in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”
The following table summarizes the restructuring reserve of $5.0 million, which is included within other current liabilities in the Condensed Consolidated Balance Sheets:
| Balance at July 14, 2006 | Utilized Cash | Balance at December 31, 2006 | ||||||||
One-time termination benefits | $ | 3,102 | $ | (824 | ) | $ | 2,278 | |||
Other labor related costs | 224 | (108 | ) | 116 | ||||||
Relocation of tooling and equipment | 967 | (261 | ) | 706 | ||||||
Other related expenses | 708 | (623 | ) | 85 | ||||||
| $ | 5,001 | $ | (1,816 | ) | $ | 3,185 | ||||
| Balance at December 31, 2006 | Additions | Adjustments | Utilized Cash | Balance at December 31, 2007 | |||||||||||||
One-time termination benefits | $ | 2,278 | $ | 44 | $ | — | $ | (683 | ) | $ | 1,639 | ||||||
Other labor related costs | 116 | 429 | — | (418 | ) | 127 | |||||||||||
Relocation of tooling and equipment | 706 | — | (389 | ) | (317 | ) | — | ||||||||||
Other related expenses | 85 | 136 | — | (221 | ) | — | |||||||||||
| $ | 3,185 | $ | 609 | $ | (389 | ) | $ | (1,639 | ) | $ | 1,766 | ||||||
On August 8, 2006 the Board of Directors of ALH Holding Inc. resolved to discontinue the Louisville, Kentucky operations (the “Discontinuation”) and close the Portland, Tennessee facility (the “Closure”). The decision was based on an analysis of each location’s manufacturing capabilities as well as the continuing investment requirements for each of the locations. The Company substantially completed the Discontinuation and Closure as of December 31, 2006.
In January 2007 the Company completed the sale of its Portland facility for approximately $0.8 million, which approximated its carrying value.
Note 4—Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The Company accounts for its 50.0% voting interest in IPSO-Rent NV and IPSO-Rent Deutschland GmbH under the equity method. Each of the joint venture partners of IPSO-Rent NV and IPSO-Rent Deutschland GmbH has identical voting, participating and protective rights and responsibilities and as such, the Company does not have voting interest control. All significant intercompany transactions have been eliminated. Gains and losses from the translation of substantially all foreign currency financial statements are recorded in the accumulated other comprehensive income account within member(s)’ equity.
Cash, Cash Equivalents and Cash Management
All highly liquid debt instruments with an initial maturity of three months or less at the date of purchase are considered cash equivalents.
Revenue Recognition
Revenue from product sales is recognized by us when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred and ownership has transferred to the customer; the price to the customer is fixed or determinable; and collectability is reasonably assured. With the exception of certain sales to international customers, which are recognized upon receipt or acceptance by the customer, these criteria are satisfied, and accordingly, revenue is recognized upon shipment by us.
Shipping and Handling Fees and Costs
In accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10 “Accounting for Shipping and Handling Fees and Costs,” shipping and handling fees and costs are reflected in net revenues and cost of goods sold as appropriate.
Sales Incentive Costs
In accordance with EITF Issue No. 01-09 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” all sales incentive costs including cash discounts, customer promotional allowances, and volume rebates are reflected as a reduction of net revenues.
Financing Program Revenue
As discussed below, we sell notes receivable and accounts receivable through our special-purpose bankruptcy remote entity. As servicing agent, we retain collection and administrative responsibilities for the notes and accounts receivable. We earn a servicing fee, based on the average outstanding balance. In addition, we have recorded gains or losses on the sales of notes receivable and accounts receivable in the period in which such sales occur in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140 “Accounting for Transfers and Servicing of Financial Assets
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
and Extinguishments of Liabilities, a Replacement of FASB Statement No. 125.” We apply the provisions of EITF Issue No. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” In accordance with the provisions of EITF 99-20, we recognize write-downs of our retained interests pursuant to the impairment provisions of EITF 99-20. We recognize interest income on retained beneficial interests in accordance with EITF 99-20. We also recognize interest income on beneficial interests retained in the period the interest is earned. We retain the servicing rights and receive a servicing fee for the trade receivables and equipment loans sold. Since the servicing fee adequately compensates us for the retained servicing rights, we do not establish a servicing asset or liability. The servicing fee is recognized as collected over the remaining terms of the trade receivables and equipment loans sold. Servicing revenue, interest income on beneficial interests retained, and gains on the sale of notes receivable are included in equipment financing, net revenue.
Sales of Accounts Receivable and Notes Receivable (See Notes 6 and 7)
According to SFAS No. 140, a transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. We sell all of our trade receivable and eligible notes receivable to third parties through a special-purpose bankruptcy remote entity designed to meet the SFAS No. 140 requirements for sale treatment. Accordingly, we remove these receivables from our balance sheet at the time of transfer.
In a subordinated capacity, we retain rights to the residual portion of cash flows, including interest earned, from the notes receivable sold. This retained beneficial interest is recorded at its estimated fair value at the balance sheet date. In determining the gain on sales of notes receivable, the investment in the sold receivable pool is allocated between the portion sold and the portion retained, based on their relative fair values. We generally estimate the fair values of our retained interests based on the present value of expected future cash flows to be received, using our best estimate of key assumptions, including credit losses, prepayment rates, interest rates and discount rates commensurate with the risks involved. Unrealized gains and losses resulting from changes in the estimated fair value of our retained interests are recorded as other comprehensive income (loss). Impairment losses are recognized when the estimated fair value is less than the carrying amount of the retained interest in accordance with EITF 99-20.
Inventories
Inventories are stated at cost using the first-in, first-out method but not in excess of net realizable value. Our policy is to evaluate all inventory including manufacturing raw material, work-in-process, finished goods, and spare parts. Inventory in excess of our estimated usage requirements is written down to its estimated net realizable value. Inherent in the estimates of net realizable value are our estimates related to future manufacturing schedules, customer demand, possible alternate uses and ultimate realization of potentially excess inventory.
Notes Receivable
Notes receivable reflect equipment loans that we expect to sell shortly after the balance sheet date, and non-performing and other loans not eligible for sale to our existing securitization facility.
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Notes to Consolidated Financial Statements – (Continued)
Notes receivable are stated at the principal amount outstanding, net of the allowance for credit losses. Interest income is accrued as earned on outstanding balances. Recognition of income is suspended when we determine that collection of future income is not probable (after 90 days past due). Fees earned and incremental direct costs incurred upon origination of equipment loans are not significant.
We determine that a note receivable is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the note. These equipment loans are collateral-dependent and accordingly, measurement of impairment is based upon the estimated fair value of collateral.
The determination of the allowance for credit losses is based on an analysis of the related notes and reflects an amount which, in our judgment, is adequate to provide for probable credit losses. Notes deemed to be uncollectible are charged off and deducted from the allowance. The allowance is increased for recoveries and by charges to income.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Betterments and major renewals are capitalized and included in property, plant and equipment while expenditures for maintenance and minor renewals are charged to expense. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations. Long-lived assets, principally property, plant and equipment to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable based upon related estimated future undiscounted cash flows. When required, impairment losses on assets to be held and used are recognized based upon the fair value of the asset as compared to its carrying value. Long-lived assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell.
Depreciation provisions are based on the following estimated useful lives: buildings 40 years; machinery and equipment (including production tooling) 5 to 10 years. Leasehold improvements are amortized over the lesser of the remaining life of the lease or the estimated useful life of the improvement.
Intangibles
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized. However, under SFAS No. 142, goodwill shall be tested for impairment at least annually and more frequently if an event occurs which indicates the goodwill may be impaired. Impairment of goodwill is measured according to a two-step approach. In the first step, the fair value of a reporting unit, as defined by the statement, is compared to the carrying value of the reporting unit, including goodwill. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. In the second step the implied value of the goodwill is estimated as the fair value of the reporting unit less the fair value of all other tangible and intangible assets of the reporting unit. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. We have completed the analysis required by SFAS No. 142 and have concluded that no impairment of recorded goodwill exists at December 31, 2007.
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Notes to Consolidated Financial Statements – (Continued)
Additionally, under SFAS No. 142, intangible assets not subject to amortization (indefinite lived intangible assets) shall be tested for impairment at least annually and more frequently if an event occurs which indicates the intangible asset may be impaired. These assets are tested for impairment separately from goodwill under paragraph 17 of the SFAS No. 142 and EITF 02-7 “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets.” The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. The Company’s other recorded intangible assets, tradenames and trademarks, have been deemed to have an indefinite life as the Company expects to continue to use these assets for the foreseeable future, there are no limitations of a legal, regulatory, or contractual nature that limits the period of time for which the Company can use these assets, the Company has the right to continue to use these assets and can continue to do so with limited cost to the Company, and the effects of obsolescence, demand, competition, and other economic factors are not expected to impact the indefinite life assumptions.
The method used to determine the fair value of the trademarks and tradenames is based on management prepared analysis. This analysis was the relief from royalty method to value the trademarks incorporating projected sales related to the trademarks and tradenames. Based on the impairment analysis required by SFAS No. 142 for indefinite lived intangible assets, we recorded a reduction in the value of the Ajax trademark of $1.7 million at December 31, 2005. A further Ajax impairment charge of $1.4 million was recorded in the quarter ending March 31, 2006, resulting from the Company’s decision to discontinue sales of Ajax products and sell this product line to a third party. We received $1.2 million from the sale of the Ajax trademark in June of 2006.
In the quarter ending December 31, 2006 the Company recorded impairment charges of $1.0 million related to the finite lived LSG customer agreement, based on an asset impairment test conducted pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets” resulting from the Company’s CLD Acquisition and the decision to replace the 2002 supply agreement with LSG with a new supply agreement at substantially lower volumes.
Income Taxes
Subsequent to the Alliance Acquisition, the income tax provision (benefit) is computed based on the pretax income (loss) included in the consolidated statement of income. Certain items of income and expense are not recognized on our income tax returns and financial statements in the same year, which creates timing differences. The income tax effect of these timing differences results in (1) deferred income tax assets that create a reduction in future income taxes and (2) deferred income tax liabilities that create an increase in future income taxes. Recognition of deferred income tax assets is based on management’s belief that it is more likely than not that the income tax benefit associated with certain temporary differences, operating loss and capital loss carry forwards, and income tax credits, would be realized. We have recorded a valuation allowance to reduce our deferred income tax assets based on our assessment of future taxable income. If our estimate of future taxable income changes at any time in the future, we may have to adjust the valuation allowance; recording such an adjustment could have a material adverse effect on our consolidated statement of income.
Under APB 23 “Accounting for Income Taxes – Special Areas,” deferred income taxes must be provided on the unremitted earnings of foreign subsidiaries that are not part of a consolidated tax return
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Notes to Consolidated Financial Statements – (Continued)
unless such earnings could be deemed to be indefinitely reinvested. The Company plans to have its foreign subsidiaries pay dividends to the U.S. and has, therefore, provided deferred taxes on the unremitted earnings.
Prior to the Alliance Acquisition, we were a stand-alone limited liability company and were not subject to federal and most state income taxes.
Debt Issuance Costs
As a result of the Alliance Acquisition, in 2005 we capitalized as debt issuance costs the fees associated with the Senior Credit Agreement and the Senior Subordinated Notes, totaling $13.2 million. As a result of the CLD Acquisition we capitalized additional debt issuance costs in 2006 totaling $1.3 million. Accumulated amortization related to these debt issuance costs was $6.4 million at December 31, 2007 and $4.2 million at December 31, 2006.
As a result of the 1998 Recapitalization and as a result of amending and restating our 2002 Senior Credit Facility in 2002, we had previously capitalized as debt issuance costs the fees associated with these facilities of $13.4 million. As a result of the Transaction, in the period ended January 27, 2005 we wrote-off $5.8 million of remaining debt issuance costs associated with these prior financing arrangements.
Warranty Liabilities
The cost of warranty obligations are estimated and provided for at the time of sale. Standard product warranties cover most parts for three years and certain parts for five years. We also sell separately priced extended warranties associated with our products. We recognize extended warranty revenues over the period covered by the warranty in accordance with FTB 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.” The reserves for extended warranties are included in the table in Note 15.
Research and Development Expenses
Research and development expenditures are expensed as incurred. Research and development costs were $10.9 million for the year ended December 31, 2007, $7.9 million for the year ended December 31, 2006, $5.9 million for the period from January 28, 2005 through December 31, 2005 and, $0.5 million for the period from January 1, 2005 through January 27, 2005.
Advertising Expenses
We expense advertising costs as incurred. We incurred advertising expenses of approximately $4.1 million for the year ended December 31, 2007, $3.1 million for the year ended December 31, 2006, $3.3 million for the period from January 28, 2005 through December 31, 2005 and $0.3 million for the period from January 1, 2005 through January 27, 2005.
Pre-Alliance Acquisition Class B and C Units
The Company issued Class B and C Unit interests to certain members of management in connection with the May 5, 1998 recapitalization transaction, and certain additional Class B and Class M
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Notes to Consolidated Financial Statements – (Continued)
interests in 2003 (see Note 18). These units were issued for nominal consideration based upon the subordinated nature of such interests, and represented performance-based compensatory awards for accounting purposes. Compensation expense was measured each period based upon the estimated fair value of all common units and recognized over the vesting period when it became probable that certain fair value target multiples, as defined, would be achieved. We recognized $1.1 million in non-cash incentive compensation expense related to these units in the period ended January 27, 2005. All Class B and C Unit interests were settled in connection with the consummation of the Transactions on January 27, 2005.
ALH Stock Option Plan
On January 27, 2005 in connection with the Alliance Acquisition, ALH established a stock option plan, primarily for the benefit of Alliance Laundry’s executive officers. As of the closing date of the Alliance Acquisition, ALH granted stock options among certain members of management. The granted options entitle the member of management to purchase shares of our common stock at an option price which averages $101.96 per share at year-end December 31, 2007, subject to certain requirements. As of December 31, 2007 stock options represented an aggregate of 7.7% of the fully diluted common shares of ALH common stock issuable upon exercise of stock options. As of December 31, 2007 approximately sixty-three percent (63%) of the options granted were time based options, which vest according to anniversary dates. The majority of these time based options vest in five equal annual installments on each of the first five anniversaries of the closing date, with the potential for accelerated vesting upon a change in control of Alliance Laundry. As of December 31, 2007 approximately thirty-seven percent (37%) of the options granted were “performance options.” The majority of the performance options have the opportunity to vest in five annual installments based on Alliance Laundry’s achievement of certain specified annual or cumulative earnings targets during fiscal years 2005 through 2009. ALH is viewed as a nonpublic company for the purposes of applying FAS 123R as it does not meet the definition of a public company. ALH does not have publicly traded equity securities. ALH made a one time accounting policy decision to use the intrinsic value methodology to value its liability awards based on paragraph 38 of FAS 123R for both the service and performance option pools. The service and performance options are being classified as liabilities given the awards are expected to be settled in cash rather than shares. ALH elected to use the intrinsic value method for the service and performance options as they are being accounted for as liability awards. Intrinsic value estimates prepared by management are based on forecasted cash flow projections which are used to estimate the value of the company. This estimate is then used to determine the intrinsic value of the individual options as of the respective balance sheet date. The service options are re-measured based on management’s estimates of intrinsic value at each reporting period multiplied by the percentage of the awards that have vested as of the respective balance sheet date using the graded vesting approach. The performance options are re-measured based on management’s estimates of intrinsic value as well as management’s estimate of whether or not the related performance conditions have been or will be satisfied using the graded vesting approach.
During 2007, 9,633 unvested options were terminated and cancelled upon the retirement of an executive officer and 10,920 unvested options were terminated and cancelled related to an individual who is no longer an executive officer. During 2007 ALH granted 7,605 new options to a new member of the executive staff. No further options have been issued since December 31, 2006 and no options were exercised in the year ended December 31, 2007.
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Notes to Consolidated Financial Statements – (Continued)
Based upon a valuation of these stock options, we recognized $0.6 million of compensation expense, $0.1 million of income and $1.1 million of compensation expense for the Successor periods ended December 31, 2007, 2006 and 2005, respectively. No expense was recognized for the Successor periods ended December 31, 2007, 2006 or 2005 for the performance options as the specified annual targets for the respective years were not attained and other earnings target requirements are currently not expected to be attained.
Fair Value of Other Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these financial instruments. The amounts reported for borrowings under the Senior Credit Facility approximate fair value since the underlying instruments bear interest at variable rates that re-price frequently. The fair value of our Senior Subordinated Notes at December 31, 2007 is estimated based upon prices prevailing in recent market transactions. The fair value of interest rate swaps and commodity and foreign exchange hedges are obtained based upon third party quotes.
Derivative Financial Instruments
The Company follows the guidance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 137, No. 138 and No. 139. SFAS No. 133 as amended, requires us to recognize all derivatives as either assets or liabilities and measure those instruments at fair value, and recognize changes in the fair value of derivatives in net income or other comprehensive income, as appropriate.
We recognized a loss reflecting changes in the fair value of interest rate swaps of $1.5 million for the year ended December 31, 2007 and a loss of $0.3 million for the year ended December 31, 2006. We recognized gains of $1.1 million for the period from January 28, 2005 through December 31, 2005 and nine thousand dollars for the period from January 1, 2005 through January 27, 2005.
We recognized a loss reflecting changes in the fair value of commodity hedges of $1.0 million and recognized a gain reflecting changes in the fair value of foreign currency hedges of $0.3 million for the year ended December 31, 2007. There was no significant activity with respect to either commodity or foreign currency hedges prior to 2007.
The Company periodically enters into short-term gas supply contracts for its facilities. The Company concluded that these contracts met the normal purchases and sales exception of SFAS 133, and therefore does not record the fair value of these instruments in the financial statements.
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk include trade accounts receivable and notes receivable, and related retained interests in securitized accounts and notes receivable. Concentrations of credit risk with respect to trade receivables and notes receivable are limited, to a degree, by the large number of geographically diverse customers that make up our customer base. We control credit risk through credit approvals, credit limits and monitoring procedures, as well as secured payment terms or Foreign Credit Insurance Agency (“FCIA”) insurance for sales to certain international customers.
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Notes to Consolidated Financial Statements – (Continued)
Certain Concentrations
We sell our products primarily to independent distributors. Our largest customer accounted for 8.8%, 10.2% and 12.6% of net revenues in 2007, 2006, and 2005 respectively.
Recently Issued Accounting Standards
The FASB is expected to issue a statement that would amend and clarify SFAS No. 140 (and related implementation guidance). The proposed statement will address permitted activities of qualifying special-purpose entities, including the degree of discretion allowable in determining the terms of beneficial interests issued after inception, and whether certain transfers can meet the criteria for sale accounting under SFAS No. 140 if the transferor or any consolidated affiliate provides liquidity support for the transferee’s beneficial interests. As the proposed statement has not been issued, the Company is unable to determine the effects of the related transition provisions, if any, on its existing securitization entity. However, in the event that transfers to its existing asset backed facility would no longer qualify as sales of financial assets in the future, the Company may recognize additional costs for a replacement facility or it may have other material financial statement effects. An exposure draft was issued in the third quarter of 2005 and a revised exposure draft is anticipated in the second quarter of 2008.
In March 2006 the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140.” SFAS No. 156, amends certain aspects of SFAS No. 140, by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 was effective for the Company on January 1, 2007. The provisions of SFAS No. 156 did not have an impact on the Company’s consolidated financial statements.
In July 2006 the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The initial adoption of FIN 48 did not have an impact on our financial statements at January 1, 2007. During the year, we recorded a tax provision of $0.2 million under FIN 48.
In June 2006 the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (EITF 06-03). The scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on EITF 06-03 will be effective for interim and annual reporting periods beginning after December 15, 2006. The Company records gross receipts taxes and miscellaneous other taxes on a net basis in its Consolidated Statements of Operations. The Company concluded that such tax amounts are more appropriately presented on a net basis, as such there was no impact to the presentation on the financial statements.
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Notes to Consolidated Financial Statements – (Continued)
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-b which delays the effective date of SFAS No. 157 for one year, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FAS 157 and FSP 157-b are effective for financial statements issued for fiscal years beginning after November 15, 2007. We have elected a partial deferral of SFAS No. 157 under the provisions of FSP 157-b related to the measurement of fair value used when evaluating goodwill, other intangible assets and other long-lived assets for impairment and valuing asset retirement obligations and liabilities for exit or disposal activities. We are currently evaluating the impact this statement will have on its financial position and results of operations.
In September 2006 the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires the recognition of a net liability or asset to report the funded status of defined benefit pension and other postretirement benefit plans on the balance sheet. The recognition and disclosure provisions of SFAS No. 158 are effective as of December 31, 2007 as the Company does not have publicly traded equity securities. The company has adopted SFAS No. 158 as of December 31, 2007 which resulted in a $0.1 million loss, net of tax, recorded in accumulated other comprehensive income account within member(s)’ equity.
In December 2007 the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. SFAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact this statement will have on its financial position and results of operations.
In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected are recognized in earnings as incurred and not deferred. SFAS 159 also
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Notes to Consolidated Financial Statements – (Continued)
establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning on or after January 1, 2008. We have evaluated and determined that when we adopt SFAS No. 159, it will not have a significant impact to the Company’s financial position and results of operations.
