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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
COMMISSION FILE NUMBER 333-56857
333-56857-01
333-56857-02
ALLIANCE LAUNDRY SYSTEMS LLC
ALLIANCE LAUNDRY CORPORATION
ALLIANCE LAUNDRY HOLDINGS LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-1927923
DELAWARE 39-1928505
DELAWARE 52-2055893
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. BOX 990
RIPON, WISCONSIN 54971-0990
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(920) 748-3121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Alliance Laundry Systems LLC
Index to Annual Report on Form 10-K
Year Ended December 31, 1999
Page
----
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING
INFORMATION.................................................................... 3
PART I.
ITEM 1. BUSINESS........................................................................ 3
ITEM 2. PROPERTIES...................................................................... 13
ITEM 3. LEGAL PROCEEDINGS............................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS............................................................ 16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.................................................... 16
ITEM 6. SELECTED FINANCIAL DATA......................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 27
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..................................................................... 63
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS................................................ 63
ITEM 11. EXECUTIVE COMPENSATION.......................................................... 64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................................. 67
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 70
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K............................................................ 73
INDEX TO EXHIBITS............................................................... 73
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
This Annual Report includes "forward-looking statements" which appear in a
number of places in this Annual Report and include 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, including 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. 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.
PART I.
ITEM 1. BUSINESS
Introduction
As used in this Annual Report, unless the context requires otherwise,
references to "Alliance" or the "Company" (i) with respect to periods prior to
the Merger (as defined below) refer to Alliance Laundry Holdings LLC (the
"Parent," formerly known as Raytheon Commercial Laundry LLC prior to the Merger)
and its predecessors and subsidiaries, (ii) with respect to periods subsequent
to the Merger, refer collectively to Alliance Laundry Systems LLC and its
subsidiaries and (iii) when used with regard to financial data refer to the
consolidated financial results of Alliance Laundry Holdings LLC and Alliance
Laundry Systems LLC. As used herein, the term "stand alone commercial laundry
equipment" refers to commercial laundry equipment excluding dry cleaning
equipment and custom engineered, continuous process laundry systems and the term
"stand alone commercial laundry industry" includes laundromats, multi-housing
laundries and on-premise laundries and excludes dry cleaners and continuous
process laundries.
On May 5, 1998, pursuant to an Agreement and Plan of Merger ("Merger
Agreement") among Bain/RCL, L.L.C., a Delaware limited liability company ("Bain
LLC"), RCL Acquisitions LLC ("MergeCo"), the Parent and Raytheon Company
("Raytheon"), MergeCo was merged with and into the Parent (the "Merger") with
the Parent being the surviving entity. Prior to the Merger, Raytheon owned 100%
of the equity securities of the Parent, and Bain LLC, the BRS Investors (as
defined below), and certain members of senior management (the "Management
Investors") of the Parent owned 100% of the equity securities of MergeCo. As a
result of the Merger, Bain LLC, the BRS Investors and the Management Investors
acquired 93% of the common equity of the Parent. Simultaneous with the
consummation of the Merger, the Parent contributed substantially all of its
assets and liabilities to the Company. Immediately after the consummation of
the Merger, the Company became the only direct subsidiary of the Parent and
succeeded to substantially all of the assets and liabilities of the Parent.
Alliance believes it is the leading designer, manufacturer and
marketer of stand alone commercial laundry equipment in North America and a
leader worldwide. Under the well-known brand names of Speed Queen, UniMac and
Huebsch, the Company produces a full line of commercial washing
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machines and dryers with load capacities from 16 to 250 pounds. The Company
believes it has had the leading market share in the North American stand alone
commercial laundry equipment industry for the last five years and has
increased its market share from approximately 35% in 1995 to 37% in 1999. The
Company attributes its industry leading position to: (i) the quality,
reliability and functionality of its products; (ii) the breadth of its product
offerings; (iii) its extensive distributor network and strategic alliances with
key customers; and (iv) its investment in new product development and
manufacturing capabilities. As a result of its market leadership, the Company
has an installed base of equipment that it believes is the largest in the
industry and that generates significant recurring sales of replacement equipment
and service parts. Internationally, the Company has developed targeted
opportunities, generating equipment sales of $35.3 million, $34.1 million and
$45.5 million in 1999, 1998 and 1997, respectively. In addition, pursuant to an
agreement which concluded September 17, 1999, the Company supplied consumer
washing machines to Amana Company, L.P. ("Appliance Co.") for sale at retail.
For 1999, 1998 and 1997 the Company generated net sales of $312.4 million,
$330.3 million and $347.7 million and EBITDA (as defined in Item 6 - Selected
Financial Data) of $51.0 million, $44.2 million and $57.2 million, respectively.
The Company believes it has developed the most extensive distribution
networks to each of the three distinct customer groups within the North American
stand alone commercial laundry equipment industry: (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. The Company estimates that in
over 80% of the North American market its laundromat and on-premise laundry
distributors are either the number one or number two distributor for their
respective selling regions. In addition, the Company's in-house sales force has
developed superior relationships with leading route operators that own, install
and maintain commercial laundry equipment in multi-housing laundries, a critical
factor in enabling the Company to grow its market share. Internationally, the
Company sells its laundry equipment through distributors and to retailers.
With an investment of over $77.0 million since 1995, the Company has
substantially completed the development of many new products, the redesign of
existing products and the modernization of its manufacturing facilities in
Wisconsin and Florida. The Company believes its considerable investment in its
product line and manufacturing capabilities has strengthened and will continue
to enhance its market leadership position.
Alliance Laundry Corporation ("ALC") is a wholly owned subsidiary of
Alliance that was incorporated for the sole purpose of serving as a co-issuer of
the Series B 9 5/8% Senior Subordinated Notes (the "Notes") in order to
facilitate the Note offering. ALC does not have any substantial operations or
assets of any kind and will not have any revenues.
Company Strengths
Market Leader with Significant Installed Base. The Company believes
it led the North American industry in sales to all customer groups, with a 37%
market share overall in 1999. As a result of its leading market position, the
Company has achieved superior brand recognition and extensive distribution
capabilities. The Company's market position has also allowed it to establish
what it believes to be the largest installed base in its industry, which
generates a significant level of recurring sales of replacement equipment and
service parts and provides a platform for sales growth.
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Industry-leading Product Offering. The Company believes its product
line leads the industry in reliability, breadth of offerings, functionality and
advanced features. Its development team of more than 90 engineers and technical
personnel, together with its marketing and sales personnel, work with the
Company's major customers to redesign and enhance the Company's products to
better meet customer needs. For example, the Company's new products emphasize
efficiency and new technology, facilitating ease of use as well as improving
performance and reliability. In addition, the Company believes it is the only
manufacturer in North America to produce a full product line (including topload
washers, dryers, frontload washers, washer-extractors and tumbler dryers for all
customer groups), thereby providing customers with a single source for all their
stand alone commercial laundry equipment needs.
Extensive and Loyal Distribution Networks. The Company believes it
has developed the industry's most extensive North American distribution
networks. The Company estimates its distributors are either the number one or
number two distributor for their respective selling regions in over 80% of the
North American market. Most of the Company's distributors have been customers
for over ten years. In addition, through its in-house sales force the Company
has developed excellent relationships with industry-leading route operators, who
are direct customers of the Company. The Company believes its strong
relationships with its customers are based, in part, on the quality, breadth and
performance of its products and on its comprehensive value-added services.
Leading National Brands. The Company markets and sells its products
under the widely recognized brand names Speed Queen, UniMac and Huebsch. A
survey commissioned by the Company in 1993 of more than 1,000 commercial laundry
distributors and end-users ranked Speed Queen as the leader in terms of brand
awareness and as an industry leader for quality and reliability. In the same
study, UniMac was ranked a leading brand in the stand alone on-premise laundry
industry; Huebsch and Speed Queen ranked first and second, respectively, in
customer satisfaction.
Strong and Incentivized Management Team. Led by Chief Executive
Officer Thomas L'Esperance, the Company believes it has assembled the strongest
management team in the commercial laundry equipment industry. The Company's
seven executive officers have over 87 years of combined experience in the
commercial laundry equipment and appliance industries. This management team has
executed numerous strategic initiatives, including: (i) ongoing refinements to
its product offerings; (ii) the development of strategic alliances with key
customers; (iii) the implementation of manufacturing cost reduction and quality
improvement programs; and (iv) the acquisition and successful integration of the
commercial washer-extractor business of the UniMac Company ("UniMac"). In
addition, management owns approximately 19% of the Company's common units on a
diluted basis.
Business Strategy
The Company's strategy is to achieve profitable growth by offering a
full line of the most reliable and functional stand alone commercial laundry
equipment, along with comprehensive value-added services. The key elements of
the Company's strategy are as follows:
Offer Full Line of Superior Products and Services. The Company seeks
to satisfy all of a customer's stand alone commercial laundry equipment needs
with its full line of products and services. The Company seeks to compete with
other manufacturers in the commercial laundry equipment industry by introducing
new products, features and value-added services tailored to meet evolving
customer requirements. In 1998, for example, the Company introduced a new line
of small-chassis frontload washers, offering multi-housing laundries increased
water and energy efficiency. In addition, in 1997, the Company introduced its
Automatic Balance System for topload washers, providing industry-leading
5
out-of-balance handling; Alliance's new topload washers generate a higher g-
force, thereby reducing moisture left in the laundry and drying time, ultimately
reducing operating costs for the Company's customers.
Develop and Strengthen Alliances with Key Customers. The Company has
developed and will continue to pursue long-term alliances and multi-year supply
agreements with key customers. For example, the Company is the predominant
supplier of new laundry equipment to Coinmach Corporation ("Coinmach"), the
largest and fastest growing operator of multi-housing laundries in North
America.
Continuously Improve Manufacturing Operations. The Company seeks to
continuously enhance its product quality and reduce costs through refinements to
manufacturing processes. The Company achieves such improvements through
collaboration among key customers, suppliers and its engineering and marketing
personnel. Since 1995, the Company has progressively reduced manufacturing
costs through improvements in raw material usage and labor efficiency, among
other factors.
Industry Overview
The Company estimates that North American stand alone commercial
laundry equipment sales were approximately $498.0 million in 1999, of which the
Company's equipment sales represented approximately $182.5 million. The Company
believes that North American sales of stand alone commercial laundry equipment
have grown at a compound annual rate of approximately 3% since 1993. North
American commercial laundry equipment sales historically have been relatively
insulated from business and economic cycles, given that economic conditions do
not tend to affect the frequency of use, or replacement, of laundry equipment.
Management believes industry growth will be sustained by continued population
expansion and by customers increasingly "trading up" to equipment with enhanced
functionality, raising 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) availability of innovative
technologies such as cashless payment systems and advanced electronic controls,
which improve ease of use and management audit capabilities; and (iv) value-
added services such as rapid spare parts delivery, equipment financing and
computer aided assistance in the design of commercial laundries.
Outside of the stand alone commercial laundry equipment market, the
Company does not participate in manufacturing or selling commercial custom
engineered, continuous process laundry systems. Until its March 6, 2000
acquisition of the Ajax pressing and finishing equipment line (see Note 19 -
Subsequent Event in notes to Financial Statements), the Company offered only
shirt laundering, wetcleaning and drying equipment to the commercial dry
cleaning equipment market. Each of these other markets is distinct from the
stand alone commercial laundry equipment market, employing different
technologies and serving different customer groups.
Customer Categories. 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 sophistication. For example, equipment
purchased by multi-housing route operators is most similar to consumer machines
sold at retail, while equipment purchased by laundromats and on-premise
laundries has greater durability, delivers increased capacity and provides
superior cleaning and drying capabilities.
6
Laundromats. Management estimates that laundromats accounted for
approximately 52% of North American stand alone commercial laundry equipment
sales in 1999. These approximately 35,000 facilities typically provide walk-
in, self-service washing and drying. Laundromats primarily purchase commercial
topload washers, washer-extractors and tumblers. Washer-extractors and tumblers
are larger-capacity, higher-performance washing machines and dryers,
respectively. Laundromats have historically been owned and operated by sole
proprietors. Laundromat owners typically rely on distributors to provide
equipment, technical and repair support and broader business services. For
example, distributors may host seminars for potential laundry proprietors on
laundromat investment opportunities. Independent proprietors also look to
distributors and manufacturers for equipment financing. Given the laundromat
owner's reliance on the services of its local distributor, the Company believes
that a strong distributor network in local markets differentiates manufacturers
in serving this customer group.
In addition to distributor relationships, the Company believes
laundromat owners choose among different manufacturers' products based on, among
other things: (i) availability of equipment financing; (ii) reputation,
reliability and ease and cost of repair; (iii) the water and energy efficiency
of the products (approximately 22% to 25% of annual gross wash and dry income of
laundromats is consumed by utility costs, according to the Coin Laundry
Association ("CLA")); and (iv) the efficient use of physical space in the store
(since 15% to 20% of annual gross income of laundromats is expended for rent
according to the CLA).
Multi-housing laundries. Management believes that multi-housing
laundries accounted for approximately 26% of North American stand alone
commercial laundry equipment sales in 1999. These laundries include common
laundry facilities in multi-family apartment and condominium complexes,
universities and military installations.
Most products sold to multi-housing laundries are small-chassis
topload and frontload washers and small-chassis dryers similar in appearance to
those sold at retail to the consumer market but offering a variety of enhanced
durability and performance features. For example, topload washers sold to
multi-housing laundries typically last up to 12,000 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 contract 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 the Company 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 repair service; (iii) the ability of building management to audit
laundry equipment revenue; and (iv) the water and energy efficiency of products.
The Company believes reliability and durability are key criteria for
route operators in selecting equipment, as they seek to minimize the cost of
repairs. The Company also believes route operators prefer water and energy
efficient equipment that offers enhanced electronic monitoring and tracking
features demanded by building management companies. Given their investments in
spare parts inventories and in technician training, route operators are
reluctant to change equipment suppliers. Therefore, the Company believes an
installed base gives a commercial laundry equipment manufacturer a competitive
advantage.
7
On-premise laundries. Management believes that on-premise laundries
accounted for approximately 22% of North American stand alone commercial laundry
equipment sales in 1999. 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, sports
facilities, car washes and prisons.
Most products sold to on-premise laundries are washer-extractors and
tumbler dryers, primarily in larger capacities up to 250 pounds. These machines
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. The Company believes that in a typical hotel on-premise
laundry, up to 50% of the cost of operations is labor.
On-premise laundries typically purchase equipment through a
distributor who provides a range of selling and repair services on behalf of
manufacturers. As with laundromats, the Company believes 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 to an on-premise laundry's selection of an equipment supplier.
Trends and Characteristics
Growth Drivers. The Company believes that continued population
expansion in North America has and will drive steady demand for garment and
textile laundering by all customer groups purchasing commercial laundry
equipment. The Company believes population growth has historically supported
replacement and some 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 0.9% since 1988 and is projected to grow
at approximately 1.0% per year on average over the next ten years.
In addition, customers are increasingly "trading up" to equipment with
enhanced functionality, raising 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, which the Company believes provide such customers with a competitive
advantage. Moreover, customers are moving towards equipment with increased
water and energy efficiency as the result of government and consumer pressure
and a focus on operating cost containment.
Limited Cyclicality. North American commercial laundry equipment
sales historically have been relatively insulated from business and economic
cycles because economic conditions do not tend to affect the frequency of use,
or replacement, of laundry equipment. Management believes industry growth will
be sustained by continued population expansion and by customers increasingly
"trading up" to equipment with enhanced functionality, raising average selling
prices. Under all economic conditions, owners of commercial laundries typically
delay equipment replacement until such equipment can no longer be economically
repaired or until competition forces the owner to upgrade such equipment to
provide improved appearance or functionality. The economic life of such
equipment and thus timing of replacement of such equipment are also generally
unaffected by economic conditions; the economic life of stand alone commercial
laundry equipment is generally 7-14 years.
8
International Growth. The Company anticipates growth in demand for
commercial laundry equipment in international markets, especially in developing
countries where laundry machine penetration remains low. As of 1998, less than
50% of the population of South America and 30% of the Asian population had a
washer in their home, compared to over 70% in North America.
Reducing Customer Operating Costs. The time required to wash and dry a
given load of laundry (i.e., 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 to decrease labor
costs and increase the volume of laundry that can be processed in a given time
period. Examples of methods of reducing cycle time are: (i) increasing the
fill, wash and drain rates; (ii) increasing water extraction capability by
increasing spin rate; and (iii) decreasing the number of unfinished wash cycles
by improving out-of-balance performance.
Products
Overview. The Company offers a full line of stand alone commercial
laundry washers and dryers, with service parts and value-added services
supporting its products, under the Speed Queen, Huebsch and UniMac brands
throughout North America and in over sixty foreign countries. The Company's
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 250 pounds used in on-premise laundries. The Company also benefits
from domestic and international sales of service parts for its large installed
base of commercial laundry equipment. Internationally, the Company sells laundry
equipment under the Speed Queen and private label brands. In addition, the
Company produced consumer laundry washers for Appliance Co. under a supply
agreement which concluded September 17, 1999.