In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the impact this statement will have on its financial position and results of operations.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
Note 5—Infrequently Occurring Items:
Asset Impairment Charges
On March 20, 2006 the Board of Directors of ALH Holding Inc. resolved to discontinue the sale of Ajax finished goods, which was completed in 2006. In connection with this discontinuation, we recorded a non-cash charge for impairment of $1.4 million in the quarter ending March 31, 2006 for the reduction in the value of the Ajax trademark. The non-cash impairment charge recorded in the quarter ending March 31, 2006 is a result of the Company’s determination that the best course of action for the Ajax trademark would be to sell this product line to a third party. Based on the offer received, which is discussed in the paragraph below, the fair value of the Ajax trademark was determined to be $1.4 million less than the carrying value of the Ajax trademark as of December 31, 2005. We had previously reduced the value of the Ajax trademark by $1.7 million in the fourth quarter of 2005, based on an asset impairment test conducted pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.” The reduction in value recorded in the fourth quarter of 2005 was a result of our determination that the growth projections for the Ajax line would not be achieved. When the new growth projections were utilized in preparing the asset impairment test, an impairment charge was identified and recorded in the fourth quarter of 2005. These amounts are recorded within the securitization, impairment and other (income) costs line item of the Consolidated Statements of Operations.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
On June 15, 2006 Alliance Laundry Systems LLC (the “Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Sankosha Engineering Co. Ltd. (“Sankosha Engineering”) pursuant to which the Company agreed to sell to Sankosha Engineering certain intellectual property (including the “Ajax” trademark and tradename) associated with the Company’s line of Ajax pressing and finishing equipment for $1.2 million. As this was the net book value of the intellectual property at the time, there was no gain or loss recognized on the sale in the second quarter of 2006. The Company may continue to sell service and repair parts using the Ajax trademark or tradename for ten years from the date of the Purchase Agreement.
In the quarter ending December 31, 2006 the Company recorded impairment charges of $1.0 million related to the finite lived LSG customer agreement, based on an asset impairment test conducted pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets” resulting from the Company’s CLD Acquisition and the decision to replace the 2002 supply agreement with LSG with a new supply agreement at substantially lower volumes.
Costs Associated With Exit or Disposal Activities
On October 12, 2005 the Company committed to a plan to close its Marianna, Florida facility (the “Facility”) and consolidate the manufacture and design of the Facility’s product lines into its existing Ripon, Wisconsin operations. The Company substantially completed the facility closure and consolidation as of July 30, 2006.
The total cash costs and expenses associated with the Facility closure and transition of product lines to Wisconsin are estimated to be approximately $10.5 million, comprised of (1) approximately $3.3 million of one-time termination benefits and relocation costs; (2) approximately $2.7 million of other labor related costs including training and temporary living expenses; (3) approximately $2.1 million related to the relocation of the Facility’s tooling and equipment; and (4) approximately $2.4 million of other related expenses. Of the $10.5 million, $0.9 million was incurred in the year ended December 31, 2007, $8.8 million was incurred in the year ended December 31, 2006 and $0.6 million was incurred in the period January 28, 2005 through December 31, 2005. The remaining $0.2 million is expected to be incurred prior to June 30, 2008 and relates primarily to continuing facility costs prior to disposition.
The table below summarizes the costs incurred by period and also summarizes where such costs are reflected in the Company’s Consolidated Statements of Operations:
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| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | ||||||||
Cash costs: | ||||||||||
One-time termination benefits and relocation | $ | 328 | $ | 2,421 | $ | 488 | ||||
Other labor related costs | 100 | 2,466 | 102 | |||||||
Relocation of the Facility’s tooling and equipment | 113 | 1,946 | 12 | |||||||
Other related expenses | 350 | 2,007 | 1 | |||||||
Total cash costs | 891 | 8,840 | 603 | |||||||
Noncash costs: | ||||||||||
Pension curtailment benefit | — | (513 | ) | — | ||||||
Retiree medical curtailment benefit | — | (619 | ) | — | ||||||
Accelerated depreciation | — | 4,031 | 1,021 | |||||||
Total noncash costs | — | 2,899 | 1,021 | |||||||
Total closure costs | $ | 891 | $ | 11,739 | $ | 1,624 | ||||
Cost of sales | $ | — | $ | 4,031 | $ | 1,021 | ||||
Selling, general and administrative expense | 85 | 2,989 | 428 | |||||||
Securitization, impairment and other costs | 806 | 4,719 | 175 | |||||||
Total closure costs | $ | 891 | $ | 11,739 | $ | 1,624 | ||||
Costs Associated with 2005 Asset Backed Facility
On June 28, 2005 Alliance Laundry, through a special-purpose bankruptcy remote subsidiary, Alliance Laundry Equipment Receivables 2005 LLC (“ALER 2005”), and a trust, Alliance Laundry Equipment Receivables Trust 2005-A (“ALERT 2005A”), entered into a four year $330.0 million revolving credit facility (the “Asset Backed Facility”), backed by equipment loans and trade receivables originated by us. In connection with the establishment of the Asset Backed Facility, the Company incurred $8.1 million of expenses related to establishing the new securitization facility. These expenses were comprised of structuring and underwriting fees of $5.8 million, legal and professional fees of $1.3 million and a LIBOR based cap premium of $1.0 million. These amounts are recorded within the securitization, impairment and other (income) costs line of the Consolidated Statements of Operations.
Alliance Acquisition Related Costs
In connection with the Alliance Acquisition, the Company incurred $18.8 million of seller related expenses. These amounts were expensed in the period ended January 27, 2005, and are reflected as a deduction in determining operating income (loss). In connection with the Alliance Acquisition, the Company also incurred $9.9 million of expenses related to the early redemption of debt. These amounts were expensed in the period ended January 27, 2005, and are reflected as a loss from early extinguishment of debt.
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Notes to Consolidated Financial Statements – (Continued)
Note 6—Equipment Financing and Sales of Notes Receivable:
General
We maintain an internal financing organization to originate and administer promissory notes for financing of equipment purchases primarily for laundromats. These notes typically have terms ranging from Prime plus 1.0% to Prime plus 6.0% for variable rate notes and 8.0% to 14.5% for fixed rate notes. The average interest rate for all notes at December 31, 2007 approximates 9.24% with terms ranging from two to nine years. All notes allow the holder to prepay outstanding principal amounts without penalty, and are therefore subject to prepayment risk.
Funding Facilities
On June 28, 2005 Alliance Laundry, through a special-purpose bankruptcy remote subsidiary, Alliance Laundry Equipment Receivables 2005 LLC (“ALER 2005”), and a trust, Alliance Laundry Equipment Receivables Trust 2005-A (“ALERT 2005A”), entered into a four year $330.0 million revolving credit facility (the “Asset Backed Facility”), backed by equipment loans and trade receivables originated by us. During the first four years of the new Asset Backed Facility, Alliance Laundry is permitted, from time to time, to sell its trade receivables and certain equipment loans to the special-purpose subsidiary, which in turn will sell them to the trust. The trust finances the acquisition of the trade receivables and equipment loans through borrowings under the Asset Backed Facility in the form of funding notes, which are limited to an advance rate of approximately 95% for equipment loans and 60-70% for trade receivables. Funding availability for trade receivables is limited to a maximum of $60.0 million, while funding for equipment loans is limited at $330.0 million less the amount of funding outstanding for trade receivables. Funding for the trade receivables and equipment loans is subject to certain eligibility criteria, including concentration and other limits, standard for transactions of this type. After four years from the closing date, which is June 27, 2009, (or earlier in the event of a rapid amortization event or an event of default), the trust will not be permitted to request new borrowings under the facility and the outstanding borrowings will amortize over a period of up to nine years. As of December 31, 2007 the balance of variable funding notes due to lenders under the Asset Backed Facility for equipment loans was $237.0 million.
Additional advances under the Asset Backed Facility are subject to certain continuing conditions, including but not limited to (i) covenant restrictions relating to the weighted average life, weighted average interest rate, and the amount of fixed rate equipment loans held by the trust, (ii) the absence of a rapid amortization event or event of default, as defined, (iii) our compliance, as servicer, with certain financial covenants, and (iv) no event having occurred which materially and adversely affects our operations.
The variable funding notes under the Asset Backed Facility will commence amortization and borrowings thereunder will cease prior to four years after the closing date upon the occurrence of certain “rapid amortization events” which include: (i) a borrowing base shortfall exists and remains uncured, (ii) delinquency, dilution or default ratios on pledged receivables and equipment loans exceeding certain specified ratios in any given month, (iii) the days sales outstanding on receivables exceed a specified number of days, (iv) the occurrence and continuance of an event of default or servicer default under the Asset Backed Facility, including but not limited to, as servicer, a material adverse change in our business or financial condition and our compliance with certain required financial covenants, and (v) a number of other specified events.
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Notes to Consolidated Financial Statements – (Continued)
The risk of loss to the note purchasers under the Asset Backed Facility resulting from default or dilution on the trade receivables and equipment loans is protected by credit enhancement, provided by us in the form of cash reserves, letters of credit and overcollateralization. Further, the timely payment of interest and the ultimate payment of principal on the facility are guaranteed by Ambac Assurance Corporation. All of the residual beneficial interests in the trust and cash flows remaining from the pool of receivables and loans after payment of all obligations under the Asset Backed Facility would accrue to the benefit of Alliance Laundry. Except for the retained interests and amounts of the letters of credit outstanding from time to time as credit enhancement, we provide no support or recourse for the risk of loss relating to default on the assets transferred to the trust. In addition, we are paid an annual servicing fee equal to 1.0% of the aggregate balance of such trade receivables and equipment loans.
The estimated fair value of Alliance Laundry’s beneficial interests in the accounts receivable and notes sold to ALERT 2005A are based on the amount and timing of expected distributions to Alliance Laundry as the holder of the trust’s residual equity interests. Such distributions may be substantially deferred or eliminated, and result in an impairment of our residual interests, if repayment of the variable funding notes issued by ALERT 2005A is accelerated upon an event of default or rapid amortization event described above.
Sales of Notes Receivable
Gains on sales of notes receivable and other net finance program income for the year ended December 31, 2007 (Successor) of approximately $8.1 million; for the year ended December 31, 2006 (Successor) of approximately $6.3 million; for the period January 28, 2005 through December 31, 2005 (Successor) of approximately $8.9 million, and for the period January 1, 2005 through January 27, 2005 (Predecessor) of approximately $0.4 million, are included in equipment financing, net revenue.
At December 31, 2007 we recorded $21.9 million related to the estimated fair value of our beneficial interests in the notes sold to ALER 2005. At December 31, 2006 we recorded $18.1 million related to the estimated fair value of our beneficial interests in the notes sold to ALER 2005.
The estimated fair value of our beneficial interests in the notes sold to ALER 2005 are based on the amount and timing of expected distributions to us as the holder of ALER 2005’s residual equity interests. Such distributions may be substantially deferred or eliminated, and result in an impairment of our residual interests, if repayment of amounts due under the notes issued by ALERT 2005 is accelerated upon an event of default or rapid amortization event (as those events are defined in the Asset Backed Facility indenture). These events include (i) delinquency or default ratios on equipment loans exceeding certain specified levels, (ii) a termination of us, as servicer, due to non-compliance with certain financial covenants or a material adverse change in our business and (iii) a number of other specified events.
We retain the servicing rights and receive a servicing fee for the trade receivables and equipment loans sold. Since the servicing fee adequately compensates us for the retained servicing rights, we do not establish a servicing asset or liability. The servicing fee is recognized as collected over the remaining terms of the trade receivables and equipment loans sold. We recognize interest income on retained
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Notes to Consolidated Financial Statements – (Continued)
beneficial interests in accordance with EITF 99-20. We also recognize interest income on beneficial interests retained in the period the interest is earned. Servicing revenue, interest income on beneficial interests retained, and gains on the sale of notes receivable are included in equipment financing, net revenue.
Portfolio Information
The table below summarizes certain information regarding our equipment loan portfolio, delinquencies, and cash flows received from and paid to our special-purpose securitization entity:
| December 31, 2007 | December 31, 2006 | |||||||||||||
| Principal Amount | Principal Amount of Loans 60 Days or More Past Due | Principal Amount | Principal Amount of Loans 60 Days or More Past Due | |||||||||||
Total portfolio | $ | 246,580 | $ | 6,579 | $ | 238,295 | $ | 5,507 | ||||||
Less: loans sold | 242,487 | 5,907 | 233,547 | 4,225 | ||||||||||
Loans held | 4,093 | $ | 672 | $ | 4,748 | $ | 1,282 | |||||||
Allowance for loan losses | (602 | ) | (829 | ) | ||||||||||
| $ | 3,491 | $ | 3,919 | |||||||||||
| For The Year Ended December 31, 2007 | For The Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 Through January 27, 2005 | |||||||||||
| Successor | Successor | Successor | Predecessor | |||||||||||
Proceeds from sales of loans | $ | 96,345 | $ | 97,606 | $ | 95,201 | $ | 6,660 | ||||||
Purchase of delinquent or foreclosed assets | $ | — | $ | — | $ | — | $ | — | ||||||
Servicing fees and other net cash flows received on retained interests | $ | 10,443 | $ | 10,668 | $ | 9,833 | $ | 971 | ||||||
Our credit losses, on a total portfolio basis, as a percentage of average loans outstanding during 2007, 2006 and 2005 were 0.54%, 0.54% and 0.52%, respectively. The following table presents activity in the allowance for loan losses related to loans held on-balance sheet:
| Balance at Beginning of Period | Charges to Expense/ (Income) | (Additions)/ Deductions | Balance at End of Period | ||||||||||
Period ended: | |||||||||||||
January 27, 2005 (Predecessor) | $ | 1,530 | $ | 108 | $ | 102 | $ | 1,536 | |||||
December 31, 2005 (Successor) | 1,536 | (597 | ) | 31 | 908 | ||||||||
December 31, 2006 (Successor) | 908 | 124 | 203 | 829 | |||||||||
December 31, 2007 (Successor) | 829 | — | 227 | 602 | |||||||||
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Notes to Consolidated Financial Statements – (Continued)
In 2005 the Company recognized $0.6 million of income which was primarily the result of favorable recoveries on Equipment Notes Receivable not sold. Based on historical trends approximately 40% of defaulted equipment loans are written off. When recovery rates are different, the Company adjusts its estimated recoveries accordingly. During 2005 the Company experienced recovery rates higher than the 60% historical rate on certain defaulted loans that were paid off during the year. This resulted in a favorable adjustment to the equipment notes reserve.
In 2005 the Company instituted a more aggressive program to recover on personal guaranties on defaulted equipment loans. This program generated income on several loans that were previously written off as uncollectible. It is the Company’s policy to write off the balance due on an equipment note receivable after the equipment supporting the loan has been sold and any proceeds have been applied against the outstanding balance. The Company pursues personal guarantees for the deficiencies.
Valuation of Retained Interests
With respect to the Asset Backed Facility, we recognize beneficial interests in notes sold to ALER 2005, which represents the estimated fair value of our retained interest in the residual cash flows, including interest earned from notes sold, and the present value of estimated proceeds from a cash reserve account.
| December 31, | ||||||
| 2007 | 2006 | |||||
Beneficial interests in notes sold to ALER 2005 | $ | 21,895 | $ | 18,055 | ||
Key economic assumptions used in valuing retained interests at December 31, 2007 and 2006 were as follows:
| 2007 | 2006 | |||||
Average prepayment speed (per annum) | 22.0 | % | 25.0 | % | ||
Expected credit losses (per annum) | 1.0 | % | 1.0 | % | ||
Residual cash flows discounted at | 12.5 | % | 12.5 | % |
The weighted-average remaining expected life of notes receivable sold by us was approximately 23 months at December 31, 2007.
At December 31, 2007 and 2006, key economic assumptions and the sensitivity of the current fair value estimates of such retained interests to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows:
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| December 31, | ||||||||
| 2007 | 2006 | |||||||
Prepayment speed assumption: | ||||||||
Impact on FV 10% adverse change | $ | (214 | ) | $ | (197 | ) | ||
Impact on FV 20% adverse change | $ | (431 | ) | $ | (390 | ) | ||
Expected credit losses: | ||||||||
Impact on FV 10% adverse change | $ | (251 | ) | $ | (253 | ) | ||
Impact on FV 20% adverse change | $ | (501 | ) | $ | (505 | ) | ||
Residual cash flow discount rate: | ||||||||
Impact on FV 10% adverse change | $ | (362 | ) | $ | (304 | ) | ||
Impact on FV 20% adverse change | $ | (713 | ) | $ | (598 | ) | ||
These sensitivities are hypothetical and the effect of a variation in a particular assumption on the estimated fair value of retained interests is calculated without changing any other assumptions; in reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities.
Note 7—Sales of Accounts Receivable:
As described in Note 6, we, through our bankruptcy remote subsidiary ALER 2005, entered into the Asset Backed Facility to finance the sale of all of our trade receivables and certain eligible notes receivable related to equipment loans. With respect to the variable funding notes (the “Notes”) secured by trade receivables, the Asset Backed Facility lenders will make loans which approximate 60% to 70% of the outstanding amount of trade receivables sold. Funding for the trade receivables is subject to certain eligibility criteria, including concentration and other limits, standard for transactions of this type. As servicer, we retain collection and administrative responsibilities for the accounts receivable sold. The total amount of uncollected balances on trade accounts receivable sold at December 31, 2007 was $80.7 million and the variable funding notes due to lenders under the Asset Backed Facility for trade receivables was $53.8 million. The total amount of uncollected balances on trade accounts receivable sold at December 31, 2006 was $69.0 million and the variable funding notes due to lenders under the Asset Backed Facility for trade receivables was $42.0 million.
Losses on sales of trade accounts receivable and related expenses of $3.6 million, $3.0 million and $2.1 million in 2007, 2006 and 2005, respectively, are included in selling, general and administrative expenses. Our retained interest in trade accounts receivable sold to ALER 2005 was $29.0 million at December 31, 2007 and $28.6 million at December 31, 2006.
Note 8—Goodwill and Other Intangibles:
Identifiable intangible assets, which are subject to amortization, consist primarily of customer agreements and distributor networks which are amortized over the assets’ estimated useful lives ranging from three to twenty years; engineering drawings, product designs and manufacturing processes, which are amortized over their estimated useful lives ranging from four to fifteen years; noncompete
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Notes to Consolidated Financial Statements – (Continued)
agreements which are amortized over their estimated useful lives of two years and computer software and patents which are amortized over their estimated useful lives ranging from three to twenty years. Intangible assets also include trademarks and tradenames, which have an indefinite life. Such assets are not amortized, but will be subject to an annual impairment test pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.”
Amortization expense associated with identifiable intangible assets was as follows:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 (Restated) | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | ||||||||||
| Successor | Successor | Successor | Predecessor | ||||||||||
Amortization expense | $ | 6,851 | $ | 5,676 | $ | 4,150 | $ | 14 | |||||
The following is a summary of identifiable intangible assets as of December 31, 2007:
| December 31, 2007 | |||||||||
| Gross Amount | Accumulated Amortization | Net Amount | |||||||
Identifiable intangible assets: | |||||||||
Trademarks and tradenames | $ | 113,029 | $ | — | $ | 113,029 | |||
Customer agreements and distributor network | 31,245 | 10,184 | 21,061 | ||||||
Engineering and manufacturing designs and processes | 16,003 | 3,872 | 12,131 | ||||||
Noncompete agreements | 1,961 | 1,430 | 531 | ||||||
Patents | 324 | 25 | 299 | ||||||
Computer software and other | 1,683 | 717 | 966 | ||||||
| $ | 164,245 | $ | 16,228 | $ | 148,017 | ||||
The following is a summary of identifiable intangible assets as of December 31, 2006:
| December 31, 2006 | |||||||||
| Gross Amount | Accumulated Amortization | Net Amount | |||||||
Identifiable intangible assets: | |||||||||
Trademarks and tradenames | $ | 112,778 | $ | — | $ | 112,778 | |||
Customer agreements and distributor network | 30,893 | 6,491 | 24,402 | ||||||
Engineering and manufacturing designs and processes | 15,269 | 1,793 | 13,476 | ||||||
Noncompete agreements | 1,772 | 406 | 1,366 | ||||||
Patents | 276 | 14 | 262 | ||||||
Computer software and other | 1,075 | 469 | 606 | ||||||
| $ | 162,063 | $ | 9,173 | $ | 152,890 | ||||
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
Estimated amortization expense for existing identifiable intangible assets beginning in 2008 is expected to be approximately $6.4 million, $5.7 million, $5.0 million, $4.7 million and $2.1 million for each of the years in the five-year period ending December 31, 2012. Estimated amortization expense can be affected by various factors including future acquisitions or divestitures of product and/or licensing and distribution rights.
In connection with the Alliance Acquisition, the Company recorded approximately $150.6 million of Successor goodwill. In accordance with EITF Issue No. 88-16, “Basis in Leveraged Buyout Transactions,” the goodwill attributable to the Predecessor basis of $10.7 million has been recorded as a reduction of equity. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” the Successor goodwill will not be amortized but will be subject to an annual impairment test.