Washers. Washers, including consumer products sold to Appliance Co.,
represented approximately 60% of 1999 net sales and include washer-extractors,
topload washers and frontload washers.
Washer-Extractors. The Company manufactures washer-extractors, its
largest washer products, to process from 18 to 250 pounds of laundry per load.
Washer-extractors extract water from laundry with spin speeds that produce over
300g's of centrifugal force, thereby reducing the time and energy costs for the
drying cycle. Sold under the Speed Queen, UniMac and Huebsch brands, these
products represented approximately 26% of 1999 net sales. Washer-extractors
that process up to 80 pounds of laundry per load are sold to laundromats, and
washer-extractors that process up to 250 pounds of laundry per load are sold to
on-premises laundries. Washer-extractors are built to be extremely durable due
to the enormous g-force generated by spinning several hundred pounds of water-
soaked laundry, to the constant use of the equipment and to the high cost of
failure to the user.
In late 1998 the Company introduced its new Water Saving System line
of washer-extractors for on-premise laundries. This new line of washer
extractors is designed to obtain up to 32% reductions in water consumption for
some applications. The system will also provide substantial reductions in sewer
costs and detergent usage for some users.
Topload Washers. Topload washers are small-chassis washers with the
capability to process up to 18 pounds of laundry per load with spin speeds that
produce up to 150g's. Sold primarily to multi-
9
housing laundries and laundromats under the Speed Queen and Huebsch brands,
these products represented approximately 17% of 1999 net sales. In addition, the
Company's sales of consumer washers to Appliance Co. represented approximately
17% of 1999 net sales.
In 1997, the Company introduced its Automatic Balance System ("ABS"),
which it believes provides the industry-leading out-of-balance handling. New
topload washers with ABS deliver higher g-force, reducing moisture left in the
laundry, thereby reducing drying time and energy usage.
Frontload Washers. In September 1998, the Company introduced a new
small-chassis frontload washer with the capability to process up to 18 pounds of
laundry per load. Frontload washers are sold under the Speed Queen brand to
laundromat and multi-housing customers. The frontload washer's advanced design
uses 28% less water compared to commercial topload washers. Furthermore,
decreased usage of hot water and superior water extraction in the high g-force
spin cycle reduce energy consumption. This new frontload washer is available
with front controls (front accessibility complies with Americans with
Disabilities Act regulations) and can be purchased with a matching small-chassis
dryer (single or stacked).
Dryers. Dryers represented approximately 27% of 1999 net sales and
include tumbler dryers, standard dryers and stacked dryers. The Company also
sells a new line of stacked frontload washers and dryers.
Tumbler Dryers. Tumblers are very large dryers with the capability of
drying up to 170 pounds of laundry per load. Tumblers represented approximately
18% of 1999 net sales. Tumblers are sold primarily to laundromats and on-
premise laundries under all three of the Company's brands. The Company's new
tumbler dryer design, introduced in October 1997, features commonality of
internal components between models, reducing parts inventory and improving
serviceability. These units have 33% to 50% fewer moving parts as compared to
their previous design. In addition, these tumblers reduce drying time using 22%
less energy as compared to their previous design. The Company's new product
offering expanded the capacity range of the tumbler dryer line to include the 25
pound single dryer, which is popular in foreign markets.
Standard Dryers. Standard dryers are small capacity dryers with the
capability to process up to 18 pounds of laundry per load. Sold under the Speed
Queen and Huebsch brands, standard dryers (including stacked dryers) represented
approximately 9% of 1999 net sales. In 1997, the Company introduced its newly
designed standard dryer, which serves the multi-housing and international
consumer markets. The Company believes the dryer's increased capacity,
measuring 7.1 cubic feet, is among the largest in the industry. The size of the
loading door opening has also been increased to improve loading accessibility.
The Company believes that the increased drying capacity and enhanced operational
convenience that these improvements provide are critical factors to a customer's
product satisfaction. The Company sourced its standard and stacked dryers from
Appliance Co. until September 1999.
Stacked Dryers and Stacked Frontload Washers and Dryers. To enable
its multi-housing customers to conserve valuable floor space, the Company offers
a stacked unit consisting of two 18 pound standard dryers and offers a stacked
unit consisting of an 18 pound frontload washer paired with an 18 pound standard
dryer.
Service Parts. The Company benefits from the recurring sales of
service parts to its large installed base. Such sales accounted for
approximately 10% of 1999 net sales. The Company offers
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immediate response service whereby many of its parts are available on a 24-hour
turnaround for emergency repair parts orders.
Other Value-Added Services. The Company believes its customers attach
significant importance to the value-added services it provides. The Company
offers services that it believes are significant drivers of high customer
satisfaction, such as equipment financing (which accounted for approximately 2%
of 1999 net sales), laundromat site selection assistance, investment seminar
training materials, computer-aided commercial laundry room design, sales and
service training for distributors, technical support and service training
material. In addition, the Company believes it offers an unmatched range of
complementary customer services and support, including toll-free technical
support and on-call installation and repair service through its highly trained
distributors, and web sites which provide information on all Alliance products
and services including downloadable product literature, installation guides and
site lay-out tools. The Company believes its extensive service capabilities, in
addition to the dependability and functionality of its products, will continue
to differentiate its products from the competition.
Customers
The Company's customers include more than: (i) 120 distributors to
laundromats; (ii) 100 distributors to on-premise laundries; (iii) 110 route
operators serving multi-housing laundries; and (iv) 75 international
distributors serving more than 60 countries.
The Company's top ten equipment customers (excluding Appliance Co.)
accounted for approximately 27% of 1999 net sales (excluding sales to Appliance
Co.). Coinmach, the largest multi-housing route operator in the United States,
PWS Investments, Inc. and Aaxon Holdings, Inc. were the Company's largest
customers (excluding Appliance Co.), the largest of which, Coinmach, accounted
for 14.1% of 1999 net sales (excluding sales to Appliance Co.). In addition,
sales to Appliance Co. accounted for 17% of 1999 net sales.
Sales and Marketing
Sales force. The Company's sales force of approximately 30 is
structured to serve the needs of each customer group. In addition, the Company,
through a staff of approximately 40 professionals, provides customers and
distributors with a wide range of value-added services such as laundromat site
selection assistance, investment seminar training materials, computer-aided
commercial laundry room design, sales and service training and technical
support.
Marketing programs. The Company supports its sales force and distributors
through a balanced marketing program of advertising and industry trade shows.
Advertising expenses totaled $3.2 million in 1999 and included a variety of
forms, from print and electronic media to direct mail. In addition, Company
representatives attended over 40 trade shows in 1999 to introduce new products,
maintain contact with customers, develop new customer relationships and generate
demand for the Company's products.
Equipment financing. The Company, through its special purpose financing
subsidiaries, offers 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 2-7 year loans with an average principal
amount of approximately $84,000. Management believes that the Company's off-
balance sheet equipment financing program is among the industry's most
comprehensive and that the program is an
11
important component of its marketing activities. In addition, this service
provides the Company with stable, recurring income.
The program is structured to minimize risk of loss. The Company adheres 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), the receipt 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 inclusive of loans sold to third parties since the inception of the
program in 1992 have been less than 1% as of December 31, 1999.
Research and Development
The Company's engineering organization is staffed with over 90 engineers
and technical support staff. The Company's 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 its commercial laundry equipment. The Company's
engineers and technical personnel, together with its marketing and sales
personnel, collaborate with the Company's major customers to redesign and
enhance its products to better meet customer needs. Research and development
spending has increased from $5.8 million in 1995 to $6.8 million in 1999. The
Company has developed numerous proprietary innovations that the Company uses in
select products. Over the past two years, the Company has rolled out its
MicroMaster line of electronically controlled tumblers and washer-extractors
under the Speed Queen brand as well as its CardMate Plus debit card cashless
system designed to replace coin payment systems. The Company believes this
array of new products allows it to continue to be an innovative leader in
electronic controls equipment. The Company believes improvements made to
existing products and the introduction of new products have supported the
Company's market leadership position.
Competition
Within the North American stand alone commercial laundry equipment
industry, the Company competes with several large competitors. The Company
believes, however, it is the only participant in the North American stand alone
commercial laundry equipment industry to serve significantly all three customer
groups with a full line of topload washers, washer-extractors, frontload
washers, tumbler dryers and standard dryers. With respect to laundromats, the
Company's principal competitors include Wascomat (the exclusive North American
distributor of Electrolux AB products), Maytag Corporation and The Dexter
Company. In multi-housing, the principal competitors include Maytag Corporation
and Whirlpool Corporation. In on-premise laundry, the Company competes
primarily with Pellerin Milnor Corporation, American Dryer Corporation and
Wascomat. The Company does not believe that a significant new competitor has
entered the North American stand alone commercial laundry equipment industry
during the last ten years, however there can be no assurance that significant
new competitors or existing competitors will not compete for the business of
different customer groups in the future.
Certain of the Company's principal competitors have greater financial
resources and/or are less leveraged than the Company and may be better able to
withstand market conditions within the commercial laundry industry. There can
be no assurance that the Company will not encounter increased competition in the
future, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
12
Manufacturing
The Company owns and operates three manufacturing facilities in
Wisconsin, Florida and Kentucky-with an aggregate of more than 800,000 square
feet. The facilities are organized to focus on specific product segments,
although each facility serves multiple customer groups. The Ripon plant
presently produces the Company's small-chassis topload washers and frontload
washers and began producing the Company's small-chassis dryers, beginning in
fall of 1999. The Company's large-chassis products are produced in Marianna
(washer-extractors) and Madisonville (tumblers). The Company's manufacturing
plants primarily engage in fabricating, machining, painting, assembly and
finishing operations. The Company also operates four regional distribution
centers, of which three are owned and one is leased. The Company believes that
existing manufacturing facilities provide adequate production capacity to meet
expected product demand.
The Company purchases substantially all raw materials and components
from a variety of independent suppliers. Key material inputs for manufacturing
processes include motors, stainless steel, aluminum, electronic controls,
corrugated boxes and plastics. The Company believes there are readily available
alternative sources of raw materials from other suppliers. The Company has
developed long-term relationships with many of its suppliers and has sourced
materials from nine of its ten largest suppliers for at least five years.
The Company is committed to achieving continuous improvement in all
aspects of its business in order to maintain its industry leading position. All
of the Company's manufacturing facilities are ISO 9001 certified.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding
significant facilities operated by the Company as of December 31, 1999:
Approximate
Location Function/Products Square Feet Owned/Leased
Production Facilities
Ripon, WI............. Manufacture Small Washers and Dryers 425,400 Owned
Marianna, FL.......... Manufacture Washer-Extractors 222,200 Owned /1/
Madisonville, KY...... Manufacture Tumbler Dryers 152,700 Owned /2/
------------------
Subtotal 800,300
Regional Distribution Centers
Ripon, WI............. Washers, Dryers, Tumblers 138,700 Owned
Ripon, WI............. Service Parts 60,800 Owned
Madisonville, KY...... Tumblers 80,000 Leased /3/
Marianna, FL.......... Washer-Extractors 37,000 Owned
------------------
Subtotal 316,500
Other
Ripon, WI............. Div. Support 65,700 Owned
Engineering, Procurement 43,100 Owned
------------------
Subtotal 108,800
------------------
Total 1,225,600
==================
13
- ------
/1/ The Marianna building is owned, however, the land is leased from the city
of Marianna.
/2/ The Madisonville building was offered for sale in 2000 as a result of the
restructuring project referred to in Note 4 of the Financial Statements.
/3/ Up to 80,000 square feet of warehouse space is available and is rented on
an as needed basis. Currently 40,000 square feet is rented.
The Company believes existing manufacturing facilities provide adequate
production capacity to meet product demand.
ITEM 3. LEGAL PROCEEDINGS
Various claims and legal proceedings generally incidental to the normal
course of business are pending or threatened against the Company. While the
Company cannot predict the outcome of these matters, in the opinion of
management, any liability arising thereunder will not have a material adverse
effect on the Company's business, financial condition and results of operations
after giving effect to provisions already recorded.
In April 1998, Appliance Co. filed suit in the United States District
Court for the Southern District of New York seeking, in pertinent part, to
prohibit the Company from competing in the U.S. consumer retail distribution
laundry market until July 2012. The Company currently does not participate in
this market. In June 1998, Appliance Co. added allegations asserting that the
Company, Alliance Laundry and Bain Capital, Inc. had tortiously interfered with
the non-compete agreement that Appliance Co. claimed that Alliance Laundry had
inherited from Raytheon. In January 1999, Appliance Co. added claims against
Raytheon and the Company in connection with the Horizon washing machine, a
"single-pocket" frontload washing machine that was being readied for volume
production as of the time when Raytheon (the former parent of the Company) was
completing the sale of its consumer appliances business to Appliance Co. (the
"Appliance Co. Transaction"). In January 1999, Alliance Laundry filed a
counterclaim against Appliance Co. seeking payment of sums owed for certain
top-load washing machines and parts sold pursuant to a Supply Agreement between
the companies. In May 1999, Appliance Co. filed a Reply Counterclaim for breach
of the Supply Agreement. In October 1999, Appliance Co. added another claim that
sought to revise the cross-license agreement between the two companies to
restrict the degree to which the Company can use intellectual property whose
ownership was retained by the Company as part of the 1997 transaction between
Appliance Co. and Raytheon to compete against Appliance Co. in the U.S. consumer
retail distribution laundry market.
In December 1999, the parties to this lawsuit agreed to settle all of
their claims, and all claims in the action against all parties were dismissed
with prejudice. Under the terms of the settlement agreement, the Company will be
allowed to compete in the U.S. home laundry market beginning in October 2004.
The Company will also be permitted to compete in the U.S. home laundry market
beginning in October 2004 with both the intellectual property whose ownership
was retained by the Company as part of the 1997 transaction between Appliance
Co. and Raytheon and the intellectual property that was cross-licensed to the
Company by Appliance Co. pursuant to the cross-license agreement. Likewise,
Appliance Co. will be permitted to compete against the Company in the commercial
laundry market beginning in October 2004 and will be able to do so using both
the intellectual property that Appliance Co. acquired as part of the Appliance
Co. Transaction and the intellectual property to which Alliance received a
cross-license under the cross-license agreement. Additionally, pursuant to the
terms of the settlement agreement, Appliance Co. satisfied all outstanding
invoices owed to the Company for certain top-load washing machines and parts
sold pursuant to the Supply Agreement between the companies, and the Company was
required to pay Appliance Co. $3.0 million for certain Appliance Co.
manufactured inventory. The Company estimates that such inventory has a net
realizable value of approximately $1.7 million and has recorded the difference
($1.3 million) as a legal settlement cost in other income (expense), net.
On February 8, 1999, Raytheon commenced an arbitration under the Commercial
Arbitration Rules of the American Arbitration Association in Boston,
Massachusetts against the Company, seeking damages of $12.2 million plus
interest thereon and attorney's fees for breach of the Merger Agreement based on
Raytheon's claim for indemnification for a payment made to a third party
allegedly on behalf of the Company and Alliance Laundry following the
consummation of the Merger and each of the other related transactions (the
"Closing"). An arbitration was conducted pursuant to the terms of the Merger
Agreement ("Arbitration"). The Company asserted in the Arbitration that
Raytheon owed the $12.2 million to the third party and that neither the Company
nor Alliance Laundry is liable for such amount. In addition, the Company and
Bain LLC filed counterclaims and claims, respectively, seeking damages in excess
of $30 million from Raytheon. The Arbitration was concluded on January 12,
2000. The decision and award of the Arbitration panel is currently pending.
Any ultimate liability of the Company, on a consolidated basis, pursuant to such
proceedings will not, in the opinion of management, have a material effect on
the Company's financial position, liquidity or results of operations.
Pursuant to the Merger Agreement, Bain LLC, the Company and Raytheon have
agreed on a partial settlement of claims by the Company for monies due to the
Company from Raytheon in the amount of $4 million plus interest thereon as a
result of disputes arising under the Merger Agreement. The parties have agreed
this amount will not be paid to the Company until the outcome of the Arbitration
is known and the final award is rendered. This amount will either be offset
against any amount due to Raytheon from the Company as a result of the
Arbitration award, or will be added to any other amount due to the Company from
Raytheon as a result of the Arbitration. This $4 million plus interest thereon,
net of related costs, has been reflected in the accompanying financial
statements.
Environmental, Health and Safety Matters
The 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
14
disposal of hazardous wastes. The Company is also subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at the properties it owns or operates and
at other properties where the Company or predecessors have arranged for the
disposal of hazardous substances. As a result, the Company is involved, from
time to time, in administrative and judicial proceedings and inquires relating
to environmental matters. There can be no assurance that the Company will not
be involved in such proceedings in the future and that the aggregate amount of
future clean-up costs and other environmental liabilities will not have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that its facilities and operations
are in material compliance with all environmental, health and safety laws.