The changes in the carrying value of goodwill for the years ended December 31, 2005, December 31, 2006 and December 31, 2007 are summarized as follows:
| Goodwill | |||
Balance as of December 31, 2004 | $ | 55,414 | |
Alliance Acquisition and purchase accounting, net | 84,489 | ||
Balance at December 31, 2005 | 139,903 | ||
Goodwill from CLD Acquisition | 39,678 | ||
Currency translation and other | 688 | ||
Balance at December 31, 2006 | 180,269 | ||
Goodwill from CLD Acquisition | 725 | ||
Currency translation and other | 2,871 | ||
Balance at December 31, 2007 | $ | 183,865 | |
As of December 31, 2005 pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we performed an impairment test of our goodwill, trademarks and tradenames, which have an indefinite life. Based on this impairment test we recorded no adjustment to the carrying value of goodwill and we recorded a reduction in the value of the Ajax trademark of $1.7 million which is reflected in securitization, impairment and other (income) costs. On March 20, 2006 the Board of Directors of ALH Holding Inc. resolved to discontinue the sale of Ajax finished goods, which was completed in 2006. In connection with this discontinuation, we recorded a non-cash charge for impairment of $1.4 million in the quarter ending March 31, 2006 for the reduction in the value of the Ajax trademark. On June 15, 2006 Alliance Laundry Systems LLC (the “Company”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Sankosha Engineering Co. Ltd. (“Sankosha Engineering”) pursuant to which the Company agreed to sell to Sankosha Engineering certain intellectual property (including the “Ajax” trademark and tradename) associated with the Company’s line of Ajax pressing and finishing equipment for $1.2 million. As this was the net book value of the intellectual property at the time, there was no gain or loss recognized on the sale in the second quarter of 2006. The Company may continue to sell service and repair parts using the Ajax trademark or tradename for ten years from the date of the Purchase Agreement.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
As of December 31, 2007 pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we performed an impairment test of our goodwill, trademarks and tradenames, which have an indefinite life. Based on this impairment test we recorded no adjustment to the carrying value of goodwill and the indefinite lived trademarks and tradenames. In 2006 we recorded impairment charges of $1.0 million related to the finite lived LSG customer agreement, resulting from the Company’s CLD Acquisition and the decision to replace the 2002 supply agreement with LSG with a new supply agreement at substantially lower volumes. The carrying value of the trademarks and tradenames approximated $113.0 million at December 31, 2007 and estimated fair value exceeded carrying value by $35.5 million based upon the impairment test.
Note 9—Inventories:
Inventories consisted of the following at:
| December 31, 2007 | December 31, 2006 | |||||||
Materials and purchased parts | $ | 25,186 | $ | 23,127 | ||||
Work in process | 7,288 | 7,826 | ||||||
Finished goods | 27,370 | 23,363 | ||||||
Less: inventory reserves | (2,235 | ) | (2,401 | ) | ||||
| $ | 57,609 | $ | 51,915 | |||||
The Company recorded inventories at fair market value as a result of the Alliance Acquisition. This resulted in a net write-up of $6.2 million. This amount was expensed in cost of sales in 2005 as this inventory was sold. The Company recorded inventories acquired in the CLD Acquisition at fair market value. This resulted in a net write-up of $3.2 million. This amount was expensed in cost of sales in 2006 as this inventory was sold.
Note 10—Property, Plant and Equipment:
Property, plant and equipment consisted of the following at:
| December 31, 2007 | December 31, 2006 | |||||||
Land | $ | 2,959 | $ | 3,087 | ||||
Buildings and leasehold improvements | 38,908 | 35,060 | ||||||
Capital leases | 2,303 | 2,081 | ||||||
Machinery and equipment | 62,089 | 55,886 | ||||||
| 106,259 | 96,114 | |||||||
Less: accumulated depreciation | (37,715 | ) | (27,661 | ) | ||||
| 68,544 | 68,453 | |||||||
Construction in progress | 3,381 | 5,336 | ||||||
| $ | 71,925 | $ | 73,789 | |||||
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Notes to Consolidated Financial Statements – (Continued)
Depreciation expense was $10.2 million for the year ended December 31, 2007, $13.8 million for the year ended December 31, 2006, $14.0 million for the period from January 28, 2005 through December 31, 2005 and $0.5 million for the period from January 1, 2005 through January 27, 2005.
Note 11—Other Current Liabilities:
The major components of other current liabilities consisted of the following at:
| December 31, 2007 | December 31, 2006 | |||||
Warranty reserve | $ | 7,748 | $ | 7,194 | ||
Accrued sales incentives | 4,650 | 4,204 | ||||
Salaries, wages and other employee benefits | 9,860 | 11,859 | ||||
Federal & state income tax | 1,225 | 589 | ||||
Accrued interest | 8,307 | 6,907 | ||||
Accrued interest swap contracts | 1,247 | — | ||||
CLD restructuring reserve | 1,766 | 3,185 | ||||
Other current liabilities | 3,960 | 3,147 | ||||
| $ | 38,763 | $ | 37,085 | |||
Note 12—Debt:
Debt consisted of the following at:
| December 31, 2007 | December 31, 2006 | |||||||
Senior Credit Facility | $ | 190,000 | $ | 224,000 | ||||
Senior subordinated notes | 149,523 | 149,430 | ||||||
Revolving credit facility | — | — | ||||||
Other long-term debt | 875 | 998 | ||||||
Capital lease obligations | 1,390 | 1,687 | ||||||
Gross long-term debt | 341,788 | 376,115 | ||||||
Less: current portion | (601 | ) | (526 | ) | ||||
| $ | 341,187 | $ | 375,589 | |||||
Senior Credit Facility
Concurrent with the closing of the Alliance Acquisition on January 27, 2005, we entered into a Senior Credit Facility, consisting of a six-year $50.0 million revolving credit facility (the “Revolving Credit Facility”) and a seven-year $200.0 million term loan facility (the “Term Loan Facility”). Alliance Laundry is the borrower under this facility and Alliance Holdings and Alliance Laundry Corporation are the guarantors under this facility.
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Notes to Consolidated Financial Statements – (Continued)
On July 14, 2006 Alliance Laundry, Alliance Holdings, Lehman Commercial Paper Inc., as administrative agent and lender, and the other parties named therein as lenders, entered into an amendment (the “Amendment”) to the credit agreement, dated as of January 27, 2005 (the “Credit Agreement”), among Alliance Laundry, Alliance Holdings, ALH Finance LLC, Lehman Commercial Paper Inc., as administrative agent, and the several banks and other financial institutions party thereto. The Amendment amends the Credit Agreement to (i) provide for an additional $60.0 million of term loans under the Credit Agreement term loan facility; (ii) increase the revolving credit commitments to $55.0 million from $50.0 million under the Credit Agreement revolving credit facility; (iii) permit the acquisition of CLD; (iv) modify certain negative covenants in the Credit Agreement, including (a) adjusting the calculation of the consolidated leverage ratio, (b) adjusting the calculation of the consolidated interest coverage ratio, (c) increasing the annual ordinary course capital expenditures permitted by Alliance Laundry and its subsidiaries to $13.0 million from $10.0 million, effective 2007, and (d) increasing the maximum permitted debt Alliance Laundry’s non-U.S. subsidiaries may incur without restriction to $5.0 million from $2.5 million; (v) revising the procedure for term loan borrowing; (vi) revising the term loan repayment schedule; and (vii) making conforming changes to the definitions contained therein. This Amendment did not affect interest rates charged under the Credit Agreement.
After considering $70.0 million of cumulative voluntary prepayments made through December 31, 2007, the Term Loan Facility requires quarterly principal payments of approximately $0.5 million beginning March 31, 2009 though December 31, 2011. The final principal payment of $184.2 million is due on January 27, 2012. We are required to make prepayments with the proceeds from the issuance of certain equity, the incurrence of certain indebtedness, the disposition of certain assets and from excess cash flow, as defined in the Senior Credit Facility.
The Revolving Credit Facility is available, subject to certain conditions, for general corporate purposes in the ordinary course of business and for other transactions permitted under the Senior Credit Facility. A portion of the Revolving Credit Facility not in excess of $35.0 million is available for the issuance of letters of credit. Letters of credit issued on our behalf under the Revolving Credit Facility totaled $34.1 million at December 31, 2007.
Borrowings under the Senior Credit Facility bear interest, at our option, at a rate equal to an applicable margin plus (a) the base rate, which is the higher of (1) the prime lending rate as set forth on the British Banking Association Telerate and (2) the federal funds effective rate from time to time plus 0.5% or (b) the Eurodollar rate, which will be the rate at which Eurodollar deposits for one, two, three or six months are offered in the interbank Eurodollar market. Effective December 31, 2007, the applicable margin for the Revolving Credit Facility is 2.00% with respect to base rate loans and 3.00% with respect to Eurodollar loans, subject to step-downs if we meet certain leverage ratios. The applicable margin for the Term Loan Facility is 1.75% with respect to base rate loans and 2.75% with respect to Eurodollar loans, subject to step-downs if we meet certain leverage ratios. The interest rate on these borrowings as of December 31, 2007 was 7.38%.
In addition, we are obligated to pay a quarterly commitment fee currently equal to 1/2 of 1% per annum on the average daily unused portion of the $55.0 million revolving loan commitment. We recognized $0.1 million of interest expense each for commitment fees in 2007, 2006 and 2005, respectively. We are also obligated to pay a commission on all outstanding letters of credit in the amount of the applicable margin, then in effect with respect to Eurodollar loans under the Revolving Credit Facility, which currently is 3.00%, as well as a 0.25% fronting fee on the aggregate amount of all outstanding letters of credit.
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Notes to Consolidated Financial Statements – (Continued)
Additional borrowings and the issuance of additional letters of credit under the Senior Credit Facility are subject to certain continuing representations and warranties, including the absence of any development or event which has had or could reasonably be expected to have a material adverse effect on our business or financial condition.
On September 10, 2007 the Company entered into an amendment and waiver (the “Amendment and Waiver”) to the Company’s Senior Credit Facility. Among other things, the Amendment and Waiver waived, until November 13, 2007, the Company’s failure to timely provide its financial statements to the Administrative Agent for the quarterly period ended June 30, 2007 and provided waivers related to defaults arising from the restatement of the Company’s financial statements for the fiscal year ended December 31, 2006 and the fiscal quarters ended March 31, 2006, June 30, 2006, September 30, 2006 and March 31, 2007. The Amendment and Waiver increased the applicable interest rate under the Senior Credit Facility (subject to adjustment for certain ratings events) by 25 basis points and provides for a 1% prepayment fee in the event the term loans under the Senior Credit Facility are refinanced at a lower rate during the twelve months following the effective date of the Amendment and Waiver.
Senior Subordinated Notes
As part of the Financing Transactions on January 27, 2005, we offered and sold $150.0 million of Senior Subordinated Notes and received proceeds of approximately $149.3 million. The maturity date of the Senior Subordinated Notes is January 15, 2013. The Senior Subordinated Notes are general unsecured obligations and are subordinated in right of payment to all current and future senior indebtedness, including permitted borrowings under the Senior Credit Facility. The indenture governing the Senior Subordinated Notes, among other things, restricts our ability and the ability of our restricted subsidiaries to make investments, incur or guarantee additional indebtedness, pay dividends, create liens, sell assets, merge or consolidate with other entities, enter into transactions with affiliates and engage in certain business activities. In addition, under the Senior Credit Facility, the Company is required to satisfy specified financial ratios and tests, including a maximum of total debt to EBITDA (earnings before interest, income taxes, depreciation and amortization) and a minimum interest coverage ratio.
Interest on the Senior Subordinated Notes accrues at the rate of 8 1/2% per annum and is payable semi-annually in arrears on January 15 and July 15. Such payments commenced on July 15, 2005. The fair value of the Senior Subordinated Notes at December 31, 2007 was approximately $144.0 million based upon prices prevailing in recent market transactions.
The Senior Subordinated Notes are subject to redemption on or after January 15, 2009, in whole or in part, upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
Year | Redemption Price | ||
2009 | 104.250 | % | |
2010 | 102.125 | % | |
2011 and thereafter | 100.000 | % |
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Notes to Consolidated Financial Statements – (Continued)
If we experience certain kinds of changes in control, we must offer to repurchase the then outstanding notes at the redemption price set forth in the indenture governing the Senior Subordinated Notes. At any time prior to January 15, 2009, we may redeem up to 35% of the notes with the net cash proceeds of certain equity offerings at the redemption price set forth in the indenture governing the Senior Subordinated Notes.
Other Debt and Capital Lease Obligations
On January 25, 2006 the Company received $1.0 million in borrowings, evidenced by two promissory notes, pursuant to a Wisconsin Community Development Block Grant Agreement (the “Agreement”) dated January 6, 2006 between the Wisconsin Department of Commerce, Alliance Laundry and Fond du Lac County, Wisconsin. The first promissory note, in the amount of $0.5 million bears interest at an annual rate of 2%, with monthly payments of interest and principal commencing January 1, 2007 and a final installment paid on December 1, 2010, subject to the covenants of the Agreement. The second promissory note, in the amount of $0.5 million bears interest at an annual rate of 2%, with monthly payments of interest and principal commencing January 1, 2009 and a final installment paid on December 1, 2010, subject to the covenants of the Agreement. A portion or the entire amount of this second promissory note may be forgiven if the Company meets certain job creation and retention requirements outlined in the promissory note.
On July 14, 2006, as a result of the CLD Acquisition, the Company assumed certain capital lease obligations which consist primarily of a capital lease obligation of approximately $1.5 million for a laser cutter in its Wevelgem, Belgium facility. This capital lease commenced in November 2005 and requires monthly payments of approximately $37,000 through October 2010. The acquired value of the laser cutter was $2.0 million as of December 31, 2007 with related accumulated depreciation of $0.3 million at December 31, 2007 and $0.1 million at December 31, 2006, respectively.
Debt Maturities and Liquidity Considerations
The aggregate scheduled maturities of long-term debt in subsequent years, after giving effect to $70.0 million of cumulative voluntary prepayments made prior to December 31, 2007 and including $0.5 million related to the discount on the Senior Subordinated Notes, are as follows:
Year | Long-term Debt | Capital Lease Obligation | Amount Due | |||||||
2008 | $ | 116 | $ | 485 | $ | 601 | ||||
2009 | 2,344 | 478 | 2,822 | |||||||
2010 | 2,312 | 423 | 2,735 | |||||||
2011 | 1,949 | 4 | 1,953 | |||||||
2012 | 184,154 | — | 184,154 | |||||||
Thereafter | 150,000 | — | 150,000 | |||||||
| $ | 340,875 | $ | 1,390 | $ | 342,265 | |||||
Less: Unamortized discount on long-term debt | (477 | ) | ||||||||
Long-term debt and capital lease obligations, net | $ | 341,788 | ||||||||
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Notes to Consolidated Financial Statements – (Continued)
The Senior Credit Facility and the indenture governing the Senior Subordinated Notes contain a number of covenants that, among other things, restrict our ability to dispose of assets, repay other indebtedness (including, in the case of the Senior Credit Facility, the Senior Subordinated Notes), incur liens, make capital expenditures and make certain investments or acquisitions, engage in mergers or consolidation and otherwise restrict our operating activities. In addition, under the Senior Credit Facility, the Company is required to satisfy specified financial ratios and tests, including a maximum of total debt to Adjusted EBITDA (as defined in the credit agreement governing the Senior Credit Facility) and a minimum interest coverage ratio.
The maximum ratio of consolidated debt to Adjusted EBITDA under the Senior Credit Facility is scheduled to be reduced from 5.00 at December 31, 2007 to 4.50 at December 31, 2008. At December 31, 2007 based upon the maximum ratio of consolidated debt to Adjusted EBITDA allowable under the Senior Credit Facility of 5.00, we could have borrowed an additional $3.9 million of the available and unutilized Revolving Credit Facility, to finance our operations. We believe that future cash flows from operations, together with available borrowings under the Revolving Credit Facility, will be adequate to meet our anticipated requirements for capital expenditures, working capital, interest payments, scheduled principal payments and other debt repayments that may be required as a result of the scheduled ratio of consolidated debt to Adjusted EBITDA discussed above.
Note 13—Member(s)’ Equity:
Member(s)’ equity at December 31, 2007 and December 31, 2006 consists of the following:
| December 31, 2007 | December 31, 2006 | |||||||
Common member(s) contributed capital | $ | 95,244 | $ | 95,244 | ||||
Common stock | 32,878 | 23,493 | ||||||
Treasury stock | (50 | ) | (50 | ) | ||||
Retained earnings (deficit) | 5,798 | (4,071 | ) | |||||
Foreign currency translation adjustment | 7,506 | 1,800 | ||||||
Pension liability and other benefits | (138 | ) | (25 | ) | ||||
| $ | 141,238 | $ | 116,391 | |||||
On December 28, 2007, ALH entered into a subscription agreement with OTPP, pursuant to which ALH sold to OTPP shares of its common stock with a value of $9.4 million. ALH contributed the proceeds of the offering to the Company, which were used to repay indebtedness outstanding under the term loan portion of our Senior Credit Facility.
Accumulated Other Comprehensive Income totaled $7.4 million and $1.8 million as of December 31, 2007 and 2006, respectively.
Note 14—Commitments and Contingencies:
The Company rents under operating leases a variety of assets used in its operations including manufacturing facilities, office equipment, automobiles and trucks. At December 31, 2007 we had commitments under long-term operating leases requiring approximate annual rentals in subsequent years as follows:
2008 | $ | 1,144 | |
2009 | 1,001 | ||
2010 | 764 | ||
2011 | 622 | ||
2012 | 572 | ||
Thereafter | 257 | ||
| $ | 4,360 | ||
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Notes to Consolidated Financial Statements – (Continued)
Rental expense amounted to $2.1 million for the year ended December 31, 2007, $2.7 million for the year ended December 31, 2006, $1.4 million for the period from January 28, 2005 through December 31, 2005 and $0.1 million for the period January 1, 2005 through January 27, 2005.
Our Marianna, Florida plant is located on property leased from the Marianna Municipal Airport Development Authority (acting on behalf of the City of Marianna). The lease expires on February 28, 2015.
Our Company and its operations are subject to comprehensive and frequently changing federal, state and local environmental and occupational health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of waste and storm water and the transportation, storage and disposal of wastes, including solid and hazardous wastes. We are also subject to potential liability for non-compliance with other environmental laws and for the investigation and remediation of environmental contamination (including contamination caused by other parties) at the properties we own or operate (or formerly owned or operated) and at other properties where the Company or predecessors have carried on business or have arranged for the disposal of hazardous substances. As a result, we are involved, from time to time, in administrative and judicial proceedings and inquiries relating to environmental matters. There can be no assurance that we will not be involved in such proceedings in the future and that the aggregate amount of future clean-up costs and other environmental liabilities (including potential fines and civil damages) will not have a material adverse effect on our business, financial condition and results of operations. We believe that our facilities and operations are in material compliance with all environmental, health and safety laws. In our opinion, any liability related to matters presently pending will not have a material effect on our financial position, liquidity or results of operations after considering provisions already recorded.
In September 2006 one of our foreign subsidiaries, Alliance International BVBA, was named in a lawsuit in the Belgian civil courts by a Belgian customer for having allegedly negligently designed, manufactured and assembled certain safety devices. These safety devices are not being used in our products, but were sold to that Belgian customer prior to the CLD Acquisition. The cause of the alleged defect is unknown and is being investigated by a court appointed expert. The damages claimed of EUR 1.6 million by the Belgian customer are currently unsubstantiated. No court hearing is expected before 2009. No injury has been reported as a consequence of the alleged defect.Although the outcome of this matter is not predictable with assurance, management believes that the amount of any potential damages, if any at all, resulting from this action would not exceed accruals and available indemnification recoverable from LSG pursuant to the CLD Acquisition agreements.
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Notes to Consolidated Financial Statements – (Continued)
Note 15—Guarantees:
The Company, through its special-purpose bankruptcy remote subsidiary entered into a $330.0 million Asset Backed Facility as described in Notes 6 and 7 above. Pursuant to the terms of the Asset Backed Facility, we provide credit enhancement to the note purchasers including an irrevocable letter of credit, which is an unconditional lending commitment of the lenders under the Senior Credit Facility, subject to certain limits. We are obligated under the reimbursement provisions of the Senior Credit Facility to reimburse the lenders for any drawings on the credit enhancement by the facility indenture trustee. If the credit enhancement is not replenished by us after a drawing, the trust will not be permitted to request new borrowings under the Asset Backed Facility and the Asset Backed Facility will begin to amortize. The amount of the irrevocable letter of credit related to the Asset Backed Facility at December 31, 2007 was $32.4 million.
We offer warranties to our customers depending upon the specific product and the product use. Standard product warranties vary from one to three years for most parts with certain components extending to five years. Certain customers have elected to buy without warranty coverage. The standard warranty program requires that we replace defective components within a specified time period from the date of installation. We also sell separately priced extended warranties associated with our products. We recognize extended warranty revenues over the period covered by the warranty in accordance with FTB 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.”
We record an estimate for future warranty related costs based on actual historical incident rates and costs per incident trends. Based on analysis of these and other factors, the carrying amount of our warranty liability is adjusted as necessary. While our warranty costs have historically been within our calculated estimates, it is possible that future warranty costs could exceed those estimates.