Federal, state and local governments could enact laws or regulations
concerning environmental matters that affect the Company's operations or
facilities or increase the cost of producing, or otherwise adversely affect the
demand for, the Company's products. The Company 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 the
Company predict how existing or future laws and regulations will be administered
or interpreted or what environmental conditions may be found to exist at the
Company's facilities or at other properties where the Company or its
predecessors have arranged for the disposal of hazardous substances.
Certain environmental investigatory and remedial work is underway or
planned at, or relating to, the Company's Marianna, Florida and Ripon, Wisconsin
manufacturing facilities and at a facility in Omro, Wisconsin formerly leased by
the Company. With respect to the Marianna facility, such work is being
conducted by a former owner of the property and is being funded through an
escrow account, the available balance of which the Company believes to be
substantially greater than remaining remediation costs. With respect to the
Ripon facility, such work will be conducted by the Company. The Company
currently expects to incur costs of approximately $100,000 through 2000 at the
Ripon facility to complete remedial work, subject to the Raytheon
indemnification described below. There can be no assurance, however, that
additional remedial costs will not be incurred by the Company in the future with
respect to the Ripon facility. With respect to the Omro facility, the Company
leased the Omro facility through July 1998 at which time it completed a
transition to outsourced aluminum die castings. The remedial work is being
conducted by Raytheon, the current owner of the facility, at Raytheon's sole
cost and expense. The Company does not currently expect to incur any costs with
respect to the remediation of the Omro facility.
Pursuant to the Merger Agreement, and subject to a three year notice
period following the Closing, Raytheon has agreed to indemnify the Company for
certain environmental liabilities in excess of $1,500,000 in the aggregate
arising from the operations of the Company and its predecessors prior to the
Merger, including with respect to environmental liabilities at the Ripon and
Marianna facilities. In addition to the Raytheon indemnification, with respect
to the Marianna, Florida facility, a former owner of the property has agreed to
indemnify the Company for certain environmental liabilities. In the event that
Raytheon or the former owner fail to honor their respective obligations under
these indemnifications, such liabilities could be borne directly by the Company
and could be material.
The Company has also received an order from the U.S. Environmental
Protection Agency ("EPA") requiring participation in clean-up activities at the
Marina Cliffs site in South Milwaukee, Wisconsin, the location of a former drum
reconditioner. EPA asserted that the Ripon facility was a generator of wastes
that were disposed of at the Marina Cliffs site. The asserted disposal predated
the Company's ownership of the Ripon facility. The Company believes that EPA
also has contacted a prior
15
owner of the facility to assert that the former owner may be liable. There is an
established group of potentially responsible parties that are conducting a
cleanup of the site. The group has estimated that the cleanup will cost
approximately $5 million. The group proposed to settle their alleged claims
against the Company, and to protect the Company from further liability at the
site, for approximately $100,000. The Company declined the proposal because it
believes that any liability related to the site is borne by the Ripon facility's
prior owner, and not the Company. The Company has met with EPA to explain its
defenses to enforcement of the administrative order. However, in the event the
Company were to incur liability related to the site, the Company believes that
any allocated remediation costs (currently estimated by the Company at $100,000
based upon on the proposed settlement offer mentioned above which would protect
the Company from further liability at the site) would not have a material
adverse affect on its business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
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
the Company. There was one holder of record of the Company's common equity as
of March 8, 2000.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical combined financial data
for the three years ended December 31, 1997 and selected historical consolidated
financial data for the years ended December 31, 1998 and December 31, 1999. For
periods prior to the Merger, the historical combined financial information
represents the results of the Company. As a result of the Merger, the Company
is now a wholly-owned subsidiary of the Parent. Because the Parent is a holding
company with no operating activities and provides certain guarantees, the
financial information presented herein for periods subsequent to the Merger
represents consolidated financial information of the Parent, rather than
consolidated financial information of the Company. The selected historical
combined financial data for the three years ended December 31, 1997 were derived
from the audited combined financial statements of the Company. The summary
historical consolidated financial data for the years ended December 31, 1998 and
December 31, 1999 were derived from audited consolidated financial statements of
the Company, which are included elsewhere herein, together with the report of
PricewaterhouseCoopers LLP, independent accountants. 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 the Company included elsewhere in this Annual
Report.
16
Years Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Statements of Income:
Net sales.................................................. $ 312,359 $ 330,267 $ 347,709 $ 318,263 $ 324,529
Operating income........................................... 38,296 28,846 42,950 34,078 29,323
Other income (expense), net................................ (1,706) 306 (243) 685 778
Interest expense........................................... 31,509 21,426 -- -- --
Income before taxes........................................ 5,081 7,726 42,707 34,763 30,101
Net income/(1)/............................................ 5,052 5,335 26,276 21,355 18,556
Other Operating Data:
EBITDA/(2)/................................................ 50,997 44,241 57,152 45,908 40,948
EBITDA before restructuring and nonrecurring costs/(3)/.... 54,704 51,025 57,152 49,612 41,522
Depreciation and amortization.............................. 16,969 16,671 14,445 11,145 10,847
Non-cash interest expense included in amortization above... 2,562 1,582 -- -- --
Restructuring and nonrecurring costs/(4)/.................. 3,707 6,784 -- 3,704 574
Capital expenditures....................................... 10,947 7,861 19,990 22,030 16,177
Total assets............................................... 219,866 214,204 205,086 209,795 220,063
Total debt................................................. 322,048 320,124 -- 1,000 1,100
(1) Subsequent to the consummation of the Merger, the Company is not a tax
paying entity. Historical amounts represent the Company's tax attributes as
a division of Raytheon as calculated on a separate return basis.
(2) "EBITDA," as presented, represents income before income taxes plus
depreciation, amortization (including non-cash interest expense related to
amortization of debt issuance costs), cash interest expense and non-cash
interest expense on the seller subordinated note. Interest accrued on the
seller subordinated note is capitalized annually and will be repaid when
the note becomes due. EBITDA is included because management believes that
such information provides an additional basis for evaluating the Company's
ability to pay interest, repay debt and make capital expenditures. EBITDA
should not be considered an alternative to measures of operating
performance as determined in accordance with generally accepted accounting
principles, including net income as a measure of the Company's operating
results and cash flows as a measure of the Company's liquidity. Because
EBITDA is not calculated identically by all companies, the presentation
herein may not be comparable to other similarly titled measures of other
companies.
(3) "EBITDA before restructuring and nonrecurring costs," as presented,
represents income before income taxes plus depreciation, amortization
(including non-cash interest expense related to amortization of debt
issuance costs), plant restructuring costs, other nonrecurring costs, cash
interest expense and non-cash interest expense on the seller subordinated
note. EBITDA before restructuring and nonrecurring costs is included
because management believes that such information provides an additional
basis for evaluating the Company's ability to pay interest, repay debt and
make capital expenditures. EBITDA before restructuring and nonrecurring
costs should not be considered an alternative to measures of operating
performance as determined in accordance with generally accepted accounting
principles, including net income as a measure of the Company's operating
results and cash flows as a measure of the Company's liquidity. Because
EBITDA before restructuring and nonrecurring costs is not calculated
identically by all companies,
17
the presentation herein may not be comparable to other similarly titled
measures of other companies.
(4) Nonrecurring costs in 1999 relate to a $2.3 million restructuring charge
and $1.5 million associated with payments under retention agreements with
certain key employees. In 1998 such costs relate to a $4.5 million
restructuring charge and $2.3 million associated with payments under
retention agreements with certain key employees. 1996 and 1995 are
associated primarily with reductions in work force.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included in this report. The following discussion
and analysis of the financial condition and results of operations covers periods
before the consummation of the Merger. In connection with the Merger, the
Company has entered into financing arrangements and significantly altered its
capital structure. As a result of the Merger, the Company is operating as a
stand-alone entity for the first time, and the historical financial statements
reflect management's estimates of certain costs associated with operating as a
stand-alone entity and reflect taxes that are not applicable to the Company
following the consummation of the Merger. Accordingly, the results of operations
for the periods subsequent to the consummation of the Merger will not
necessarily be comparable to prior periods.
The Company believes it is the leading designer, manufacturer and marketer
of stand-alone commercial laundry equipment in North America and a leader
worldwide. Under the well-known brand names of Speed Queen, UniMac and Huebsch,
the Company produces a full line of commercial washing machines and dryers with
load capacities from 16 to 250 pounds. The Company's commercial products are
sold to three distinct customer groups: (i) laundromats; (ii) multi-housing
laundries, consisting primarily of common laundry facilities in apartment
buildings, universities and military installations; and (iii) on-premise
laundries, consisting primarily of in-house laundry facilities of hotels,
hospitals, nursing homes and prisons. In addition, pursuant to a supply
agreement with Appliance Co., the Company supplied consumer washing machines to
the consumer appliance business of Appliance Co. for sale at retail. This supply
agreement was completed and concluded on September 17, 1999.
RESULTS OF OPERATIONS
The following table sets forth the Company's historical net sales for the
periods indicated:
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- ----------------- ---------------
(Dollars in millions)
Net sales
Commercial laundry......................... $ 225.5 $ 220.1 $ 239.3
Appliance Co. consumer laundry............. 54.7 77.2 76.8
Service parts.............................. 32.2 33.0 31.6
--------------- ----------------- ---------------
$ 312.4 $ 330.3 $ 347.7
=============== ================= ===============
18
The following table sets forth certain condensed historical financial data for
the Company expressed as a percentage of net sales for each of the periods
indicated:
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 73.2% 76.0% 75.9%
Gross profit........................................ 26.8% 24.0% 24.1%
Selling, general and administrative expense......... 13.3% 13.2% 11.7%
Plant restructuring costs........................... 0.7% 0.0% 0.0%
Other nonrecurring costs............................ 0.5% 2.1% 0.0%
Operating income.................................... 12.3% 8.7% 12.4%
Net income....................................... 1.6% 1.6% 7.6%
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales. Net sales for the year ended December 31, 1999 decreased $17.9
million, or 5.4%, to $312.4 million from $330.3 million for the year ended
December 31, 1998. This decrease was attributable to lower consumer laundry
equipment sales of $22.5 million and service part sales of $0.8 million partly
offset by increases in commercial laundry sales of $5.4 million. The decrease
in consumer laundry sales is due to the completion and conclusion of the two
year supply agreement with Appliance Co. as of September 17, 1999. The increase
in commercial laundry sales was primarily due to higher sales for multi-housing
laundries, $4.4 million, and laundromats, $4.6 million, which were partly offset
by a decrease in sales for on-premise laundries, $2.3 million, and lower sales
to international customers, $1.0 million. The multi-housing sales increase was
driven by the growth of several key customers. The laundromat sales increase
was driven by the expansion of several regional coin laundry customers. Sales
to on-premise laundries declined primarily as a result of lower government
funding for long-term health care facilities. Sales to international customers
were lower due to the Company's closure of its Latin American coin laundromat
operations.
Gross profit. Gross profit for the year ended December 31, 1999 increased
$4.6 million, or 5.8%, to $83.7 million from $79.1 million for the year ended
December 31, 1998. This increase was attributable to manufacturing efficiencies
which were partially offset by higher field service expenses of $1.7 million
related to a recent new product introduction. Gross profit as a percentage of
net sales increased to 26.8% for the year ended December 31, 1999 from 24.0% for
the year ended December 31, 1998. The increase in gross profit as a percentage
of net sales is primarily attributable to the manufacturing efficiencies noted
above and the decrease in sales of consumer laundry equipment, which were at
margins substantially below that of the remaining business.
Selling, general and administrative expense. Selling, general and
administrative expenses for the year ended December 31, 1999 decreased $1.8
million, or 4.2%, to $41.7 million from $43.5 million for the year ended
December 31, 1998. The decrease in selling, general and administrative expenses
was primarily due to lower loss recognition related to reduced sales of trade
receivables through the Company's off-balance sheet special purpose entity of
$1.5 million, and lower selling, general and administrative expenses resulting
from the closure of the Company's Latin American coin laundromat operations of
$1.3 million, which were partially offset by costs of being a stand-alone
business entity (resulting from the May 5, 1998 Merger). Selling, general and
administrative expenses as a percentage of net sales increased to 13.3% for the
year ended December 31, 1999 from 13.2% for the year ended December 31, 1998.
19
Plant restructuring costs. Plant restructuring costs for the year ended
December 31, 1999 were $2.3 million, with no plant restructuring costs incurred
for the year ended December 31, 1998. These costs relate to a $2.3 million
charge ($2.1 million is non-cash) associated with recognition of closure costs
for the Company's Madisonville, Kentucky manufacturing facility. See Note 4 -
Nonrecurring Items in notes to Financial Statements.
Other nonrecurring costs. Other nonrecurring costs for the year ended
December 31, 1999 decreased $5.3 million to $1.5 million from $6.8 million for
the year ended December 31, 1998. The 1998 other nonrecurring costs were
comprised of employee retention costs of $2.3 million and a restructuring charge
of $4.5 million ($3.6 million was non-cash) associated with the closing of the
Company's Argentina coin laundromat operations. The 1999 other nonrecurring
costs were comprised entirely of employee retention costs. See Note 4 -
Nonrecurring Items in notes to Financial Statements.
Operating income. As a result of the aforementioned, operating income for
the year ended December 31, 1999 increased $9.5 million, or 32.8%, to $38.3
million from $28.8 million for the year ended December 31, 1998. Operating
income as a percentage of net sales increased to 12.3% for the year ended
December 31, 1999 from 8.7% for the year ended December 31, 1998.
Interest Expense. Interest expense for the year ended December 31, 1999
increased $10.1 million, or 47.1%, to $31.5 million from $21.4 million for the
year ended December 31, 1998. The increase is attributable to incurring a full
year of interest expense in 1999 on debt issued in connection with the Merger
whereas 1998 includes only interest expense from the Merger date (May 5, 1998)
through December 31, 1998.
Other Income (Expense), Net. Other expense for the year ended December 31,
1999 was $1.7 million as compared to other income of $0.3 million for the year
ended December 31, 1998. The 1999 other expense is comprised of a $1.5 million
legal settlement resulting from the Appliance Co. settlement agreement (see Note
14 - Commitments and Contingencies in notes to Financial Statements) and $0.2
million related to losses on the sale of fixed assets. The 1998 other income for
1998 is comprised entirely of gains on the sale of fixed assets.
Net Income. As a result of the aforementioned, net income for the year
ended December 31, 1999 decreased $0.2 million, or 5.3%, to $5.1 million from
$5.3 million for the year ended December 31, 1998. Net income as a percentage
of net sales remained unchanged at 1.6% for the years ended December 31, 1999
and December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales for the year ended December 31, 1998 decreased $17.4
million, or 5.0%, to $330.3 million from $347.7 million for the year ended
December 31, 1997. This decrease was primarily due to decreases in commercial
laundry equipment sales of $19.2 million which were partially offset by
increases in consumer laundry equipment sales of $0.4 million and in service
part sales of $1.4 million. The decrease in commercial laundry sales consisted
of lower sales to international customers of $11.4 million and a decrease in
laundromat sales of $11.5 million which were partially offset by higher earnings
from the Company's off-balance sheet equipment financing program of $1.8
million. Sales to international customers were lower as the Company's products
(priced in U.S. dollars) have become less competitive due to unfavorable
exchange rate movements. The laundromat sales decrease was due to
20
lower sales to a recently formed laundromat chain following higher sales in 1997
to support an initial nationwide rollout.
Gross profit. Gross profit for the year ended December 31, 1998 decreased
$4.7 million, or 5.6%, to $79.1 million from $83.8 million for the year ended
December 31, 1997. Gross profit as a percentage of net sales decreased to 24.0%
for the year ended December 31, 1998 from 24.1% for the year ended December 31,
1997. The gross profit decrease is primarily attributable to the decreases in
international sales, laundromat sales and higher field service expenses of $1.4
million related to late 1997 product introductions, and a decrease in consumer
laundry selling prices and related service parts pricing under the Appliance Co.
Supply Agreement (see Note 1 - Description of Business and Basis of Presentation
in notes to Financial Statements). These reductions were partly offset by
profit growth from other North American sales, manufacturing efficiencies and
the increased earnings from the Company's equipment financing program.
Selling, general and administrative expense. Selling, general and
administrative expenses for the year ended December 31, 1998 increased $2.7
million, or 6.6%, to $43.5 million from $40.8 million for the year ended
December 31, 1997. Selling, general and administrative expenses as a percentage
of net sales increased to 13.2% for the year ended December 31, 1998 from 11.7%
for the year ended December 31, 1997. The increase in selling, general and
administrative expenses was primarily due to an increase in the Company's
Argentina selling and administrative expense of $1.2 million and higher
administrative expenses associated with being a stand-alone company of $1.3
million.
Other nonrecurring costs. Other nonrecurring costs for the year ended
December 31, 1998 were $6.8 million, with no other nonrecurring costs recorded
for the year ended December 31, 1997. Other nonrecurring costs in 1998 are
comprised of employee retention costs of $2.3 million and a restructuring charge
of $4.5 million ($3.6 million is non-cash) associated with the closing of the
Company's Argentina coin laundromat operations. See Note 4 - Nonrecurring Items
in notes to Financial Statements.