The changes in the carrying amount of our total product warranty liability were as follows:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | |||||||||||||
| Successor | Successor | Successor | Predecessor | |||||||||||||
Balance at beginning of period | $ | 7,194 | $ | 4,109 | $ | 4,309 | $ | 4,309 | ||||||||
Acquired product warranty liability | — | 2,011 | — | — | ||||||||||||
Currency translation adjustment | 150 | 58 | — | — | ||||||||||||
Accruals for current and pre-existing warranties issued during the period | 5,364 | 4,947 | 2,140 | 140 | ||||||||||||
Settlements made during the period | (4,960 | ) | (3,931 | ) | (2,340 | ) | (140 | ) | ||||||||
Balance at end of period | $ | 7,748 | $ | 7,194 | $ | 4,109 | $ | 4,309 | ||||||||
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Notes to Consolidated Financial Statements – (Continued)
Note 16—Income Taxes:
Alliance Holdings is owned by Alliance Finance LLC, both single member limited liability companies. Alliance Finance LLC is owned by ALH, which is a corporation for U.S. tax purposes. Accordingly, the consolidated financial statements are being presented as if Alliance Holdings was taxed as a corporation. The Company uses the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets and liabilities are revalued to reflect new tax rates during the periods in which rate changes are enacted. Management believes, based on the operating earnings in prior years, expected reversals of taxable temporary differences, and reliance on future earnings, that it is more likely than not that the recorded deferred tax assets are fully realizable.
The Company has various foreign subsidiaries which were either formed or acquired in conjunction with the CLD Acquisition. In the opinion of management, the earnings of these subsidiaries are not permanently invested outside the United States. Pursuant to APB Opinion No. 23, “Accounting For Income Taxes-Special Areas,” therefore tax expense has accordingly been provided for these unremitted earnings. Foreign taxes in the current year have been deducted instead of credited and are part of the current year federal net operating loss deferred tax asset.
There are various factors that may cause our tax assumptions to change in the near term, and as a result the Company may have to increase or decrease its valuation allowance against deferred income tax assets. The Company cannot predict whether future U.S. federal, foreign and state income tax laws and regulations might be passed that could have a material effect on its results of operations. The Company will assess the impact of significant changes to the U.S. federal, foreign and state income tax laws and regulations on a regular basis and update the assumptions and estimates used to prepare its consolidated financial statements when new regulations and legislation are enacted.
Pre-tax income (loss) from operations was taxed in the following jurisdictions (in thousands):
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | |||||||||
Domestic | $ | 10,803 | $ | (4,035 | ) | $ | (1,819 | ) | |||
Foreign | 5,951 | (1,915 | ) | — | |||||||
| $ | 16,754 | $ | (5,950 | ) | $ | (1,819 | ) | ||||
The provision for income taxes consists of the following (in thousands):
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Notes to Consolidated Financial Statements – (Continued)
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | — | $ | — | ||||||
State | 76 | 57 | — | |||||||||
Foreign | 3,268 | 1,149 | — | |||||||||
Total current | 3,344 | 1,206 | — | |||||||||
Deferred: | ||||||||||||
Federal | 3,512 | (2,125 | ) | (455 | ) | |||||||
State | 952 | (308 | ) | (703 | ) | |||||||
Foreign | (923 | ) | (1,313 | ) | — | |||||||
Total deferred | 3,541 | (3,746 | ) | (1,158 | ) | |||||||
Provision (benefit) for income taxes | $ | 6,885 | $ | (2,540 | ) | $ | (1,158 | ) | ||||
The Company did not provide for U.S. Federal income taxes or tax benefits for the Predecessor Company as it was a partnership for tax reporting purposes and the payment of federal and most state taxes were the responsibility of the partners.
Below is a reconciliation of the statutory federal income tax rate and the effective income tax rate:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | |||||||
Statutory federal tax rate | 34.0 | % | -34.0 | % | -34.0 | % | |||
State taxes, net (benefit) | 3.7 | % | -3.9 | % | -1.0 | % | |||
Goodwill | -1.0 | % | -3.0 | % | -8.9 | % | |||
Foreign rate differential | 0.4 | % | -0.1 | % | 0.0 | % | |||
Tax effect of hydrid instrument | -7.0 | % | -9.0 | % | 0.0 | % | |||
US tax on remitted earnings | 6.1 | % | 0.0 | % | 0.0 | % | |||
US tax on unremitted earnings | 8.0 | % | 5.0 | % | 0.0 | % | |||
Valuation allowance | 7.2 | % | 7.7 | % | 0.0 | % | |||
Federal tax credit | -7.8 | % | -2.4 | % | 0.0 | % | |||
State tax credits, net | -4.0 | % | -5.5 | % | -22.6 | % | |||
Other, net | 1.5 | % | 2.5 | % | 2.8 | % | |||
Effective income tax rate | 41.1 | % | -42.7 | % | -63.7 | % | |||
Temporary differences which give rise to the deferred tax assets and liabilities at December 31, 2007 and December 31, 2006 are as follows (in thousands):
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Notes to Consolidated Financial Statements – (Continued)
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | |||||||
Deferred income tax liabilities: | ||||||||
Unrealized gain on equipment notes sold | $ | (3,244 | ) | $ | (2,557 | ) | ||
Goodwill | (10,139 | ) | (6,864 | ) | ||||
Intangibles | (5,059 | ) | (2,651 | ) | ||||
Foreign income | (1,453 | ) | (297 | ) | ||||
Fixed Assets | (1,136 | ) | — | |||||
Other | (114 | ) | (974 | ) | ||||
Deferred income tax liabilities | (21,145 | ) | (13,343 | ) | ||||
Deferred income tax assets: | ||||||||
Inventory | 454 | 1,309 | ||||||
Fixed assets | — | 476 | ||||||
Deferred financing costs | 2,375 | 2,708 | ||||||
Warranty reserves | 2,237 | 2,208 | ||||||
Net operating loss and credit carry forwards | 16,280 | 9,792 | ||||||
Other assets | 2,992 | 2,707 | ||||||
Pensions and employee benefits | 1,415 | 1,867 | ||||||
Other | 559 | 260 | ||||||
Gross deferred income tax assets | 26,312 | 21,327 | ||||||
Less valuation allowance | (1,662 | ) | (458 | ) | ||||
Deferred income tax assets | 24,650 | 20,869 | ||||||
Net deferred income tax asset | $ | 3,505 | $ | 7,526 | ||||
The net deferred income tax asset is classified in the Consolidated Balance Sheet as follows (in thousands):
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | |||||||
Current net deferred income tax asset | $ | 2,481 | $ | 3,202 | ||||
Non-current net deferred income tax asset | 7,068 | 10,677 | ||||||
Current net deferred income tax liability | — | (216 | ) | |||||
Non-current net deferred income tax liability | (6,044 | ) | (6,137 | ) | ||||
| $ | 3,682 | $ | 7,526 | |||||
The Company has recorded valuation allowances for certain tax attributes and other deferred tax assets. At this time, sufficient uncertainty exists regarding the future realization of these deferred tax assets. A valuation allowance in the amount of $1.1 million has been recorded in 2007 against the domestic deferred tax asset for state net operating losses and credit carryforwards. A valuation allowance in the amount of $55,000 has been recorded in 2007 against the foreign deferred tax asset for losses in various countries where future earnings are not expected. If in the future the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reversed and recognized in income.
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Notes to Consolidated Financial Statements – (Continued)
At December 31, 2007, the Company’s federal and state net operating loss carryforwards for income tax purposes were approximately $33.0 million and $26.5 million, respectively. The federal net operating loss carryforward will expire in 18-20 years and the state net operating loss carryforwards will expire in 3-20 years. The Company’s federal and state credit carryforwards were approximately $1.4 million and $2.0 million, respectively. The federal credit carryforwards will expire in 19-20 years and the state credit carryforwards will expire in 13-15 years.
The Company has various foreign subsidiaries which were either formed or acquired in conjunction with the CLD Acquisition. In the opinion of management, the earnings of these subsidiaries are not permanently invested outside the United States. Pursuant to APB Opinion No. 23, “Accounting For Income Taxes-Special Areas,” tax expense has accordingly been provided for these unremitted earnings. Also, the foreign tax expense generated in the current year has been deducted instead of credited and is part of the current year federal net operating loss deferred tax asset.
The Company has approximately $0.2 million of unrecognized tax benefits as of December 31, 2007, which, if recognized, would impact the effective tax rate. The Company does not anticipate that the net amount of unrecognized tax benefits will change significantly during the next twelve months. The Company’s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company has open tax years for which the Company could be subject to income tax examination by the U.S. federal and state tax authorities since becoming a U.S. taxable entity on January 27, 2005. In addition, the Company has open tax years in Belgium and Luxemburg, its primary foreign jurisdictions, for 2005, 2006 and 2007.
Below is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):
| Year Ended December 31, 2007 | |||
Unrecognized tax benefits upon adoption on January 1, 2007 | — | ||
Additions based on tax positions related to the current year | 158 | ||
Unrecognized tax benefits upon adoption on December 31, 2007 | $ | 158 | |
Note 17—Pensions and Other Employee Benefits:
Substantially all of our U.S. employees are covered by defined benefit pension plans. Effective December 31, 2002, the Alliance Laundry Systems Retirement Benefit Accumulation Plan, a pension plan covering salaried and management employees, was merged into the Alliance Laundry Systems Plan for Hourly Employees. The pension plan as combined was amended and renamed the Alliance Laundry Systems Pension Plan. A final determination of the merged plan’s qualified status remains pending with the Internal Revenue Service. The pension benefit for salaried and management employees is a cash balance plan whereby an account is established for each participant in which pay credits are based on salary and service, and interest credits are earned annually. Pay credits are calculated as a pre-determined percentage of the participant’s salary adjusted for age and years of service. Interest credits are earned at the rate of a one-year U.S. Treasury Bill, as of the last day of the prior plan year, plus 1%. The pension benefit for hourly and union employees generally provides benefits of stated amounts for each year of service. On July 14, 2006 in connection with the CLD Acquisition, the Company acquired a defined benefit plan which covered certain hourly employees at CLD’s Louisville, Kentucky plant (the “Cissell Pension Plan”). Participation in the Cissell Pension Plan has been frozen since October 15, 2004. The Company’s policy is to fund its pension plans in amounts sufficient to gradually accumulate plan assets equal to the plans’ projected benefit obligation and to comply with the funding requirements imposed by law.
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Notes to Consolidated Financial Statements – (Continued)
During 2007 the Company amended the Alliance Laundry Systems Pension Plan to freeze benefit accruals effective January 1, 2009 for all U.S. salaried employees. The amendment resulted in a one-time curtailment gain of $1.6 million measured as of December 31, 2007.
Total pension income for our pension plans was $1.1 million, which included a $1.6 million curtailment gain, for the year ended December 31, 2007. The pension plan expense was $0.4 million, which included a $0.5 million curtailment gain, for the year ended December 31, 2006, and $0.8 million for the period from January 28, 2005 through December 31, 2005 and $0.1 million for the period from January 1, 2005 through January 27, 2005, including the following components:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | |||||||||||||
| Successor | Successor | Successor | Predecessor | |||||||||||||
Service cost benefits earned during the period | $ | 1,633 | $ | 1,618 | $ | 1,608 | $ | 151 | ||||||||
Interest cost on projected benefit obligation | 3,619 | 3,229 | 2,519 | 228 | ||||||||||||
Expected return on plan assets | (4,790 | ) | (3,962 | ) | (3,334 | ) | (310 | ) | ||||||||
Net amortization and deferral | — | — | — | 10 | ||||||||||||
Curtailment gain | (1,557 | ) | (513 | ) | — | — | ||||||||||
Net pension benefit (income) cost | $ | (1,095 | ) | $ | 372 | $ | 793 | $ | 79 | |||||||
The pension curtailment gain of $1.6 million in 2007 was recorded as a result of the freezing of benefit accruals effective January 1, 2009 for all salaried employees. The pension curtailment gain of $0.5 million in 2006 was recorded as a result of the termination of employees in Marianna, Florida in connection with the Marianna facility closure which is further discussed in Note 5 “Infrequently Occurring Items.”
Assumptions used in determining net pension benefit cost were as follows:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | |||||||||
| Successor | Successor | Successor | Predecessor | |||||||||
Discount rate | 5.90 | % | 5.50 | % | 5.75 | % | 5.75 | % | ||||
Expected long-term rate of return on assets | 8.50 | % | 8.50 | % | 8.75 | % | 8.75 | % | ||||
Rate of increase in salaried compensation levels | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % |
In determining the net pension benefit cost for 2007, we used an 8.50% long-term rate of return on assets assumption. To develop the expected long-term rate of return on assets assumption we considered historical returns and future expectations. Over the 10 and 15 year periods ending December 31, 2007 the returns on the portfolio, assuming it was invested at the mid point of our investment policy statement’s strategic asset allocation and is rebalanced annually, would have been an
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Notes to Consolidated Financial Statements – (Continued)
annual average of approximately 8.28% and 10.61%, respectively. Considering these historical returns, costs of administering the plans and the potential for lower future returns due to a generally lower interest rate environment, we believe our long-term rate of return on assets assumption of 8.50% for 2007 and future years is reasonable. For the December 31, 2007 valuation of the benefit obligations the Company used the RP 2000 mortality table projected to 2008 to better align the plans with current life expectancies.
The reconciliation of the changes in the plans’ benefit obligation and the fair value of plan assets and the statement of the funded status of the plans at December 31 are as follows:
| 2007 | 2006 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 62,629 | $ | 54,190 | ||||
Service cost | 1,633 | 1,618 | ||||||
Interest cost | 3,619 | 3,229 | ||||||
Curtailment gain | (1,557 | ) | (513 | ) | ||||
Acquisition | — | 8,857 | ||||||
Actuarial gain | (2,024 | ) | (1,522 | ) | ||||
Benefits paid | (3,345 | ) | (3,230 | ) | ||||
Benefit obligation at end of year | $ | 60,955 | $ | 62,629 | ||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 57,658 | $ | 44,719 | ||||
Actual return on plan assets | 1,856 | 6,985 | ||||||
Acquisition | — | 8,148 | ||||||
Employer contributions | 1,775 | 1,036 | ||||||
Benefits paid | (3,345 | ) | (3,230 | ) | ||||
Fair value of plan assets at end of year | $ | 57,944 | $ | 57,658 | ||||
Reconciliation of funded status: | ||||||||
Funded status | $ | (3,011 | ) | $ | (4,971 | ) | ||
Unrecognized actuarial net loss | — | (1,299 | ) | |||||
Accrued benefit cost | $ | (3,011 | ) | $ | (6,270 | ) | ||
Net amount recognized: | ||||||||
Other long-term liabilities | $ | (3,011 | ) | $ | (6,270 | ) | ||
| $ | (3,011 | ) | $ | (6,270 | ) | |||
Assumptions used to determine the benefit obligation at the end of the year were as follows:
| 2007 | 2006 | |||||
Discount rate | 6.40 | % | 5.90 | % | ||
Rate of increase in salaried compensation levels | 4.00 | % | 4.00 | % | ||
Expected long-term rate of return on assets | 8.50 | % | 8.50 | % |
We use a December 31 measurement date for these plans.
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Notes to Consolidated Financial Statements – (Continued)
The accumulated benefit obligation for the plans was $60,702 and $60,877 as of December 31, 2007 and 2006, respectively.
The weighted-average asset allocation of our plans as of December 31, by asset category is as follows:
Asset Category | 2007 | 2006 | ||||
Equity securities | 67.0 | % | 70.0 | % | ||
Debt securities | 32.0 | % | 29.0 | % | ||
Other | 1.0 | % | 1.0 | % | ||
Total | 100.0 | % | 100.0 | % | ||
Pension Committees (the “Committees”) have been appointed on behalf of Alliance Laundry as the plans’ administrator to manage the operations and administration of the pension plans and related trusts. The Committees have an investment policy statement for the pension plans that establishes target asset allocation ranges by asset type, plan objectives, securities guidelines for money managers, evaluation benchmarks and control procedures. The midpoint of the asset allocation ranges for the above listed asset classes are as follows: Equity securities 63%, Debt securities 34%, and Other (cash and cash equivalents) 3%. The Committees are committed to diversification to reduce the risk of large losses. To that end, the investment policy requires that each asset class will be diversified, multiple money managers with differing styles of management will be employed, and equity exposure will be limited to 80% of the total portfolio value. On a quarterly basis the Committees and an external investment advisor review progress towards achieving the pension plans’ and individual money managers’ performance objectives.
In addition to providing pension benefits in the U.S. we provide post-retirement benefit plans including health care, salary continuation and death benefits for eligible retirees and their dependents. Alliance Laundry’s health care benefits are for retired employees upon early retirement, up to age 65. Employees with more than 10 years of service are eligible for these benefits if they reach age 62 while working for the Company. Retiree health plans are paid for in part by employee contributions and are adjusted annually. Benefits are provided through various insurance companies whose charges are based either on the benefits paid during the year or annual premiums. Health benefits are provided to retirees and their covered dependents. On July 14, 2006 in connection with the CLD Acquisition, the Company acquired certain post-retirement benefit plans which included two salary continuation agreements and a retiree’s medical plan and a retiree’s life insurance plan for certain union employees at CLD’s Louisville, Kentucky plant. The purchased liabilities for the CLD post-retirement benefit plans were approximately $1.5 million.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
Our net other post-retirement benefit cost included the following components:
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | ||||||||||||
| Successor | Successor | Successor | Predecessor | ||||||||||||
Service cost benefits earned during the period | $ | 136 | $ | 85 | $ | 96 | $ | 11 | |||||||
Interest cost on projected benefit obligation | 141 | 148 | 107 | 11 | |||||||||||
Net amortization and deferral | (16 | ) | (19 | ) | (19 | ) | 10 | ||||||||
Recognized actuarial loss | 34 | — | — | — | |||||||||||
Curtailment gain | — | (619 | ) | — | — | ||||||||||
Net other post-retirement benefit cost (income) | $ | 295 | $ | (405 | ) | $ | 184 | $ | 32 | ||||||
Assumptions used in determining the net other post-retirement benefit cost were as follows:
| 2007 | 2006 | 2005 | |||||||
Discount rate | 5.90 | % | 5.50 | % | 5.75 | % | |||
Rate of increase in salaried compensation levels | 4.00 | % | 4.00 | % | 4.00 | % |
The following provides a reconciliation of benefit obligations, plan assets and the funded status of the plans at December 31:
| 2007 | 2006 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 3,072 | $ | 2,239 | ||||
Service cost | 136 | 85 | ||||||
Interest cost | 141 | 148 | ||||||
Acquisitions | — | 1,497 | ||||||
Plan terminations | (1,326 | ) | — | |||||
Curtailments | — | (539 | ) | |||||
Actuarial loss (gain) | 742 | (136 | ) | |||||
Benefits paid | (286 | ) | (222 | ) | ||||
Benefit obligation at end of year | $ | 2,479 | $ | 3,072 | ||||
Change in plan assets: | ||||||||
Employer contributions | $ | 286 | $ | 222 | ||||
Benefits paid | (286 | ) | (222 | ) | ||||
Fair value of plan assets at end of year | $ | — | $ | — | ||||
Funded status | $ | (2,479 | ) | $ | (3,072 | ) | ||
Unrecognized prior service cost | — | (195 | ) | |||||
Unrecognized actuarial loss | — | 45 | ||||||
Accrued benefit cost | $ | (2,479 | ) | $ | (3,222 | ) | ||
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
The post-retirement benefit curtailment gain of $0.5 million in 2006 was recorded as a result of the termination of employees in Marianna, Florida in connection with the Marianna facility closure which is further discussed in Note 5 “Infrequently Occurring Items.” The plan termination cost of $1.3 million resulted from the settlement of the Cissell Life and Cissell Salary Continuation plans during 2007.
Assumptions used to determine the benefit obligation at the end of the year were as follows:
| 2007 | 2006 | |||||
Discount rate | 6.40 | % | 5.90 | % | ||
Rate of increase in salaried compensation levels | 4.00 | % | 4.00 | % |
We use a December 31 measurement date for these plans.
A 9% annual rate of increase in the per capita cost of covered health care benefits was assumed in 2007 to determine the benefit obligation at the end of the year. A 10% annual rate of increase in the per capita cost of covered health care benefits was assumed in 2006 to determine the benefit obligation at the end of the year. The rate in 2007 was assumed to decrease gradually to 6% until 2011 and remain at that level thereafter. The rate in 2006 was assumed to decrease gradually to 6% until 2010 and remain at that level thereafter.
A one percentage point increase in the assumed health care cost trend rate would increase the accumulated other post-retirement benefit obligation as of December 31, 2007 by approximately $183 thousand and increase the total of service and interest cost by approximately $28 thousand. A one percentage point decrease in the assumed health care cost trend rate would decrease the accumulated other post-retirement benefit obligation as of December 31, 2007 by approximately $160 thousand and decrease the total service and interest cost by approximately $24 thousand.
Projected benefit payments from the plans as of December 31, 2007 are estimated as follows:
Year | Pension | Other Benefits | ||||
2008 | $ | 3,874 | $ | 217 | ||
2009 | 4,009 | 168 | ||||
2010 | 4,241 | 198 | ||||
2011 | 4,176 | 237 | ||||
2012 | 4,221 | 223 | ||||
2013 - 2017 | 22,062 | 1,331 | ||||
We currently anticipate making a voluntary contribution in 2008 of approximately $1.8 million to our defined benefit pension plans.
In September 2006 the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires, among other things, the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans and post employment benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The initial impact of the standard, due to unrecognized prior service costs or credits and net actuarial gains or losses as well as subsequent changes in the funded status, is recognized as a component of accumulated comprehensive income in Member(s)’ equity. The Company has adopted SFAS No. 158 as of December 31, 2007 which resulted in a $0.1 million loss, net of tax, recorded in the accumulated other comprehensive income account within member(s)’ equity.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
The following table summarizes the impact of the adoption of SFAS No. 158 (in thousands):
| December 31, 2007 Prior to SFAS 158 Adjustment | SFAS 158 Adjustments (Increase)/ Decrease | December 31, 2007 Post SFAS 158 Adjustment | ||||||||||
Deferred income tax asset, net | $ | 6,998 | $ | 80 | $ | 7,068 | ||||||
Total assets | $ | 560,207 | $ | 80 | $ | 560,287 | ||||||
Other current liabilities | $ | (38,155 | ) | $ | (607 | ) | $ | (38,763 | ) | |||
Total current liabilities | (64,867 | ) | (607 | ) | (65,475 | ) | ||||||
Other long-term liabilities | (6,732 | ) | 389 | (6,343 | ) | |||||||
Total liabilities | (418,831 | ) | (218 | ) | (419,049 | ) | ||||||
Member(s)’ equity | (141,376 | ) | 138 | (141,238 | ) | |||||||
Total liabilities and member(s)’ equity | $ | (560,207 | ) | $ | (80 | ) | $ | (560,287 | ) | |||
The amounts in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit cost during the next fiscal year are as follows (in thousands):
| Pension | Other | ||||||
| Benefits | Benefits | ||||||
Prior service cost | $ | — | $ | (16 | ) | ||
Loss | — | 41 | |||||
Net loss | $ | — | $ | 25 | |||
Amounts recognized in accumulated other comprehensive income as of December 31, 2007 consist of the following (in thousands):
| Pension | Other | |||||||
| Benefits | Benefits | |||||||
Prior service credit (cost) | $ | — | $ | 180 | ||||
Accumulated gain (loss) | 389 | (787 | ) | |||||
Deferred tax | (142 | ) | 222 | |||||
Total amount recognized | $ | 247 | $ | (385 | ) | |||
Our other post-retirement benefit provides for prescription drug benefits. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” any measures of our accumulated other post-retirement benefit obligation or
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
net periodic other post-retirement benefit cost in the financial statements and accompanying notes do not reflect the effects of the Act on the plans. Because our other post-retirement benefits do not provide prescription drug benefits beyond age 65 (general eligibility for Medicare Part D), the Medicare Act had no effect on our accumulated other post-retirement benefit obligations or net periodic other post-retirement benefit cost.
Eligible U.S. employees are able to participate in the Alliance Laundry Systems Capital Appreciation Plan (“ALCAP”), which is a qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code. In addition, we may make a discretionary annual contribution to ALCAP equal to approximately one half of one percent of salaries and wages, subject to statutory limits, of eligible employees. Under the terms of ALCAP, covered employees are allowed to contribute up to 50 percent of their pay on a pre-tax basis up to the limit established by the Internal Revenue Service. We contribute amounts equal to 50 percent of the employee’s contributions, up to a maximum of such Company contributions equal to three percent of the employee’s pay. Effective January 1, 2008, the company match has been increased to 100% of the first 6% of the employee’s contributions. Total expense for ALCAP was $1.4 million, $1.2 million, and $1.2 million, for 2007, 2006 and 2005, respectively.
We have a defined contribution pension plan covering substantially all of our salaried employees in Belgium. We contribute 3.5% to 5.0% of their pay to the plan. Contributions to the plan for 2007 totaled $0.1 million. Contributions to the plan were $0.1 million for 2006 from the date of the CLD Acquisition.
Note 18—Related Party Transactions:
Post-Closing Retention Bonuses
On January 27, 2005, in connection with the Alliance Acquisition, the Company entered into new retention bonus agreements with certain members of management. Under the retention bonus agreements, these executives are entitled to receive special retention bonus awards upon the second anniversary of the closing date of the Alliance Acquisition, subject generally to their continued employment with Alliance Laundry through such date. The aggregate amount of retention bonuses payable upon the two year anniversary of the sale date under these agreements is approximately $2.3 million. For the years ended December 31, 2006 and December 31, 2005, we recognized $1.2 million and $1.1 million of expense related to these agreements, respectively. These retention bonuses were paid on January 29, 2007 to the named executives.
ALH Stock Option Plan
On January 27, 2005, in connection with the Alliance Acquisition, ALH established a stock option plan, primarily for the benefit of Alliance Laundry’s executive officers. As of the closing date of the Alliance Acquisition, ALH granted a total of 130,000 stock options among certain members of management. The granted options entitle the member of management to purchase shares of our common stock at an option price which averages $101.96 per share at year-end December 31, 2007, subject to certain requirements. As of December 31, 2007 stock options represented an aggregate of 7.7% of the fully diluted common shares of ALH common stock issuable upon exercise of stock options. As of December 31, 2007 approximately sixty-three percent (63%) of the options granted were time based
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
options, which vest according to anniversary dates. The majority of these time based options vest in five equal annual installments on each of the first five anniversaries of the closing date, with the potential for accelerated vesting upon a change in control of Alliance Laundry. As of December 31, 2007 approximately thirty-seven percent (37%) of the options granted were “performance options.” The majority of the performance options have the opportunity to vest in five annual installments based on Alliance Laundry’s achievement of certain specified annual or cumulative earnings targets during fiscal years 2005 through 2009. ALH is viewed as a nonpublic company for the purposes of applying FAS 123R as it does not meet the definition of a public company. ALH does not have publicly traded equity securities. ALH made a one time accounting policy decision to use the intrinsic value methodology to value its liability awards based on paragraph 38 of FAS 123R for both the service and performance option pools. The service and performance options are being classified as liabilities given the awards are expected to be settled in cash rather than shares. ALH elected to use the intrinsic value method for the service and performance options as they are being accounted for as liability awards. Intrinsic value estimates prepared by management are based on forecasted cash flow projections which are used to estimate the value of the company. This estimate is then used to determine the intrinsic value of the individual options as of the respective balance sheet date. The service options are re-measured based on management’s estimates of intrinsic value at each reporting period multiplied by the percentage of the awards that have vested as of the respective balance sheet date using the graded vesting approach. The performance options are re-measured based on management’s estimates of intrinsic value as well as management’s estimate of whether or not the related performance conditions have been or will be satisfied using the graded vesting approach.
During 2007, 9,633 unvested options were terminated and cancelled upon the retirement of an executive officer and 10,920 unvested options were terminated and cancelled related to an individual who is no longer an executive officer. During 2007 ALH granted 7,605 new options to a new member of the executive staff. No further options have been issued since December 31, 2006 and no options were exercised in the year ended December 31, 2007.
Based upon a valuation of these stock options we recognized $0.6 million of expense, $0.1 million of income and $1.1 million of compensation expense for the periods ended December 31, 2007, December 31, 2006 and December 31, 2005, respectively. No expense was recognized for the periods ended December 31, 2007, December 31, 2006 and December 31, 2005, respectively, for the performance options as the specified annual targets for the respective years were not attained and other earnings target requirements are currently not expected to be attained.
Pre-Alliance Acquisition Executive Unit Purchase Agreements
Certain members of management of the Company had entered into executive unit purchase agreements (the “Purchase Agreements”) which governed the Executives’ investment in their common membership interests of the Company prior to the Alliance Acquisition. The Purchase Agreements included vesting provisions for certain Class M, Class B and Class C Units which were issued as an incentive for the Executive’s retention and future performance. The Class M, Class B and Class C Units were purchased by the Executives at a nominal value based upon the subordinated nature of such interests.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
Based upon a valuation of these and all other previously issued incentive units, for the period ended January 27, 2005 we recognized $1.1 million of compensation expense, primarily associated with the acceleration of vesting of these units as of the Alliance Acquisition date.
Stockholders Agreement
Upon the consummation of the Alliance Acquisition and related transactions, ALH, OTPP and certain management stockholders entered into a stockholders agreement (the “Stockholders Agreement”). The Stockholders Agreement contains customary terms, including, among other things, terms regarding transfer restrictions, tag-along rights, drag-along rights, calls and preemptive rights. The Stockholders Agreement places certain restrictions on the transfer of shares of common stock. Additionally, OTPP has “drag-along” rights to cause the management stockholders to sell their shares on a pro rata basis with OTPP to a third party in a liquidity event (as defined in the Stockholders Agreement).
Pre-Alliance Acquisition Junior Subordinated Promissory Notes
In May 1998 Alliance Holdings’ predecessor issued a junior subordinated promissory note in the principal amount of $9.0 million, plus accrued interest, due August 21, 2009, to Raytheon. All outstanding junior subordinated promissory notes were repaid in connection with the consummation of the Transactions on January 27, 2005.
Pre-Alliance Acquisition Preferred Interests
In May 1998 Alliance Holdings’ predecessor issued mandatorily redeemable preferred membership interests to Raytheon. In September 2003 these preferred membership interests were sold to affiliates of each of TCW and Sankaty. We redeemed all preferred membership interests in connection with the consummation of the Transactions on January 27, 2005.
Pre-Alliance Acquisition Management Investor Promissory Notes
We entered into promissory notes (the “Promissory Notes”), aggregating approximately $1.8 million with certain members of management to help finance the purchase of Common Units in the Company as of May 5, 1998. All outstanding Promissory Notes were repaid in connection with the consummation of the Transactions on January 27, 2005.
Pre-Alliance Acquisition Management Services Agreement
In May 1998 we entered into a management services agreement (the “Management Services Agreement”) with Bain LLC pursuant to which Bain LLC agreed to provide: (i) general executive and management services; (ii) identification, support, negotiation and analysis of acquisitions and dispositions; (iii) support, negotiation and analysis of financial alternatives; and (iv) other services agreed upon by us and Bain LLC. In exchange for services, Bain LLC would receive (i) an annual management fee of $1.0 million, plus reasonable out-of-pocket expenses (payable quarterly) and (ii) a transaction fee in an amount in accordance with the general practices of Bain LLC at the time of the consummation of any additional acquisition or divestiture by us and of each financing or refinancing. Under this agreement, we recognized management services expense of $0.1 million for the period ended January 27, 2005. Additionally, pursuant to the Management Services Agreement, transaction fees paid to Bain in the period ended January 27, 2005 related to the Alliance Acquisition totaled $4.6 million.
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
Note 19 – Segment Information:
Based upon the information used by management for making operating decisions and assessing performance, the Company has organized its business into three reportable segments. Commercial laundry equipment sales to domestic and international markets, which are serviced by the U.S. Operations, are combined to form the commercial laundry segment. Commercial laundry net sales include amounts related to our finance program which supports the commercial laundry operations. Our second reportable segment is consumer laundry, which includes sales to domestic and Canadian distributors. Our third reportable segment is our European Operations, which were acquired in the July 14, 2006 CLD Acquisition. Service parts is not considered a separate segment in that the service operations are required to support both commercial laundry and consumer laundry segments, but the operations could not stand alone and the results are not reviewed as a separate operating entity. As the service operations are also not allocated to the commercial laundry equipment segment or the consumer laundry segment, we have chosen to show the service operations separately. Similarly worldwide eliminations are not considered a reportable segment. However, we do not actively manage or evaluate the worldwide eliminations as a portion of any other segment. For that reason, we have chosen not to commingle these amounts with other actively managed segments.
Our assets and liabilities, including inventory, trade receivables, property, plant and equipment, and accounts payable are not reviewed by segment for commercial laundry, consumer laundry and service parts by management for making operating decisions and assessing performance. Such information would not be useful due to common manufacturing lines and significant shared components across all product lines for commercial laundry, consumer laundry and service parts. Assets are reviewed for the European Operations separate from the Company’s other reportable segments. Assets, capital expenditures and depreciation and amortization have been provided below for U.S. Operations separate from European Operations.
The Company’s primary measure of operating performance is gross profit which does not include an allocation of any selling expenses. Such amounts are reviewed on a consolidated basis by management. In determining gross profit for our operating units, the Company does not allocate certain manufacturing costs, including manufacturing variances and warranty 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, supplies, utilities, property taxes and insurance. We do 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:
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ALLIANCE LAUNDRY HOLDINGS LLC
Notes to Consolidated Financial Statements – (Continued)
| Year Ended December 31, 2007 | Year Ended December 31, 2006 | January 28, 2005 through December 31, 2005 | January 1, 2005 through January 27, 2005 | |||||||||||||
| Successor | Successor | Successor | Predecessor | |||||||||||||
| (in millions) | ||||||||||||||||
Net Revenues: | ||||||||||||||||
Commercial laundry | $ | 317.4 | $ | 282.9 | $ | 249.5 | $ | 17.3 | ||||||||
Consumer laundry | 19.4 | 14.4 | 9.8 | 0.2 | ||||||||||||
Service parts | 51.8 | 45.7 | 37.3 | 3.2 | ||||||||||||
European Operations | 85.4 | 36.5 | — | — | ||||||||||||
Worldwide eliminations | (30.7 | ) | (13.4 | ) | — | — | ||||||||||
| $ | 443.3 | $ | 366.1 | $ | 296.6 | $ | 20.7 | |||||||||
Gross Profit: | ||||||||||||||||
Commercial laundry | $ | 104.2 | $ | 94.3 | $ | 83.1 | $ | 4.6 | ||||||||
Consumer laundry | (0.1 | ) | (0.2 | ) | (0.3 | ) | — | |||||||||
Service parts | 21.0 | 19.1 | 15.7 | 1.5 | ||||||||||||
European Operations | 22.0 | 6.6 | — | — | ||||||||||||
Worldwide eliminations | 0.2 | (2.0 | ) | — | — | |||||||||||
| 147.3 | 117.8 | 98.5 | 6.1 | |||||||||||||
Other manufacturing costs | (36.6 | ) | (34.0 | ) | (27.6 | ) | (1.0 | ) | ||||||||
Gross profit as reported | $ | 110.7 | $ | 83.8 | $ | 70.9 | $ | 5.1 | ||||||||
Depreciation and Amortization: | ||||||||||||||||
U.S. Operations | $ | 15.3 | $ | 20.0 | $ | 20.2 | $ | 0.5 | ||||||||
European Operations | $ | 3.9 | $ | 1.7 | $ | — | $ | — | ||||||||
Capital Expenditures: | ||||||||||||||||
U.S. Operations | $ | 7.0 | $ | 5.6 | $ | 4.2 | $ | 0.2 | ||||||||
European Operations | $ | 1.3 | $ | 0.6 | $ | — | $ | — | ||||||||
Assets: | ||||||||||||||||
U.S. Operations | $ | 471.5 | $ | 482.4 | $ | 463.5 | $ | 487.1 | ||||||||
European Operations | $ | 89.0 | $ | 91.9 | $ | — | $ | — | ||||||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and the Sole Member
of Alliance Laundry Holdings LLC:
Our audits of the consolidated financial statements referred to in our reports dated February 28, 2006 and March 10, 2008, (appearing in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, the Company had a change in ownership as of January 27, 2005 which resulted in a new basis of accounting.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 10, 2008
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Schedule II—Valuation and Qualifying Accounts
Accounts Receivable Allowance for Doubtful Accounts:
| Balance at | Acquisition | Charges to | Impact of Foreign | Balance | ||||||||||||
| Beginning | of | Expense/ | (Additions)/ | Exchange | at End of | |||||||||||
| of Period | Business | (Income) | Deductions | Rates | Period | |||||||||||
Period ended: | ||||||||||||||||
January 27, 2005 (Predecessor) | $ | 123 | — | 1 | (7 | ) | — | $ | 131 | |||||||
December 31, 2005 (Successor) | $ | 131 | — | 138 | 165 | — | $ | 104 | ||||||||
December 31, 2006 (Successor) | $ | 104 | 802 | 157 | 136 | 22 | $ | 949 | ||||||||
December 31, 2007 (Successor) | $ | 949 | — | 310 | 158 | 81 | $ | 1,182 | ||||||||
Inventory Valuation Reserves: | ||||||||||||||||
| Balance at Beginning of Period | Acquisition of Business | Charges to Expense/ (Income) | (Additions)/ Deductions | Impact of Foreign Exchange Rates | Balance at End of Period | |||||||||||
Period ended: | ||||||||||||||||
January 27, 2005 (Predecessor) | $ | 1,319 | — | 223 | 58 | — | $ | 1,484 | ||||||||
December 31, 2005 (Successor) | $ | 1,484 | — | 217 | 185 | — | $ | 1,516 | ||||||||
December 31, 2006 (Successor) | $ | 1,516 | 358 | 694 | 167 | — | $ | 2,401 | ||||||||
December 31, 2007 (Successor) | $ | 2,401 | — | 916 | 1,082 | — | $ | 2,235 | ||||||||
Notes Receivable Reserve: | ||||||||||||||||
| Balance at Beginning of Period | Acquisition of Business | Charges to Expense/ (Income) | (Additions)/ Deductions | Impact of Foreign Exchange Rates | Balance at End of Period | |||||||||||
Period ended: | ||||||||||||||||
January 27, 2005 (Predecessor) | $ | 1,530 | — | 108 | 102 | — | $ | 1,536 | ||||||||
December 31, 2005 (Successor) | $ | 1,536 | — | (597 | ) | 31 | — | $ | 908 | |||||||
December 31, 2006 (Successor) | $ | 908 | — | 124 | 203 | — | $ | 829 | ||||||||
December 31, 2007 (Successor) | $ | 829 | — | — | 227 | — | $ | 602 | ||||||||
Tax Valuation Reserve: | ||||||||||||||||
| Balance at Beginning of Period | Acquisition of Business | Charges to Expense/ (Income) | (Additions)/ Deductions | Impact of Foreign Exchange Rates | Balance at End of Period | |||||||||||
Period ended: | ||||||||||||||||
January 27, 2005 (Predecessor) | $ | 0 | — | — | — | — | $ | 0 | ||||||||
December 31, 2005 (Successor) | $ | 0 | — | — | — | — | $ | 0 | ||||||||
December 31, 2006 (Successor) | $ | 0 | — | 458 | — | — | $ | 458 | ||||||||
December 31, 2007 (Successor) | $ | 458 | — | 1,204 | — | — | $ | 1,662 | ||||||||
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified under applicable rules of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting based on the framework inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management has concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Remediation of Material Weakness in Internal Control Over Financial Reporting:
During the third and fourth quarters of 2007 the Company implemented remedial actions under the remediation plan to address its material weakness. Specific remedial actions that have been taken or are being taken for each of the deficiencies that comprise the material weakness described above are as follows:
| 1. | Established requirements for the timely reconciliation of unvouched payables, including: |
| • | During the quarter ended December 31, 2007 and the quarter ended September 30, 2007, hired additional technical accounting personnel to address accounting and financial reporting requirements. |
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| • | During the quarter ended September 30, 2007, documented reconciliation processes and adequately trained the appropriate accounting personnel. |
| • | During the quarter ended December 31, 2007, implemented a process that ensures the timely review and approval of accounting transactions by qualified accounting personnel. |
| • | During the quarter ended December 31, 2007, implemented procedure requiring that analyses of all significant non-routine transactions be reviewed by senior management. |
| • | During the quarter ended December 31, 2007, developed improved monitoring controls in the accounting department. |
| 2. | Improved the technical accounting knowledge, experience and training in the application of generally accepted accounting principles, including: |
| • | During the quarter ended September 30, 2007, replaced the Plant Controller and hired a Senior Cost Accountant for the Ripon, Wisconsin manufacturing facility to address plant accounting and financial reporting requirements. |
| • | During the quarter ended December 31, 2007, assessed the technical accounting capabilities of its personnel to ensure the right complement of knowledge, skills and training. |
| • | During the quarter ended December 31, 2007, trained technical accounting personnel on new policies and procedures related to unvouched payables. |
| 3. | Update the computation of unvouched payables and consignment inventory, including: |
| • | During the quarter ended December 31, 2007, created an enhanced database that more closely measures open receivers for inventory receipts and items cleared to vouched payables. |
| • | During the quarter ended September 30, 2007, implemented new policies and procedures requiring a detailed and comprehensive review of the underlying information supporting the amounts removed from unvouched payables for consignment inventory. |
| • | During the quarter ended September 30, 2007, enhanced communication and collaboration between the accounting department and the purchasing department. |
| • | During the quarter ended September 30, 2007, separated receipts of intercompany purchases into separate accounts to facilitate control and monitoring activities. |
| • | During the quarter ended December 31, 2007, assigned monitoring and control activities to the new Plant Controller and upgraded the accounting function through the hiring of additional accountants with relevant experience. |
There have been changes, as identified above in the section, “Remediation of Material Weakness in Internal Control over Financial Reporting,” in our internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The certifications of our Chief Executive Officer and Chief Financial Officer included as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 9A “Controls and Procedures,” for a more complete understanding of the matters covered by such certifications.
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| ITEM 9B. | OTHER INFORMATION |
None.
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| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS |
The following table identifies Alliance Laundry’s executive officers and key employees, as well as the members of the board of directors of ALH. As limited liability companies, neither Alliance Laundry nor Alliance Holdings has a board of directors and neither entity has a board of managers. The ultimate function of a board of directors for both Alliance Laundry and Alliance Holdings is fulfilled by the board of directors of ALH. We therefore disclose the identity of the directors of ALH because they have the power to direct decisions made by our managing member.