Operating income. As a result of the aforementioned, operating income for
the year ended December 31, 1998 decreased $14.1 million, or 32.8%, to $28.8
million from $43.0 million for the year ended December 31, 1997. Operating
income as a percentage of net sales decreased to 8.7% for the year ended
December 31, 1998 from 12.4% for the year ended December 31, 1997.
Interest Expense. Interest expense for the year ended December 31, 1998
was $21.4 million, with no interest expense recorded for the year ended December
31, 1997. The increase is attributable to interest expense on debt issued in
connection with the Merger and represents interest from May 5, 1998 through
December 31, 1998.
Income Taxes. The provision for income taxes for the year ended December
31, 1998 decreased $14.0 million, to $2.4 million from $16.4 million for the
year ended December 31, 1997. Income tax provisions recorded through May 4,
1998 represent the Company's tax attributes as a unit of Raytheon as calculated
on a separate return basis. Effective May 5, 1998 the Company is a stand-alone
limited liability company, and is no longer subject to federal and most state
income taxes.
Net Income. As a result of the aforementioned, net income for the year
ended December 31, 1998 decreased $21.0 million, or 79.7%, to $5.3 million from
$26.3 million for the year ended December 31, 1997. Net income as a percentage
of net sales decreased to 1.6% for the twelve months ended December 31, 1998
from 7.6% for the year ended December 31, 1997.
21
LIQUIDITY AND CAPITAL RESOURCES
Post-Merger.
Following the Merger, the Company's principal sources of liquidity are cash
flows generated from operations and borrowings under the Company's $75.0 million
revolving credit facility (the "Revolving Credit Facility"). The Company's
principal uses of liquidity are to meet debt service requirements, finance the
Company's capital expenditures and provide working capital. The Company expects
that capital expenditures in 2000 will not exceed $12.0 million including all
capital expenditures associated with readying the Ripon, Wisconsin facility for
the production of tumbler dryers and the recently acquired Ajax business (see
Note 19 - Subsequent Event in notes to Financial Statements). The Company
expects the ongoing requirements for debt service, capital expenditures and
working capital will be funded by internally generated cash flow and borrowings
under the Revolving Credit Facility. Any ultimate liability of the Company, on a
consolidated basis, will not, in the opinion of management, have a material
effect on the Company's liquidity or financial position. The Company has
incurred substantial indebtedness in connection with the Merger. As of December
31, 1999, the Company has $322.0 million of indebtedness outstanding.
At December 31, 1999 the Company had outstanding debt of $200.0 million
under the Company's term loan facility (the "Term Loan Facility"), $110.0
million of senior subordinated notes, $12.0 million of junior subordinated notes
and had $61.7 million of its $75.0 million Revolving Credit Facility available
subject to certain limitations under the Company's $275 million credit
agreement, dated May 5, 1998 (the "Senior Credit Facility"). After considering
such limitations, the Company could have borrowed up to $54.8 million at
December 31, 1999 in additional indebtedness under the Revolving Credit
Facility.
The $200.0 million Term Loan Facility amortizes yearly and is repayable in
the following aggregate annual amounts:
Amount Due
Year ----------
---- (Dollars in
millions)
2000............. $ 0.5
2001............. $ 1.0
2002............. $ 1.0
2003............. $ 20.5
2004............. $ 98.5
2005............. $ 78.5
The Term Loan Facility is also subject to mandatory prepayment with the
proceeds of certain debt incurrences, asset sales and a portion of Excess Cash
Flow (as defined in the Senior Credit Facility). The Revolving Credit Facility
will terminate in 2003.
Concurrent with the Closing of the Merger, the Company entered into an
asset backed facility, which provides $250.0 million of off-balance sheet
financing for trade receivables and equipment loans (the "Asset Backed
Facility"). The finance programs have been and will continue to be structured
in a manner that qualifies for off-balance sheet treatment in accordance with
generally accepted accounting principles. It is expected that under the Asset
Backed Facility, the Company will continue to act as originator and servicer of
the equipment financing promissory notes and the trade receivables.
22
The Company's ability to make scheduled payments of principal or to pay the
interest or liquidated damages, if any, or to refinance its indebtedness, or to
fund planned capital expenditures, will depend upon its future performance,
which in turn is subject to general economic, financial, competitive and other
factors that are beyond its control. Based upon the current level of operations
and anticipated growth, management believes that future cash flow from
operations, together with available borrowings under the Revolving Credit
Facility, will be adequate to meet the Company's anticipated requirements for
capital expenditures, working capital, interest payments and scheduled principal
payments. There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt and make necessary capital expenditures after satisfying
certain liabilities arising in the ordinary course of business. If unable to do
so, the Company may be required to refinance all or a portion of its existing
debt, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing would be available or that any such sales of
assets or additional financing could be obtained.
Historical
Cash generated from operations for the twelve months ended December 31,
1999 of $11.7 million was principally derived from the Company's earnings before
depreciation and amortization partially offset by changes in working capital.
The working capital investment in accounts receivable at December 31, 1999 of
$33.6 million increased $12.2 million as compared to the balance of $21.4
million at December 31, 1998, which was primarily attributable to selling fewer
accounts receivable through Alliance Laundry Receivable Warehouse ("ALRW"), a
special-purpose single member limited liability company. The working capital
investment in accounts payable at December 31, 1999 of $12.4 million increased
$3.8 million as compared to the balance of $8.6 million at December 31, 1998.
The accounts payable balance at December 31, 1998 reflected lower purchases and
production in December 1998 as compared to December 1999.
Cash generated from operations during the year ended December 31, 1998 of
$6.8 million decreased from $39.7 million for the year ended December 31, 1997.
The decrease is attributable to (i) the lower net income for the period, (ii)
amounts held as retained interests related to trade receivables and equipment
loans under the Asset Backed Facility and (iii) lower levels of trade payables
principally due to lower production activity in the fourth quarter of 1998.
Prior to the Merger, cash had been transferred between the Company and
Raytheon based on the Company's cash position. For the period from January 1,
1998 through May 4, 1998, the Company transferred cash to Raytheon of $17.5
million, which was generated substantially through the sale of trade receivables
prior to the Merger and from the Company's earnings before depreciation and
amortization.
Capital Expenditures
The Company's capital expenditures for the twelve months ended December 31,
1999 and December 31, 1998 were $10.9 million and $7.9 million, respectively.
Capital spending in 1999 was principally related to transitioning dryer
production from Appliance Co. to the Ripon manufacturing facility and reducing
manufacturing costs, while spending in 1998 was principally related to reducing
manufacturing costs and transitioning frontload washer production from Appliance
Co. to the Company's Ripon manufacturing facility.
23
YEAR 2000 (Y2K) COMPLIANCE
The Company undertook various initiatives intended to ensure its computer
equipment and software would function properly with respect to the Y2K issue and
completed its Y2K remediation efforts prior to the end of 1999. In addition,
prior to the end of 1999, the Company developed various contingency plans to
address any unforeseen circumstances that may have arisen.
In total, the Company spent about $2.7 million since the second half of
1997 to address the Y2K issue, which included significant upgrades to current
hardware and software systems. About $1.5 million was spent during 1999. These
expenditures were funded using cash flows from operations.
The Company has experienced no system failures or miscalculations as a
result of the Y2K computer issue. In addition, the Company is not aware of any
failures attributable to the Y2K problem at its customers or suppliers that
threaten to have an adverse impact on the Company's business at this time.
Even though the Company has not experienced problems related to the Y2K
issue at this time and does not expect to experience any problems in the future,
it is still remotely possible that the Company could be affected by Y2K issues
in the future. Future Y2K issues may arise due to unforeseen problems with the
Company's systems or due to Y2K issues of other entities which may affect the
Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and was effective for all fiscal years beginning
after June 15, 1999. SFAS No. 133 was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133", and will now be effective for fiscal years
beginning after June 15, 2000, with early adoption permitted. SFAS No. 133, as
amended, requires the Company to recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. Upon adoption, the
Company will be required to report derivative and hedging instruments at fair
value in the balance sheet and recognize changes in the fair value of
derivatives in net income or other comprehensive income, as appropriate. This
statement will be effective for the Company's first quarter of 2001. Given the
Company's current derivative and hedging activities, the statement is not
expected to have a material effect on the Company's income or statement of
financial position.