Name | Age | Position | ||||||
Thomas F. L’Esperance | 59 | Chief Executive Officer and Director | ||||||
Michael D. Schoeb | 45 | President and Chief Operating Officer | ||||||
Bruce P. Rounds | 51 | Vice President Chief Financial Officer | ||||||
Jeffrey J. Brothers | 61 | Senior Vice President, Sales and Marketing | ||||||
R. Scott Gaster | 55 | Vice President, General Manager Ripon Operations | ||||||
Robert J. Baudhuin | 46 | Vice President, Engineering | ||||||
Jean-Marc Vandoorne | 38 | Vice President, European Operations | ||||||
Scott L. Spiller | 57 | Vice President, Chief Legal Officer, Secretary | ||||||
Lee L. Sienna | 56 | Director | ||||||
Shael J. Dolman | 36 | Director | ||||||
Charles J. Philippin | 57 | Director | ||||||
J. Hugh MacDiarmid | 55 | Director | ||||||
Thomas F. L’Esperance has been a member of the Board of Directors of ALH since the consummation of the Transactions on January 27, 2005. He has been our Chief Executive Officer since May 1998, and additionally he was our President from March 1996 through October 2007. Mr. L’Esperance served as president for Caloric Corporation and Amana Home Appliances. Prior to that time, Mr. L’Esperance held several executive management positions with Raytheon.
Michael D. Schoeb joined us October 2007 as President and Chief Operating Officer. Before joining us he served as President and Chief Operating Officer at Wausau Homes, Inc. Prior to Wausau Homes, Mr. Schoeb served in senior management positions for six years with Hilti, Inc. and for eleven years with Johnson Controls, Inc.
Jeffrey J. Brothers has been our Senior Vice President of Sales and Marketing since October 1989. He has been employed with us since 1977. Mr. Brothers has been involved in sales for us since 1983 and has held other positions such as Manager of Distribution Development, Plant Controller and Financial Analyst.
Bruce P. Rounds joined us in 1989 as Vice President of Finance and was promoted to his current position as Vice President Chief Financial Officer in February 1998. He held the position of Vice President Business Development, from 1996 to 1998. Before joining us, he served in a variety of capacities for eight years at Mueller Company and for three years with Price Waterhouse. He is a Certified Public Accountant.
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R. Scott Gaster joined us as Vice President, Procurement and Materials, in June 1995. He became the Vice President of Washer and Dryer Operations in July 1997 and Tumbler Operations in August 1998. In December of 2003 Mr. Gaster was promoted to Vice President, General Manager Ripon Operations. Mr. Gaster has also retained his former purchasing responsibilities. Prior to joining us, he was employed by GKN Automotive, Inc. from 1979 to 1995 in such positions as Director of Procurement and Logistics, Corporate Purchasing Agent and Purchasing Manager.
Robert J. Baudhuin has been our Vice President, Engineering since July 2006. He has been employed with us since 1992 and has held various management positions with us which include Vice President, General Manager Marianna Operations, Vice President of Product Management and Customer Support and Ripon Plant Manager. Prior to joining us, he served in various engineering and quality assurance positions for seven years with Maysteel Corporation.
Jean-Marc Vandoorne has been our Vice President, European Operations since July 14, 2006, coinciding with the CLD Acquisition. He was employed by LSG from 1999 through July 2006, holding several positions including Chief Operations Officer of the Belgium plant, General Manager of IPSO-LSG and President of the Commercial Laundry Division (CLD). Prior to joining LSG, he was employed by Arthur Andersen Business Consulting Belgium from 1992 to 1998 as a consulting manager, and in 1998 by Mobil (Plastics Division), in Luxemburg, as a Supply Chain Manager.
Mr. Vandoorne is employed by Alliance through his management company, JM Vandoorne BVBA. For ease of reference throughout this Annual Report on Form 10-K, we have referred to Mr. Vandoorne, and not his management company, as an Alliance employee.
Scott L. Spiller had been our Vice President of Law & Human Resources, General Counsel and Secretary since February 1998 but he assumed the new title of Vice President, Chief Legal Officer and Secretary for Alliance Laundry in June 2004. From April 1996 to February 1998, Mr. Spiller practiced law as a sole practitioner. Prior to that, he was our General Counsel and Secretary for ten years.
Shael J. Dolman has been a member of the Board of Directors of ALH since the consummation of the Transactions on January 27, 2005. Mr. Dolman is a Director at Teachers’ Private Capital, the private equity arm of OTPP. Mr. Dolman joined OTPP in 1997 after working in Commercial and Corporate Banking at a Canadian chartered bank. Mr. Dolman received his Bachelor of Arts from the University of Western Ontario and his MBA from McGill University. He is a director of The Hillman Group Inc. and Easton-Bell Sports, LLC.
Lee L. Sienna has been a member of the Board of Directors of ALH since the consummation of the Transactions on January 27, 2005 and is currently the Chairman of the Board. Mr. Sienna has been Vice President of Teachers’ Private Capital since 2002. From 1998 to 2002, Mr. Sienna was Partner at Calcap Corporate Finance Limited. From 1995 to 1998, Mr. Sienna was Vice President, Corporate Development at Dairyworld Foods. Prior to 1995, Mr. Sienna held various positions in management and corporate development. He currently serves on the Board of Directors of Easton-Bell Sports, AOT Bedding Holdings Corporation and General Nutrition Centers Inc. Mr. Sienna is also a Chartered Accountant and a graduate (HBA) of the Richard Ivey School of Business at the University of Western Ontario and received an MBA from the Rotman School at the University of Toronto.
Charles J. Philippin has been a member of the Board of Directors of ALH since May 1, 2005 and is currently the chair of the audit committee of the Board of Directors. Mr. Philippin has been a principal of Garmark Advisors since 2002. From 2000 through 2002 Mr. Philippin was CEO of Online Retail
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Partners. From 1994 through 2000 Mr. Philippin was a member of the management committee of Investcorp International Inc. Prior to 1994 Mr. Philippin was a partner of PricewaterhouseCoopers and was National Director of Mergers & Acquisitions. He currently serves on the Board of Directors of CSK Auto. Mr. Philippin is also a Certified Public Accountant and received a Bachelor’s Degree from Columbia School of Engineering and Applied Sciences.
J. Hugh MacDiarmid has been a member of the Board of Directors of ALH since July 27, 2007. Mr. MacDiarmid has been the president and chief executive officer of Atomic Energy of Canada Limited since January 2008. From 2005 to 2007 Mr. MacDiarmid was the Managing Director of Holden America LLC. From 2003 to 2005 Mr. MacDiarmid was the president and chief executive officer of Laidlaw Transit Inc. From 2001 to 2003 Mr. MacDiarmid was the president of Killin Management Corporation. From 1995 to 2001 Mr. MacDiarmid was the executive vice-president of Canadian Pacific Railway. Prior to 1995 Mr. MacDiarmid served in senior management positions with Raptor Management Corporation, SC Stormont Corporation and Lumonics Inc., and was a Principal with McKinsey & Company.
Board of Directors Committees
Alliance Laundry is a limited liability company, and the ultimate function of our Board of Directors is fulfilled by the Board of Directors of ALH which is the single managing member of Alliance Laundry’s parent, Alliance Laundry Holdings LLC.
The audit committee of the Board of Directors is comprised of Messrs. Charles J. Philippin, Lee L. Sienna and Shael J. Dolman. Messrs. Philippin, Sienna and Dolman qualify as “audit committee financial experts,” as defined by Securities and Exchange Commission Rules, based on their education, experience and background. Mr. Philippin serves as the committee chair and is an independent member of the Board of Directors. The audit committee will, among other things, recommend the annual appointment of auditors with whom the audit committee will review the scope of audit and non-audit assignments and related fees, accounting principles we will use in financial reporting, internal auditing procedures and the adequacy of our internal control procedures.
The compensation committee of the Board of Directors (the “Compensation Committee”) is comprised of Messrs. Lee L. Sienna and Shael J. Dolman. The Compensation Committee will, among other things, review and approve the compensation and benefits of our executive officers, authorize and ratify stock option grants and other incentive arrangements, and authorize employment and related agreements.
The charters of the audit committee and the Compensation Committee are available atwww.comlaundry.com (investor section).
Board of Directors and Officers of Alliance Laundry Corporation
Upon the consummation of the Transactions, Mr. L’Esperance was appointed the sole member of the Board of Directors of ALC, and Lee L. Sienna and Shael J. Dolman were appointed the President and Secretary of ALC, respectively. On February 28, 2005 Bruce P. Rounds and Scott S. Spiller were appointed Vice President Chief Financial Officer and Assistant Secretary of ALC, respectively.
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Code of Ethics
On February 28, 2005 ALH, ALC and the manager and sole member of each of Alliance Laundry Holdings LLC and of Alliance Laundry Systems LLC adopted a code of ethics (“Code”) that applies to our Board of Directors of ALH and the officers of ALH and its subsidiaries, including our principal executive officer, principal financial officer, principal accounting manager and controller of ALH and all of its subsidiaries. This Code supersedes the code of ethics adopted by the Board of Managers of Alliance Laundry Holdings LLC on March 4, 2004. We filed the Code as Exhibit 14.1 to our Annual Report on Form 10-K for 2005, posted it on our Internet web site atwww.comlaundry.com (investor section) and it is available to any person upon request by calling 920-748-3121.
| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
Overview
We believe that a skilled and motivated team of senior executives is essential to building and maintaining a successful company. As a leader in the North American and European stand-alone commercial laundry equipment industry, we also understand that our senior executives are highly sought after. Therefore, our executive compensation program has been designed to motivate, reward, attract and retain the management deemed essential to achieve our Company objectives, business strategy and financial performance. Our executive compensation program objectives are: (1) to reward executives and key employees for the enhancement of stockholder value; (2) to support an environment that rewards performance with respect to our goals, as well as our performance relative to industry competitors; (3) to integrate compensation programs with our short and long-term strategic plans; (4) to attract and retain key executives critical to our long-term success; and (5) to align the interests of our executives with the long-term interests of our owners through award opportunities that can result in ownership of stock.
Setting Executive Compensation
The Compensation Committee is responsible for establishing the Company’s general compensation philosophy and, in consultation with senior management, overseeing the development and implementation of compensation programs. The Compensation Committee is appointed annually by our Board of Directors and operates pursuant to a Charter, which is available atwww.comlaundry.com (investor section). Annually the Compensation Committee authorizes the compensation of the Chief Executive Officer, and reviews and approves the compensation of the other executive officers to ensure that compensation levels and benefits are competitive and reasonable using the program objectives described above. The particular elements of the compensation programs for our executive officers are set forth in more detail below.
The Compensation Committee utilizes publicly available compensation information and surveys to make informed decisions regarding pay and benefit practices. Salary, benefit and financial performance data prepared by management is also used to periodically ensure that executive compensation is market competitive and aligned with Company goals. We do not retain compensation consultants to advise the Compensation Committee on compensation matters. While we do not set compensation at set percentage levels compared to the market, we do seek to provide salary, incentive compensation opportunity and benefits that fall within the average practice of other comparable industrial companies of similar size and complexity.
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Components of 2007 Executive Compensation
For the year ended December 31, 2007 the principal components of compensation for the named executive officers were:
| • | Base salary |
| • | Annual incentives |
| • | Retention bonuses |
| • | Long-term cash and equity incentives |
| • | Severance agreements |
| • | Retirement and savings benefits |
| • | Other employee benefits |
Base Salary.In our review of base salaries for executives, we primarily consider:
| • | Publicly available market data and analyses prepared by management; |
| • | Internal review of each executive officer’s compensation, both individually and relative to other executive officers; and |
| • | Individual performance of the executive. |
We consider changes in the base salaries of executive officers at least annually. Decisions to increase or decrease an executive’s compensation materially, if any, is based on: (1) significant changes in individual performance; (2) significant changes in job duties and responsibilities; and/or (3) market surveys or other market data which may indicate that compensation is not competitive.
Jean-Marc Vandoorne, our Vice President, European Operations, is compensated in EUROS. Unless otherwise indicated, all amounts paid to Mr. Vandoorne as disclosed in this Item 11 have been translated to U.S. dollars based on the average monthly conversion rate as provided by Pacific Exchange Rate Service. In addition, as discussed above, Mr. Vandoorne’s consulting services are compensated by Alliance through his management company, JM Vandoorne BVBA. As such, amounts due in respect of Mr. Vandoorne’s services are paid to JM Vandoorne BVBA and subsequently applied to applicable expenses incurred by the management company.
The base salaries for our named executive officers for the following fiscal years ended December 31 were as follows:
| 2007 | 2006 | % Change | ||||||
Thomas F. L’Esperance | $ | 397,512 | $ | 369,400 | 7.6% increase | |||
Bruce P. Rounds | $ | 206,952 | $ | 186,620 | 10.9% increase | |||
Jean-Marc Vandoorne | $ | 374,998 | $ | 313,819 | 19.5% increase | |||
Jeffrey J. Brothers | $ | 201,924 | $ | 186,424 | 8.3% increase | |||
R. Scott Gaster | $ | 192,924 | $ | 186,396 | 3.5% increase | |||
Mr. Vandoorne’s base compensation at December 31, 2006 was EUR 237,580 and EUR 255,396 at December 31, 2007, which represents a 7.5% increase. The remaining percentage increase reflected above is due to the conversion of EUROS to U.S. dollars, which was affected by a weakening U.S. dollar from 2006 to 2007.
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Annual Incentives.From time to time, we award discretionary bonuses to our executive officers and key employees in the form of annual cash bonuses relating to operational achievements during the prior year. Annual incentives are at the discretion of the Compensation Committee and generally relate to the successful completion for Board of Directors approved programs that are in support of our business strategies. For 2007, there were no discretionary bonuses awarded to our U.S. named executive officers. Approved programs for 2006 included the CLD Acquisition and the Marianna, Florida facility consolidation into the Ripon, Wisconsin facility. Annual discretionary bonuses are an important component of rewarding each executive’s individual performance in light of our business performance, as well as to provide an overall competitive compensation package.
In awarding annual discretionary bonuses, we consider the following factors:
| • | Internal program review as presented by senior management; |
| • | Individual performance of the executive or key employee; and |
| • | Our overall Company performance. |
The 2007 discretionary bonuses for our named executive officers were as follows:
Thomas F. L’Esperance | $ | — | |
Bruce P. Rounds | $ | — | |
Jean-Marc Vandoorne | $ | 88,284 | |
Jeffrey J. Brothers | $ | — | |
R. Scott Gaster | $ | — |
Retention Bonuses. In connection with the Alliance Acquisition, we established an Executive Retention Bonus Program and entered into retention bonus agreements with each of Messrs. L’Esperance, Rounds, Brothers and Gaster, as well as other senior executives. The retention bonus agreements entitled the executives to receive special retention bonus awards upon the second anniversary of the closing date of the Alliance Acquisition, if they either (1) continued in employment through the second anniversary date or otherwise (2) were terminated by us without cause or by reason of death, disability or retirement. Failure to meet either of these requirements results in a forfeiture of the entire retention bonus. We entered into the retention bonus agreements in order to encourage business continuity by maintaining continuity among our top executives during the two-year period following the Alliance Acquisition, and to recognize and reward the executives’ dedication and commitment to us during this two-year transition period.
In connection with the CLD Acquisition, we entered into a retention bonus agreement with Mr. Jean-Marc Vandoorne. The retention bonus agreement entitles Mr. Vandoorne to receive a payment of EUR 217,600 (USD $319,502) no later than January 1, 2008 and an additional payment of EUR 217,600 (USD $319,502) upon the second anniversary of the closing date of the CLD Acquisition, if he either (1) continued in employment through the second anniversary date or otherwise (2) was terminated by us for any reason other than gross negligence or willful neglect.
During 2007 the named executives received the following retention bonuses:
| January 29, | December 31, | |||||
| 2007 | 2007 | |||||
Thomas F. L’Esperance | $ | 1,252,800 | $ | — | ||
Bruce P. Rounds | $ | 185,600 | $ | — | ||
Jean-Marc Vandoorne | $ | — | $ | 319,502 | ||
Jeffrey J. Brothers | $ | 203,000 | $ | — | ||
R. Scott Gaster | $ | 197,200 | $ | — | ||
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Long-Term Cash and Equity Incentives.We maintain an annual bonus plan (“Annual Bonus Plan”) that provides for cash incentive awards to be made to executive officers and key employees upon our Company’s attainment of pre-set Adjusted EBITDA targets. For the definition of Adjusted EBITDA see “ITEM 7 – Liquidity and Capital Resources underEBITDA and Adjusted EBITDA.” The pre-set Adjusted EBITDA targets are established annually, in the Compensation Committee’s discretion, as soon as practical after the Board of Directors approves the Company’s budget for a fiscal year. In addition, the Compensation Committee establishes a target amount for each executive officer as the cash incentive award for 100% attainment of the pre-set Adjusted EBITDA target. Awards are normally paid in cash in a lump sum following the close of each plan year. Executive officers must be employed on the last day of a plan year to receive an award. However, the plan provides for proration of awards in the event of certain circumstances such as the executive’s termination without cause, death, disability or retirement. No cash incentives were awarded to the executive officers for 2007 and 2006 under the Annual Bonus Plan as the Company’s actual financial performance was below the minimum threshold Adjusted EBITDA amount. The minimum threshold Adjusted EBITDA amount for 2007 was pre-set at an Adjusted EBITDA target of $70.7 million. We believe the focus on Adjusted EBITDA growth and other identified strategic business objectives as approved by the Board of Directors closely ties this element of executive compensation to our long-term objective to increase shareholder value.
Executive officers also participate in ALH Holding Inc. Stock Incentive Plan, under which we, at the Compensation Committee’s discretion, grant nonqualified and incentive stock options to our executive officers. We believe the use of stock options is intended to provide incentives to our executive officers to work toward the long-term growth of the Company by providing them with a benefit that will increase only to the extent the value of our common stock increases. The determination of the number of shares granted is based on the level and expected contribution of the executive officer. Under the plan, 80,763 nonqualified stock options were granted to the named executive officers based on stock option agreements executed in 2005. Sixty percent (60%) of these stock options for the named executive officers are time-based, i.e., they vest in annual equal installments over a five-year period. Forty percent (40%) of the options are performance-based, i.e., they vest in five annual installments if certain annual or cumulative earnings targets are met during fiscal years 2005 through 2009. We believe that this plan and the grant of time-based and performance-based stock options will (1) motivate superior executive performance by means of service and performance related incentives, (2) appropriately align the interests of the executives with the interests of the Company’s shareholders, and (3) enable us to attract and retain the services of a highly effective management team.
Retirement Benefits.Each of the named U.S. executive officers participates in the Alliance Laundry Systems Pension Plan (the “Pension Plan”), which is a qualified, non-contributory defined benefit cash balance plan, that covers all of our U.S. employees other than hourly employees hired on or after December 31, 2005. The pension plan was frozen effective January 1, 2009 for all salaried employees. No salaried employees hired after January 1, 2008 are eligible to participate in the pension
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plan. For eligible salaried employees under the Pension Plan, an account is established for each participant in which pay credits and interest credits are earned, based on a percentage of the participant’s compensation, which is adjusted for age and years of service. Compensation includes base salary, bonuses, awards, commissions, supervisory differentials and shift premiums, capped at the applicable IRS annual dollar limits. A participant’s accrued benefits under the Pension Plan vest after five years of service. Upon retirement or termination of employment, a salaried participant has the option to either (1) receive payment as a lump sum or one of the monthly annuity options or (2) leave the vested account balance in the Pension Plan (where it will continue to earn interest) until a later date. Benefit payments must begin by April 1 of the year following the year the participant reaches age 70 1/2.
In addition, all of the U.S. salaried employees, including our named executive officers, participate in the Alliance Laundry Systems Capital Appreciation Plan (“ALCAP”) 401(k) plan. Under this plan, employees are permitted to defer up to 50% of their compensation (capped at the applicable IRS annual dollar limits) and we provide a matching contribution equal to 50% of the first 6% of the employee’s contribution. Matching contributions vest after three years of service. Effective January 1, 2008, the Company match has been increased to 100% of the first 6% of the employee’s contributions.
We believe that these retirement benefits comprise an important component in our objective of retaining our highly performing executives while attracting additional highly qualified employees in the future.
Severance Benefits.We provide severance benefits to each of our named U.S. executive officers, as well as other members of our senior management. Mr. L’Esperance’s right to a severance benefit is provided in his employment agreement. In addition, each of Messrs. Rounds, Brothers and Gaster has an executive severance protection agreement with us. The severance agreements, which are described in more detail below under “Severance and Change in Control Arrangements,” generally provide for continued salary and health, dental and welfare benefits, as well as additional bonus, in the event that an executive is involuntarily terminated without cause (or, in the case of Mr. L’Esperance, due to death, permanent disability or permanent incapacity). The severance arrangements allow our executives to act in the best interest of our shareholders while mitigating the distraction of personal concerns, such as potential loss of employment, which may arise from their decisions.
Other Employee Benefits.We provide to the executive officers, standard health, dental, life insurance and other welfare benefits. We believe that providing competitive employee benefits is an important component in our objective of retaining our high-performing executives while attracting other highly qualified employees in the future.
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Stock Ownership
We encourage our executive officers and key employees to own shares of ALH. In connection with the Alliance Acquisition, each of the named executive officers, as well as other members of our senior management, has purchased shares of common stock of ALH under our Stock Purchase and Rollover Investment Plan, which was adopted on January 27, 2005. In addition, the stockholders agreement executed in connection with the Alliance Acquisition gives the executive officers and certain other designated management members a preemptive right to purchase, at fair market value, additional shares of our common stock in any new issue in order to maintain their ownership percentage of our common stock. Consistent with this preemptive right, on July 14, 2006 we completed a management offering for participants in our Stock Purchase and Rollover Investment Plan, in which our named executive officers purchased, at fair market value, an additional 15,108 shares of our common stock. Additional information about the executive officers’ current stock ownership of ALH is available under “ITEM 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” We believe that stock ownership serves to attract and retain executives as well as align their interests with the long-term interests of our owners.
Tax and Accounting Considerations
Deductibility of Executive Compensation
We generally structure all our compensation programs so that they are deductible for federal income tax purposes.
Accounting for Stock-Based Compensation
The expenses associated with the stock options issued by us to our executive officers and other key employees are reflected in our financial statements. In the fourth quarter of calendar year 2005, the Company began accounting for these stock-based payments in accordance with the requirements of FASB Statement 123R, which requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the financial statements based on their fair values. For further discussion see Item 8—Note 4 “Significant Accounting Policies” under the heading “ALH Stock Option Plan.” We previously accounted for these awards using the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, we did not recognize compensation expense for the options granted because the options had an exercise price equal to their fair market value on the date of grant.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on the review and discussions, the Compensation Committee recommends to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K.
Members of the Compensation Committee
Lee L. Sienna, Chair
Shael J. Dolman
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Summary Compensation Table
Name and Principal Position | Salary | Bonus | Option Awards (1) ($) | Non-Equity Incentive Plan Compensation (2) | Change in Pension Compensation Earnings (3) | All Other | Total | ||||||||||
| Year | ($) | ($) | (Restated) | ($) | ($) | ($) | ($) | ||||||||||
| (a) | (b) | (c) | (d) | (f) | (g) | (h) | (i) | (j) | |||||||||
Thomas F. L’Esperance | 2007 | 397,512 | 1,252,800 | 160,000 | — | 30,091 | 8,556 | 1,848,959 | |||||||||
Chief Executive Officer, | 2006 | 369,400 | 384,072 | (18,500 | ) | — | 27,298 | 8,106 | 770,376 | ||||||||
Director | |||||||||||||||||
Bruce P. Rounds | 2007 | 206,952 | 185,600 | 76,800 | — | 33,428 | 6,926 | 509,706 | |||||||||
Vice President, | 2006 | 186,620 | 92,000 | (8,880 | ) | — | 30,138 | 6,224 | 306,102 | ||||||||
Chief Financial Officer | |||||||||||||||||
Jean-Marc Vandoorne | 2007 | 333,141 | 407,786 | — | — | — | — | 740,927 | |||||||||
Vice President, | |||||||||||||||||
European Operations | |||||||||||||||||
Jeffrey J. Brothers | 2007 | 201,924 | 203,000 | 81,600 | — | 52,098 | 8,055 | 546,677 | |||||||||
Senior Vice President, | 2006 | 186,424 | 67,000 | (9,435 | ) | — | 46,205 | 7,397 | 297,591 | ||||||||
Sales and Marketing | |||||||||||||||||
R. Scott Gaster | 2007 | 192,924 | 197,200 | 79,204 | — | 30,464 | 6,448 | 506,240 | |||||||||
Vice President, General Manager | 2006 | 186,396 | 67,000 | (9,158 | ) | — | 25,528 | 6,224 | 275,990 | ||||||||
Ripon Operations | |||||||||||||||||
| (1) | No stock options were granted in 2007 to the named executive officers. As discussed below under “ALH Stock Option Plan,” options were granted in 2005 to the named executive officers and other key employees, with a portion of the stock options vesting in annual installments and a portion vesting if certain annual or cumulative earnings targets are met during fiscal years 2006 through 2009. The total number of options granted to the named executive officers that vested during 2007 was 9,691. The amount shown in column (f) is the dollar amount that was recognized in 2007 in accordance with FAS 123R under the intrinsic value method, which is further discussed in Note 18 to our consolidated financial statements. |
| (2) | No compensation was earned under the Annual Bonus Plan with respect to fiscal year 2007. |
| (3) | Change in pension value reflects the difference between the executive’s cash balance account as of December 31, 2006 and December 31, 2007, which are the relevant measurement dates used by the plan for financial reporting purposes. The change is attributable to annual pay credits (including supplemental pay credits) and interest credits. There is no above-market or preferential earnings on any deferred compensation accounts. |
| (4) | All other compensation includes matching contributions related to contributions made by the named executive officers to the Alliance Laundry Systems Capital Appreciation Plan (“ALCAP”) 401(k) plan and Company paid life insurance for the benefit of the named executive officers. |
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Grants of Plan-Based Awards in Fiscal Year 2007
| Estimated Future Payouts Under Non-Equity | ||||||
| Incentive Plan Awards (1) | ||||||
| Threshold | Target | Maximum | ||||
Name | ($) | ($) | ($) | |||
| (a) | (c) | (d) | (e) | |||
Thomas F. L’Esperance | — | 397,500 | 596,250 | |||
Bruce P. Rounds | — | 74,000 | 111,000 | |||
Jean-Marc Vandoorne | — | 88,284 | 132,426 | |||
Jeffrey J. Brothers | — | 74,000 | 111,000 | |||
R. Scott Gaster | — | 74,000 | 111,000 | |||
| (1) | The figures in these columns are estimates prepared in accordance with applicable disclosure requirements. No cash incentive amounts were actually paid to the named executive officers under the Annual Bonus Plan with respect to fiscal year 2007, as noted in the footnote to column (g) of the Summary Compensation Table, because the Company’s actual financial performance was below the minimum threshold. See the “Compensation Discussion and Analysis, Long-Term Cash and Equity Incentives,” for a detailed description of the Annual Bonus Plan. No equity-based awards were granted to the named executives during 2007. |
Outstanding Equity Awards at Fiscal Year-End
| Option Awards (1) | ||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable (2) | Number of Securities Underlying Unexercised Options (#) Unexercisable (3) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Options (#) Unearned (4) | Option Exercise Price (5) ($) | Date Options Fully Vested | Option Expiration Date | ||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | ||||||
Thomas F. L’Esperance Units Awarded in 2005 | 7800 | 11,700 | 13,000 | 100.00 | 01/27/10 | 01/27/15 | ||||||
Bruce P. Rounds | 3744 | 5,616 | 6,240 | 100.00 | 01/27/10 | 01/27/15 | ||||||
Jeffrey J. Brothers | 3978 | 5,967 | 6,630 | 100.00 | 01/27/10 | 01/27/15 | ||||||
R. Scott Gaster | 3861 | 5,792 | 6,435 | 100.00 | 01/27/10 | 01/27/15 | ||||||
| (1) | Options awards in the table describe nonqualified stock options granted under the ALH Holding Inc. Stock Incentive Plan. For the named executive officers, sixty percent (60%) of these stock options are time-based, i.e., they vest in annual equal installments over a five-year period between January 27, 2006 and January 27, 2010. Forty percent (40%) of the options are performance-based, i.e., they vest in five annual installments between January 27, 2006 and January 27, 2010 if certain annual or cumulative EBITDA targets are met during fiscal years |
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2005 through 2009. Specifically, for each fiscal year, one-fifth of the stock options vest if the annual EBITDA target is met. If the annual EBITDA target is not met in a given fiscal year, the stock options may still vest on a “catch-up” basis if the cumulative EBITDA target is met for a subsequent fiscal year. The annual and cumulative EBITDA targets were pre-set at the time the stock options were granted. The stock options will accelerate if the Company experiences a change in control, as described below under “Severance and Change of Control Arrangements.” As of December 31, 2007, none of the stock options granted under the plan have been exercised. |
| (2) | This column represents the number of time-based stock options that had vested as of December 31, 2007. |
| (3) | This column represents the number of time-based stock options that had not vested as of December 31, 2007. |
| (4) | This column represents the number of performance-based stock options that have not yet been earned by the named executive officers. Because none of the EBITDA targets have been met since the granting of the options, none of these options have vested (or been “earned”) to date. However, as described in Footnote 1 to this table, these options may still vest on a “catch-up” basis. |
| (5) | The exercise price for the options is equal to the grant date fair market value of a share of ALH common stock. |
Pension Benefits
Name | Change in Pension Value(1) ($) | Number of Years of Credited Service | Present Value of Accumulated Benefit (2) | Payments During Last Fiscal Year | ||||||||
| Plan Name | 2006 | 2007 | (#) | ($) | ($) | |||||||
Thomas L’Esperance | Pension Plan | 27,298 | 30,091 | 9 | 170,905 | — | ||||||
Bruce Rounds | Pension Plan | 30,138 | 33,428 | 17 | 229,874 | — | ||||||
Jeffrey Brothers | Pension Plan | 46,205 | 52,098 | 28 | 484,708 | — | ||||||
R. Scott Gaster | Pension Plan | 25,528 | 30,464 | 11 | 177,496 | — | ||||||
| (1) | Change in pension value reflects the difference between the executive’s cash balance account as of December 31, 2006 and December 31, 2007, which are the relevant measurement dates used by the plan for financial reporting purposes. The change is attributable to annual pay credits (including supplemental pay credits) and interest credits. There are no above-market or preferential earnings on any deferred compensation accounts. |
| (2) | The present value of accumulated benefit equals the value the executive’s cash balance account earned as of December 31, 2007 which is the relevant 2007 measurement date used by the plan for financial reporting purposes. |
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The Alliance Laundry Systems Pension Plan (the “Pension Plan”) is a qualified, non-contributory defined benefit cash balance plan. The Pension Plan presently covers all employees other than hourly employees hired on or after December 31, 2005. Substantially all of our eligible salaried employees, including our executive officers, participate in the Pension Plan. The cost of the pension plan is borne entirely by us. Under the provisions of the Pension Plan for salaried employees, a cash balance account is established for each participant in which annual pay credits and interest credits are earned as the participant provides service. Pay credits are calculated as a percentage of the participant’s compensation adjusted for age and years of service in accordance with the following table:
Pension Plan Pay Credits Table | ||
Total of Age and Years of Service | Base Remuneration Credit Rates | |
Less than 45 | 3.0% | |
45 but less than 50 | 3.5% | |
50 but less than 55 | 4.0% | |
55 but less than 60 | 4.5% | |
60 but less than 65 | 5.0% | |
65 but less than 75 | 6.0% | |
75 but less than 85 | 7.0% | |
85 or more | 8.0% | |
In addition, a supplemental pay credit is earned on remuneration in excess of $62,165 (indexed for years after 2006) at the lesser of 5% or the percentage used per the above table. Effective January 1, 2009, the Pension Plan will no longer provide annual pay credits. A participant’s account also increases for interest credits each year. Interest credits are earned at the rate of a one-year Treasury Bill as of the last day of the prior plan year plus 1%, which was 6.00% for 2007. The amount of earnings that can be recognized for plan purposes is limited by the IRS to $225,000 in 2007. Compensation includes base salary, bonuses, awards, commissions, supervisory differentials and shift premiums, but which is capped at the applicable IRS annual dollar limits. A participant’s accrued benefit under the Pension Plan vests after five years of service (effective January 1, 2009, a salaried employee vests after three years of service). Upon retirement or termination of employment, a salaried participant has the option to either (1) receive payment as a lump sum or one of the monthly annuity options or (2) leave the vested account balance in the Pension Plan (where it will continue to earn interest) until a later date. Benefit payments must begin by April 1 of the year following the year the participant reaches age 70 1/2.
Substantially all of the salaried employees, including our executive officers, participate in our ALCAP 401(k) plan. Under this plan, employees are permitted to defer up to 50% of their compensation (capped at the applicable IRS annual dollar limits) and we provide a matching contribution equal to 50% of the first 6% of the employee’s contribution. Matching contributions vest after three years of service. Effective January 1, 2008, the company match has been increased to 100% of the first 6% of the employee’s contributions and matching contributions will vest after two years of service.
Severance and Change in Control Arrangements
Severance Benefits
The Company provides severance benefits to each of its named U.S. executive officers, as well as other members of its senior management. Mr. L’Esperance’s right to a severance benefit is provided in his employment agreement with the Company. In addition, each of Messrs. Rounds, Brothers and Gaster has an executive severance protection agreement with the Company.
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In the event that Mr. L’Esperance is terminated by the Company without cause or due to death, permanent disability or permanent incapacity, he is entitled to receive (1) 24 months of continued base salary, (2) an amount equal to his bonus for the fiscal year prior to the year of termination, (3) a pro-rated bonus for the fiscal year in which the termination occurred, and (4) 24 months of continued medical, dental and health benefits. If Mr. L’Esperance is terminated by the Company due to death, permanent disability or permanent incapacity, Mr. L’Esperance is entitled to receive the same benefits except for the prior fiscal year bonus amount. Mr. L’Esperance is subject to two-year non-competition and non-solicitation covenants, as well as a confidentiality covenant, which are conditions to his receipt of the severance benefits.
In the event that any of Messrs. Rounds, Brothers or Gaster is terminated by the Company without cause, he is entitled to receive (1) 12 months of continued base salary, (2) 12 months of continued medical, dental and health benefits, and (3) a pro-rated bonus for the fiscal year in which the termination occurred. The executives are subject to one-year non-competition and non-solicitation covenants, which are conditions to their receipt of the severance benefits.
The table below reflects estimated severance benefits which each named U.S. executive officer would be entitled to receive as well as the retention obligation to Jean-Marc Vandoorne under his retention bonus agreement, had a qualifying termination occurred on December 31, 2007. The amounts shown are estimates prepared in accordance with applicable disclosure requirements and do not necessarily reflect the actual amounts that would be paid to the executives, which would only be known upon an actual qualifying termination.
| Continued Salary ($) | Bonus ($) | Medical, Dental and Health Benefits ($) | Total ($) | |||||
Thomas F. L’Esperance | 795,024 | 397,500 | 34,091 | 1,226,615 | ||||
Bruce P. Rounds | 206,952 | 74,000 | 17,046 | 297,998 | ||||
Jean-Marc Vandoorne | 319,502 | — | — | 319,502 | ||||
Jeffrey J. Brothers | 201,924 | 74,000 | 17,046 | 292,970 | ||||
R. Scott Gaster | 192,924 | 74,000 | 17,046 | 283,970 |
Change in Control Benefits
Although the service-based stock options granted to the executive officers under the ALH Holding Inc. Stock Incentive Plan become exercisable ratably over a five-year period, in the event of a change in control, all of the options, whether exercisable or unexercisable, are cancelled in exchange for a cash payment equal to the difference between the change in control consideration over the exercise price. Performance-based options that are exercisable at the time of a change in control are also cashed out in a change in control. However, this cash settlement treatment is subject to the right of the Compensation Committee to determine, in good faith, that the successor employer should instead assume the options or provide substitute options. In addition, accelerated vesting and cash settlements are limited to the extent necessary to prevent an executive from being subject to “golden parachute”
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excise taxes under Section 280G and 4999 of the Internal Revenue Code. For purposes of this plan, a “change in control” is generally defined as the sale, exchange, transfer or disposition to one or more non-affiliated persons of (i) more than 50% of the common stock of ALH beneficially owned by OTPP, (ii) more than 50% of all assets of ALH and its majority-owned subsidiaries. Any unvested options still outstanding following a change in control will be cancelled in accordance with the terms of the plan and the relevant stock option agreements.
The Company does not have any other change in control arrangements with its executive officers.
Director Compensation
Compensation of Directors
Name | Fees Earned or Paid In Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | ||||||||||||||
Lee L. Sienna | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Shael J. Dolman | — | — | — | — | — | — | — | ||||||||||||||
Charles J. Phillipin | 69,000 | — | — | — | — | — | 69,000 | ||||||||||||||
J. Hugh MacDiarmid | 23,007 | — | — | — | — | — | 23,007 | ||||||||||||||
Mr. Philippin is paid a fee of $30,000 per year as an independent member of the Board of Directors and a fee of $10,000 per year for his role as audit committee chair. In addition, Mr. Philippin is paid a meeting fee of $1,250 for each board meeting attended and $1,000 for each audit committee meeting attended plus reimbursable travel expenses. In 2007 Mr. Philippin received a total of $69,000 in director’s fees (which includes a one time special committee project fee). Mr. MacDiarmid is paid a fee of $30,000 per year as an independent member of the Board of Directors. In addition, Mr. MacDiarmid is paid a meeting fee of $1,250 for each board meeting attended plus reimbursable travel expenses. In 2007 Mr. MacDiarmid received a total of $23,007 in prorated director’s fees from his July 26, 2007 board membership date. Messrs. Lee L. Sienna, Shael J. Dolman and Thomas F. L’Esperance, as non-independent directors, receive no fees, but all directors are reimbursed for any out-of-pocket expenses incurred by them in connection with services provided in such capacity. The Compensation Committee reviews director compensation from time to time and is responsible for recommending appropriate increases in such compensation.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Lee L. Sienna and Shael J. Dolman, with Mr. Sienna acting as chair. Messrs. Sienna and Dolman serve as President and Secretary, respectively, of ALH and ALC. There are no other items to report related to Compensation Committee interlocks or insider participation relationships with the Company by its members.
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No executive officer of the Company served as a member of the Compensation Committee (or other board or board committee performing equivalent functions) of another entity, one of whose executive officers served on the Compensation Committee of the Company. No executive officer of the Company served as a director of another entity, one of whose executive officers served on the Compensation Committee of the Company. No executive officer of the Company served as a member of the Compensation Committee (or other board or board committee performing equivalent functions) of another entity, one of whose executive officers served as a director of the Company.
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ALH indirectly owns all of the outstanding equity interests of Alliance Laundry. The following table sets forth the beneficial ownership as of March 10, 2008 of ALH, of:
| • | each person or entity known to us to own 5% or more of ALH common stock; |
| • | each member of ALH’s board of directors; |
| • | each of our named executive officers; and |
| • | all members of ALH’s board of directors and our executive officers as a group. |
Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Except as indicated by footnote, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all shares of common stock held by them. Shares of common stock subject to options currently exercisable or exercisable within 60 days of March 10, 2008 and not subject to repurchase as of that date are deemed outstanding for calculating the percentage of outstanding shares of the person holding these options, but are not deemed outstanding for calculating the percentage of any other person. Unless otherwise noted, the address for each director and executive officer is c/o Alliance Laundry Systems LLC, P.O. Box 990, Shepard Street, Ripon, Wisconsin 54971.
| Common Stock | |||||
| Number of Shares Beneficially Owned(1) | Percentage of Shares Owned(1) | ||||
OTPP | 1,294,259 | 90.7 | % | ||
Thomas F. L’Esperance | 50,256 | 3.5 | |||
Bruce P. Rounds | 15,256 | 1.1 | |||
Jean-Marc Vandoorne | 2,748 | 0.2 | |||
Jeffrey J. Brothers | 17,336 | 1.2 | |||
R. Scott Gaster | 15,409 | 1.1 | |||
All employee directors and executive officers as a group(2) | 133,097 | 9.1 | |||
Shael J. Dolman(3)(4) | 1,294,259 | 90.7 | |||
Lee L. Sienna(3)(4) | 1,294,259 | 90.7 | |||
| (1) | The number of shares beneficially owned by the executives named in this table, as well as the corresponding percentage of shares owned, includes the management equity that such executives, or individual retirement accounts owned by such executives or their spouses, acquired in connection with the consummation of the Transactions and subsequent equity offerings. For each individual named in this table, the number of shares beneficially owned, as well as the corresponding percentage of shares owned, also includes vested stock options. |
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| (2) | Does not include the shares of ALH common stock held by OTPP with respect to which Messrs. Dolman and Sienna may be deemed to have the power to dispose as described in footnote (4) below. |
| (3) | The address of each of Messrs. Dolman and Sienna is c/o Ontario Teachers’ Pension Plan Board, 5650 Yonge Street, Toronto, Ontario M2M 4H5. |
| (4) | Represents the shares of ALH common stock held by OTPP. Messrs. Dolman and Sienna may be deemed to have the power to dispose of the shares held by OTPP due to a delegation of authority from the board of directors of OTPP, and each expressly disclaims beneficial ownership of such shares. |
DESCRIPTION OF CAPITAL STOCK
All of Alliance Laundry’s issued and outstanding equity interests are owned by Alliance Holdings and all of Alliance Holdings’ equity interests are owned by ALH. The following is a summary description of ALH’s capital stock and certain terms of its second amended and restated certificate of incorporation and its amended and restated by-laws, which became effective upon the consummation of the Transactions.
Authorized Capitalization
ALH’s authorized capital stock as of March 10, 2008 consists of:
| • | 2,000,000 shares of common stock, par value $0.01 per share of which 1,425,326 shares were issued to OTPP and members of our current management and 136,594 stock options related to the right to acquire shares of which 133,552 have been granted to certain members of current management; and |
| • | 50,000 shares of preferred stock, par value $0.01 per share, of which no shares are issued and outstanding. |
The rights and privileges of holders of the common stock are subject to any series of preferred stock that ALH may issue in the future and to the amended stockholders agreement. See “Certain Relationships and Related Transactions—Stockholders Agreement.”
Common Stock
Voting.Except as otherwise required by Delaware law, at every annual or special meeting of stockholders, every holder of common stock is entitled to one vote per share on all matters submitted to a vote of stockholders and do not have cumulative voting rights.
Dividends.Holders of common stock are entitled to receive proportionately any dividends that may be declared by the board of directors of ALH, subject to the preferences and rights of any shares of preferred stock.
Board of Directors.The amended and restated by-laws of ALH provide that the board of directors of ALH initially consists of three members, each of whom was elected by the holders of the outstanding common stock of ALH. The amended and restated certificate of incorporation and the
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amended and restated by-laws provide that the number of directors is fixed and may be increased or decreased from time to time by OTPP, but the board of directors will at no time consist of fewer than three directors. The amended and restated certificate of incorporation provides that no director will be personally liable to ALH or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that this limitation on or exemption from liability is not permitted by the Delaware General Corporation Law (the “DGCL”) and any amendments to that law. ALH’s organizational documents include provisions that eliminate, to the extent allowable under the DGCL, the personal liability of directors or officers for monetary damages for actions taken as a director. They also provide that ALH must indemnify directors and officers against, and if such indemnification is unavailable, advance to directors and officers expenses incurred in defending against certain such actions against such persons. ALH is also expressly authorized to carry directors’ and officers’ insurance for its directors and officers for some liabilities. See “Voting Agreements” below.
Voting Agreements.In connection with the consummation of the Alliance Acquisition, ALH entered into a stockholders agreement with OTPP, certain employees of ALH or its subsidiaries and certain entities affiliated with such employees, who own shares of ALH’s common stock. The stockholders agreement provides that Thomas F. L’Esperance will be a member of the board of directors of ALH for so long as he serves as the chief executive officer. OTPP has the right to designate a majority of the other directors. The stockholders agreement provides that the other parties to the stockholders agreement will vote all of the shares of common stock owned by such stockholders in favor of the designees of OTPP. See “Certain Relationships and Related Transactions—Stockholders Agreement.”
Preferred Stock
ALH’s amended and restated certificate of incorporation provides that it may issue shares of its preferred stock in one or more series as may be determined by its board of directors. ALH’s board of directors has broad discretionary authority with respect to the rights to issue series of its preferred stock and may take several actions without any vote or action of the holders of its common stock, including:
| • | determining the number of shares to be included in each series; |
| • | fixing the designation, powers, preferences and relative rights of the shares of each series and any qualifications, limitations or restrictions with respect to each series, including provisions related to dividends, conversion, voting, redemption and liquidation, which may be superior to those of ALH’s common stock; and |
| • | increasing or decreasing the number of shares of any series of preferred stock. |
The authorized shares of ALH’s preferred stock, as well as shares of its common stock, are available for issuance without action by its common stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which its securities may be listed or traded.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Stockholders Agreement
Concurrent with the closing of the Alliance Acquisition, ALH entered into a stockholders agreement (the “Stockholders Agreement”) with OTPP, certain employees of ALH or its subsidiaries
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and certain entities affiliated with such employees, who own shares of ALH’s common stock. The Stockholders Agreement provides that the Chief Executive Officer of ALH will be a member of the Board of Directors of ALH. OTPP has the right to designate the other directors. The Stockholders Agreement provides that the other parties to the Stockholders Agreement will vote all of the shares of common stock owned by such stockholders in favor of the designees of OTPP.
The Stockholders Agreement contains customary terms, including, among other things, terms regarding transfer restrictions, tag-along rights, drag-along rights, calls and preemptive rights. The Stockholders Agreement generally restricts the transfer of shares of common stock owned by the employees and the entities affiliated with such employees, or collectively, the management stockholders, who are or who become parties to the agreement. Exceptions to this restriction include transfers for estate planning purposes or to family members, so long as the transferee agrees to be bound by the terms of the Stockholders Agreement.
In addition, the management stockholders have “tag-along” rights to sell their shares on a pro rata basis with OTPP in sales to third parties at any time after the six month anniversary of the Alliance Acquisition, subject to certain exceptions. Similarly, OTPP has “drag-along” rights to cause the management stockholders to sell their shares on a pro rata basis with OTPP to an independent third party in a liquidity event (as defined in the Stockholders Agreement). The management stockholders are subject to “call” rights, which entitle ALH to require a management stockholder to sell ALH shares of common stock held by such management stockholder, upon any termination of the employment of the management stockholder, or the employee affiliated with such stockholder, with ALH or its subsidiaries, at differing prices, depending upon the circumstances of the termination. The Stockholders Agreement also contains a provision that requires ALH to offer the management stockholders, as long as such management stockholder or the employee affiliated with such management stockholder is employed by ALH or its subsidiaries at such time, the right to purchase equity securities of ALH in a new issuance to OTPP on a pro rata basis, subject to certain exceptions. Certain of the foregoing provisions of the Stockholders Agreement terminates upon the consummation of an initial public offering (as defined in the Stockholders Agreement).
Registration Rights Agreement
Concurrently with the closing of the Alliance Acquisition, ALH entered into a registration rights agreement with OTPP and the parties to the Stockholders Agreement. Pursuant to this agreement, OTPP has the right to make an unlimited number of requests that ALH register its shares under the Securities Act at ALH’s expense. In any demand registration, all of the parties to the registration rights agreement have the right to participate on a pro rata basis, subject to certain conditions. In addition, in the event that ALH proposes to register any of its shares (other than registrations related to benefit plans and certain other exceptions), all of the holders of registration rights under the agreement have the right to include their shares in the registration statement at ALH’s expense, subject to certain conditions. In connection with all such registrations, ALH has agreed to indemnify all holders of registration rights under the agreement against certain liabilities, including liabilities under the Securities Act.
Predecessor Junior Subordinated Promissory Notes
In May 1998 Alliance Holdings’ predecessor issued a junior subordinated promissory note in the principal amount of $9.0 million, plus accrued interest, due August 21, 2009, to Raytheon. All outstanding junior subordinated promissory notes were repaid in connection with the consummation of the Transactions.
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Predecessor Preferred Interests
In May 1998 Alliance Holdings’ predecessor issued mandatorily redeemable preferred membership interests to Raytheon. In September 2003, these preferred membership interests were sold to affiliates of each of TCW and Sankaty. These preferred membership interests were redeemable at a redemption price of $6.0 million upon a change of control or certain other liquidity events. We redeemed all preferred membership interests in connection with the consummation of the Transactions.
Predecessor Management Investor Promissory Notes
In May 1998 we entered into promissory notes aggregating approximately $1.8 million with certain members of management to help finance the purchase of common units in Alliance Holdings’ predecessor. Management repaid these promissory notes in connection with the consummation of the Transactions.
Predecessor 1998 Executive Unit Purchase Agreements
Certain members of our management entered into executive unit purchase agreements which governed these executives’ investments in the common membership interests of Alliance Holdings’ predecessor. These unit purchase agreements were terminated in connection with the consummation of the Transactions.
Predecessor Management Fees
In connection with the consummation of the Transactions, we paid to Bain Capital Partners LLC and Bruckmann, Rosser, Sherrill & Co. fees of $7.0 million. The management service agreement pursuant to which such fees were paid was terminated in connection with the consummation of the Transactions.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
For 2007 the audit committee pre-approved the continuation of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, for audit, audit related and tax related services.
Aggregate fees billed to us during the fiscal years ending December 31, 2007 and 2006, by our principal accounting firm, PricewaterhouseCoopers LLP, are set forth in the table below. All auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for Alliance by its independent auditor must be pre-approved by the Board of Directors. All audit and non-audit services provided by PricewaterhouseCoopers LLP during 2007 were pre-approved by the Board of Directors.
| 2007 | 2006 | |||||
| (in thousands) | ||||||
Audit Fees (1) | $ | 981.9 | $ | 543.1 | ||
Audit –Related Fees(2) | 271.9 | 128.2 | ||||
Tax Fees(3) | 182.2 | 369.7 | ||||
All Other Fees(4) | 4.7 | 1.5 | ||||
Total | $ | 1,440.7 | $ | 1,042.5 | ||
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| (1) | Includes the aggregate fees associated with the annual audit and quarterly reviews billed in each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for the audit of our annual financial statements included in our Annual Reports on Form 10-K and the review of financial statements included in our Quarterly Reports on Form 10-Q. |
| (2) | Includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by PricewaterhouseCoopers LLP. The audit-related fees include out-of-pocket expenses incurred by PricewaterhouseCoopers LLP while completing the financial statement audit. The audit-related fees for 2007 include services for consultations concerning acquisition related matters and related reporting standards and consultation regarding matters related to the ALERT2005 financing facility. The audit-related fees for 2006 include fees related to opening balance sheet audits, SEC comment letters and Section 404 procedures. |
| (3) | Includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for tax compliance, tax advice and tax planning. |
| (4) | Includes the aggregate fees billed in each of the last two fiscal years for services provided by PricewaterhouseCoopers LLP, other than those services described above. Other fees in 2007 and 2006 relate to software subscriptions and technical accounting seminars. |
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| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) (1) and (2) The response to this portion of Item 15 is submitted as a separate section of this report in the “List of Financial Statements and Financial Statement Schedules” on page 147.
(3) The response to this portion of Item 15 is submitted as a separate section of this report in the “Index to Exhibits” on pages 149 through 154.
(b) Exhibits—The response to this portion of Item 15 is submitted as a separate section of this report in the “Index to Exhibits” on pages 149 through 154.
(c) Financial Statement Schedules—The response to this portion of Item 15 is submitted as a separate section of this report in the “List of Financial Statements and Financial Statement Schedules” on page 147.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Alliance Laundry Systems LLC has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Ripon, state of Wisconsin, on the 11th day of March 2008.
Signature | Title | Date | ||
/s/ Thomas F. L’Esperance | Chief Executive Officer | 3/11/08 | ||
Thomas F. L’Esperance | ||||
/s/ Bruce P. Rounds | Vice President Chief Financial Officer | 3/11/08 | ||
Bruce P. Rounds | ||||
Date: March 11, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of March 11, 2008, by the following persons on behalf of the registrant and in the capacities indicated:
/s/ Thomas F. L’Esperance |
Thomas F. L’Esperance Chief Executive Officer |
/s/ Lee L. Sienna |
Lee L. Sienna Director |
/s/ Shael J. Dolman |
Shael J. Dolman Director |
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Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
No annual report to stockholders, proxy statements or forms of proxies or other proxy soliciting materials have been or will be sent to any of the Registrant’s stockholders.
Item 15(a)(1), (2) and (3), and (b)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
| Page | ||
| 62 | ||
Consolidated Balance Sheets as of December 31, 2007, and December 31, 2006 | 64 | |
| �� | 65 | |
| 66 | ||
| 67 | ||
| 68 | ||
Financial Statement Schedules:
The following consolidated financial statement schedule of Alliance Laundry Holdings LLC is included in Item 15(a),
| 118 |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
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Exhibit | Description | Incorporated Herein By Reference To | ||
| 2.1 | Agreement and Plan of Merger and Plan of Reorganization, dated as of January 27, 2005, by and among ALH Finance LLC, Alliance Laundry Systems LLC and ALH Holding Inc. | Exhibit 2.1 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 2.2 | Agreement and Plan of Merger and Plan of Reorganization, dated as of January 27, 2005, between ALH Finance Corporation and Alliance Laundry Corporation. | Exhibit 2.2 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.1 | Certificate of Incorporation of Alliance Laundry Corporation. | Exhibit 3.3 to the Registrant’s Form S-4, Amendment #1, dated July 2, 1998 (file no. 333-56857-2) | ||
| 3.1.1 | Amended and Restated Certificate of Formation of Alliance Laundry Holdings LLC. | Exhibit 3.1.1 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.1.2 | Certificate of Amendment to the Amended and Restated Certificate of Formation of Alliance Laundry Holdings LLC. | Exhibit 3.1.2 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.1.3 | Certificate of Formation of Alliance Laundry Systems LLC. | Exhibit 3.1 to Alliance Laundry Systems LLC’s Form S-4, Amendment No. 1, dated July 2, 1998 (file no. 333-56857-2) | ||
| 3.1.4 | Certificate of Amendment to Certificate of Formation of Alliance Laundry Systems LLC. | Exhibit 3.1.4 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.1.5 | Certificate of Merger of ALH Finance LLC with and into Alliance Laundry Systems LLC. | Exhibit 3.1.5 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.1.6 | Amended Certificate of Incorporation of Alliance Laundry Corporation. | Exhibit 3.1.6 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.1.7 | Certificate of Merger of ALH Finance Corporation with and into Alliance Laundry Corporation. | Exhibit 3.1.7 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.2.1 | Second Amended and Restated Limited Liability Company Agreement of Alliance Laundry Holdings LLC, dated as of January 27, 2005. | Exhibit 3.2.1 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
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Exhibit | Description | Incorporated Herein By Reference To | ||
| 3.2.2 | Second Amended and Restated Limited Liability Company Agreement of Alliance Laundry Systems LLC, dated as of January 27, 2005. | Exhibit 3.2.2 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 3.2.3 | Amended and Restated By-Laws of Alliance Laundry Corporation, as adopted on January 27, 2005. | Exhibit 3.2.3 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.1 | Indenture, dated as of January 27, 2005 (the “2005 Indenture”), among Alliance Laundry Systems LLC (as successor by merger to ALH Finance LLC), Alliance Laundry Corporation (as successor by merger to ALH Finance Corporation) and The Bank of New York Trust Company N.A., as trustee. | Exhibit 4.1 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.2 | Form of Senior Subordinated Note. | Included in Exhibit 4.1 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.3 | Supplemental Indenture to the 2005 Indenture, dated January 27, 2005, among Alliance Laundry Systems LLC, Alliance Laundry Corporation and Lehman Brothers. | Exhibit 4.3 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.4 | Registration Rights Agreement, dated as of January 27, 2005, among Alliance Laundry Systems LLC (as successor by merger to ALH Finance LLC), Alliance Laundry Corporation (as successor by merger to ALH Finance Corporation) and the Initial Purchasers named therein. | Exhibit 4.4 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.5 | Joinder Agreement to the Registration Rights Agreement, dated as of January 27, 2005, among Alliance Laundry Systems LLC, Alliance Laundry Corporation, Alliance Laundry Holdings LLC and the Initial Purchasers named therein. | Exhibit 4.5 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.6 | Credit Agreement, dated as of January 27, 2005, by and among Alliance Laundry Holdings LLC, ALH Finance LLC, Alliance Laundry Systems LLC, the several banks and other financial institutions parties thereto and Lehman Commercial Paper Inc., as administrative agent. | Exhibit 4.6 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.7 | Guarantee and Collateral Agreement, dated as of January 27, 2005, made by Alliance Laundry Holdings LLC, Alliance Laundry Systems LLC, and Alliance Laundry Corporation in favor of Lehman Commercial Paper Inc. | Exhibit 4.7 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
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Exhibit | Description | Incorporated Herein By Reference To | ||
| 4.10 | Supplemental Indenture to the 1998 Indenture, dated January 20, 2005, among Alliance Holdings, Inc., Alliance Laundry Systems LLC, Alliance Laundry Corporation and The Bank of New York as trustee. | Exhibit 4.10 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 4.11 | Second Amendment, dated September 10, 2007 to the Credit Agreement dated as of January 27, 2005, among Alliance Laundry Holdings LLC, ALH Finance LLC, Alliance Laundry Systems LLC, the several banks and other financial institutions parties thereto and Lehman Commercial Paper Inc., as administrative agent. | Exhibit 4.11 to the Registrant’s Form 10-K/A, dated October 26, 2007 (file no. 333-56857-2) | ||
| 10.1 | Unit Purchase Agreement, dated as of December 7, 2004, by and among Alliance Laundry Holdings LLC, its Securityholders and ALH Holding Inc. and the sellers named therein. | Exhibit 10.1 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.2 | Amendment No. 1 to Unit Purchase Agreement, dated as of January 27, 2005, by and among Alliance Laundry Holdings LLC, ALH Holding Inc. and the sellers named therein. | Exhibit 10.2 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.3 | Supply Agreement dated as of January 4, 2006, by and among Coinmach Corporation (hereinafter, “Buyer”), and Alliance Laundry Systems LLC, (certain portions of this exhibit were omitted subject to a pending request for confidential treatment). | Exhibit 10.11 to Alliance Laundry Systems LLC’s Form 10-K, dated March 9, 2006 (file no. 333-56857-2) | ||
| 10.4 | Agreement by and between Alliance Laundry Systems LLC and The United Steelworkers of America Local 1327 Ripon, Wisconsin, executed and accepted on September 28, 2005. | Exhibit 10.1 to Alliance Laundry Systems LLC’s Form 10-Q, dated November 10, 2005 (file no. 333-56857-2) | ||
| 10.5 | Lease agreement, dated November 11, 2005 between Alliance Laundry Systems LLC (tenant) and 700 Stanton Drive, LLC (landlord). | Exhibit 10.15 to Alliance Laundry Systems LLC’s Form 10-K, dated March 9, 2006 (file no. 333-56857-2) | ||
| 10.6 | Amended and Restated Employment Agreement, dated as of January 27, 2005, by and between Alliance Laundry Systems LLC and Thomas F. L’Esperance. | Exhibit 10.20 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.7 | Form of Executive Severance Protection and Restrictive Covenant Agreement of Alliance Laundry Systems LLC. | Exhibit 10.25 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
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Exhibit | Description | Incorporated Herein By Reference To | ||
| 10.8 | Form of Closing Bonus Letter Agreement of Alliance Laundry Holdings LLC. | Exhibit 10.26 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.9 | Executive Retention Bonus Letter Agreement, dated January 27, 2005, between Thomas F. L’Esperance and Alliance Laundry Systems LLC. | Exhibit 10.27 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.10 | Form of Executive Retention Bonus Letter Agreement of Alliance Laundry Systems LLC. | Exhibit 10.28 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.11 | ALH Holding Inc. Stock Purchase and Rollover Investment Plan, as adopted on January 27, 2005. | Exhibit 10.29 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.12 | Stockholders Agreement, dated as of January 27, 2005, among ALH Holding Inc., Ontario Teachers’ Pension Plan Board and the Management Stockholders named therein. | Exhibit 10.30 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.13 | Registration Rights Agreement of ALH Holding Inc., dated as of January 27, 2005, among ALH Holding Inc., Ontario Teachers’ Pension Plan Board and the Management Stockholders named therein. | Exhibit 10.31 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.14 | ALH Holding Inc. Stock Incentive Plan, as adopted on January 27, 2005. | Exhibit 10.32 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.15 | Form of ALH Holding Inc. Nonqualified Stock Option Agreement. | Exhibit 10.33 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.16 | Form of Management Subscription Agreement of ALH Holding Inc. | Exhibit 10.34 to the Registrant’s Form S-4/A, dated February 11, 2005 (file no. 333-122524-02) | ||
| 10.17 | Indenture, dated as of June 28, 2005, between Alliance Laundry Equipment Receivables Trust 2005-A and The Bank of New York, as indenture trustee. | Exhibit 10.1 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
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Exhibit | Description | Incorporated Herein By Reference To | ||
| 10.18 | Purchase Agreement, dated as of June 28, 2005, between Alliance Laundry Equipment Receivables 2005 LLC as buyer and Alliance Laundry Systems LLC as seller. | Exhibit 10.2 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.19 | Pooling and Service Agreement, dated June 28, 2005, among Alliance Laundry Systems LLC as servicer and originator, Alliance Laundry Equipment Receivables 2005 LLC as transferor and Alliance Laundry Equipment Receivables Trust 2005-A as issuer. | Exhibit 10.3 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.20 | Trust Agreement, dated June 14, 2005, between Alliance Laundry Equipment Receivables 2005 LLC as transferor and Wilmington Trust Company as owner trustee. | Exhibit 10.4 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.21 | Administration Agreement, dated June 28, 2005, among Alliance Laundry Equipment Receivables Trust 2005-A, Alliance Laundry Systems LLC and The Bank of New York. | Exhibit 10.5 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.22 | Limited Liability Company Agreement of Alliance Laundry Equipment Receivables 2005 LLC, dated as of June 1, 2005. | Exhibit 10.6 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.23 | Insurance and Indemnity Agreement, dated as of June 28, 2005, between AMBAC Assurance Corporation as insurer, Alliance Laundry Equipment Receivables Trust 2005-A as issuer, Alliance Laundry Equipment Receivables 2005 LLC as seller, Alliance Laundry Systems LLC and The Bank of New York as indenture trustee. | Exhibit 10.7 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.24 | Note Purchase Agreement, dated as of June 28, 2005, among Alliance Laundry Equipment Receivables Trust 2005-A as issuer, Alliance Laundry Systems LLC as the Servicer, Alliance Laundry Equipment Receivables 2005 LLC as the transferor, the Note Purchasers party hereto, IXIS Financial Products Inc. as administrative agent and as an agent, Lehman Brothers Holdings Inc. as an agent and The Other Agents Hereto. | Exhibit 10.8 to Alliance Laundry Systems LLC’s Form 10-Q, dated August 10, 2005 (file no. 333-56857-2) | ||
| 10.25 * | Employment Agreement, dated as of September 26, 2007, by and between Alliance Laundry Systems LLC and Michael D. Schoeb. | |||
| 10.26 * | Amended and Restated ALH Holding Inc. Stock Incentive Plan, as adopted on January 31, 2008. | |||
| 10.27 * | Second Amended and Restated ALH Holding Inc. Stock Purchase and Rollover Investment Plan, as adopted January 31, 2008. | |||
| 12.1* | Statement re Computation of Ratio of Earnings to Fixed Charges. | |||
| 14.1 | Code of Ethics. | Exhibit 14.1 to Alliance Laundry Systems LLC’s Form 10-K, dated March 18, 2005 (file no. 333-56857-2) | ||
| 21.1* | Subsidiaries of Alliance Laundry Systems LLC. | |||
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| 32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| * | Filed herewith |
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