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 the Company to differ materially from those
expressed or implied by such forward-looking statements. Although the Company
believes that its plans, intentions and expectations reflected in such forward-
looking statements are
24
based on reasonable assumptions, it can give no assurance that such plans,
intentions, expectations, objectives or goals will be achieved. Important
factors that could cause actual results to differ materially from those included
in forward-looking statements include: impact of competition; continued sales to
key customers; possible fluctuations in the cost of raw materials and
components; possible fluctuations in currency exchange rates, which affect the
competitiveness of the Company's products abroad; market acceptance of new and
enhanced versions of the Company's products; the impact of substantial leverage
and debt service on the Company and other risks listed from time to time in the
Company's reports, including but not limited to the Company's Registration
Statement on Form S-4 (file no. 333-56857).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is potentially exposed to market risk associated with changes in
interest and foreign exchange rates. The Company does not and currently does
not intend to hedge exchange rate fluctuations between United States dollars and
foreign currencies. However, from time to time, the Company may enter into
derivative financial instruments to hedge its interest rate exposures. An
instrument will be treated as a hedge if it is effective in offsetting the
impact of volatility in the Company's underlying interest rate exposures. The
Company does not enter into derivatives for speculative purposes.
Sales of the Company's products to international customers represented
approximately 11% of 1999 net sales. At December 31, 1999, there were no
material non-United States dollar denominated financial instruments outstanding
which exposed the Company to foreign exchange risk.
As noted above, the Company is exposed to market risk associated with adverse
movements in interest rates. Specifically, the Company is primarily exposed to
changes in the fair value of its $110 million senior subordinated notes, and to
changes in earnings and related cash flows on its variable interest rate debt
obligations outstanding under the Senior Credit Facility and its retained
interests related to trade accounts receivable and equipment loans sold to the
Company's special purpose finance subsidiaries. Borrowings outstanding under
the Senior Credit Facility totaled $200 million at December 31, 1999. Retained
interests related to sold trade accounts receivable and equipment loans totaled
$5.1 million and $17.6 million, respectively, at December 31, 1999.
The fair value of the Company's senior subordinated notes was approximately
$94 million based upon prevailing prices in recent market transactions as of
December 31, 1999. The Company estimates that this fair value would
increase/decrease by approximately $5.0 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, 1999.
An assumed 10% increase/decrease in the variable interest rate of 8.8% in
effect at December 31, 1999 related to the term loan borrowings outstanding
under the Senior Credit Facility would decrease/increase annualized earnings and
cash flows by approximately $1.8 million.
Effective March 10, 1999, the Company entered into a $67 million interest
rate swap agreement with a financial institution to hedge a portion of its
interest rate risk related to its term loan borrowings under the Senior Credit
Facility. Under the swap, which has a term of three years, the Company pays a
fixed rate of 4.962% and receives quarterly interest payments based upon LIBOR.
The differential between the fixed and floating interest rates under the swap is
accrued and is recorded as an adjustment of interest expense. The effect of
this agreement on the Company's interest expense during 1999 was a
25
reduction of $0.2 million. The fair value of this interest rate swap agreement
which represents the amount that the Company would receive to settle the
instrument is $2.4 million at December 31, 1999.
An assumed 10% increase/decrease in interest rates under the Asset Backed
Facility at December 31, 1999 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 sold by the Company, a 10% increase/decrease in
interest rates would decrease/increase the fair value of the Company's retained
interests at December 31, 1999 of $17.6 million by less than $1.0 million.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to 1999 Financial Statements:
Page
------
Report of Independent Accountants........................................................ 28
Balance Sheets at December 31, 1999 and 1998............................................. 29
Statements of Income for the three years ended December 31, 1999......................... 30
Statements of Parent Company Investment/Members' Deficit and Comprehensive
Income (Loss) for three years ended December 31, 1999................................. 31
Statements of Cash Flows for the three years ended December 31, 1999..................... 32
Notes to Financial Statements............................................................ 33
Financial Statement Schedules:
For the three years ended December 31, 1999
II - Valuation And Qualifying Accounts..................................................... 62
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
27
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Managers and Members
of Alliance Laundry Holdings LLC
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Alliance
Laundry Holdings LLC at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 25, 2000, except
as to Note 19 which is as of
March 6, 2000
28
ALLIANCE LAUNDRY HOLDINGS LLC
BALANCE SHEETS
(in thousands)
Consolidated
December 31,
------------------------------
1999 1998
------------ ------------
Assets
Current assets:
Cash.............................................................. $ 3,028 $ 4,839
Cash-restricted................................................... 956 2,084
Accounts receivable (net of allowance for doubtful accounts of
$463 and $692 at December 31, 1999 and 1998, respectively)...... 33,578 21,421
Inventories, net.................................................. 31,282 30,443
Prepaid expenses and other........................................ 6,160 8,900
------------ ------------
Total current assets............................................ 75,004 67,687
Notes receivable..................................................... 18,314 10,036
Property, plant and equipment, net................................... 57,615 62,264
Goodwill (net of accumulated amortization of $7,746 and $6,246 at
December 31, 1999 and 1998, respectively)......................... 48,319 49,819
Debt issuance costs, net............................................. 13,064 14,940
Other assets......................................................... 7,550 9,458
------------ ------------
Total assets.................................................... $ 219,866 $ 214,204
============ ============
Liabilities and Members' Deficit
Current liabilities:
Current portion of long-term debt................................. $ 500 $ --
Accounts payable.................................................. 12,362 8,617
Finance program obligation........................................ 3,551 5,154
Other current liabilities......................................... 21,805 24,538
------------ ------------
Total current liabilities....................................... 38,218 38,309
Long-term debt:
Senior credit facility............................................ 199,500 200,000
Senior subordinated notes......................................... 110,000 110,000
Junior subordinated note.......................................... 12,048 10,124
Other long-term liabilities.......................................... 1,866 1,083
------------ ------------
Total liabilities............................................... 361,632 359,516
Commitments and contingencies (See Note 14)
Mandatorily redeemable preferred equity.............................. 6,000 6,000
Members' deficit..................................................... (147,766) (151,312)
------------ ------------
Total liabilities and members' deficit.......................... $ 219,866 $ 214,204
============ ============
The accompanying notes are an integral part of the financial statements.
29
ALLIANCE LAUNDRY HOLDINGS LLC
STATEMENTS OF INCOME
(in thousands)
Combined
Consolidated Year Ended
Years Ended December 31, December 31,
-------------------------
1999 1998 1997
------------ ------------ ------------
Net sales:
Commercial laundry ........................... $ 225,511 $ 220,068 $ 239,255
Appliance Co. consumer laundry ............... 54,682 77,184 76,853
Service parts ................................ 32,166 33,015 31,601
------------ ------------ ------------
312,359 330,267 347,709
Cost of sales .................................. 228,692 251,159 263,932
------------ ------------ ------------
Gross profit ................................... 83,667 79,108 83,777
------------ ------------ ------------
Selling, general and administrative expense..... 41,664 43,478 40,827
Plant restructuring costs ...................... 2,255 -- --
Other nonrecurring costs ....................... 1,452 6,784 --
------------ ------------ ------------
Total operating expenses ....................... 45,371 50,262 40,827
------------ ------------ ------------
Operating income ......................... 38,296 28,846 42,950
Interest expense ............................... 31,509 21,426 --
Other income (expense), net .................... (1,706) 306 (243)
------------ ------------ ------------
Income before taxes ...................... 5,081 7,726 42,707
Provision for income taxes ..................... 29 2,391 16,431
------------ ------------ ------------
Net income ............................... $ 5,052 $ 5,335 $ 26,276
============ ============ ============
The accompanying notes are an integral part of the financial statements.
30
ALLIANCE LAUNDRY HOLDINGS LLC
STATEMENT OF PARENT COMPANY INVESTMENT/ MEMBERS' DEFICIT
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Combined
Consolidated Year Ended
Years Ended December 31, December 31,
-------------------------
1999 1998 1997
------------ ------------ ------------
Members' deficit, beginning of year .................................... $ (151,312) $ 148,573 $ 141,546
Net income ............................................................. 5,052 5,335 26,276
Accumulated other comprehensive income (loss):
Net unrealized holding gain on residual interest, beginning of year... 2,800 -- --
Unrealized gain (loss) ............................................... (2,927) 2,800 --
------------ ------------ ------------
Net unrealized holding gain (loss) on residual interest, end of year.. (127) 2,800 --
Net cash and noncash transfers to Raytheon ............................. -- (17,450) (19,249)
Issuance of common units ............................................... -- 48,882 --
Distribution from/(to) Raytheon and related transaction costs .......... 1,421 (339,452) --
------------ ------------ ------------
Members' deficit, end of year .......................................... $ (147,766) $ (151,312) $ 148,573
============ ============ ============
Comprehensive income:
Net income ........................................................... $ 5,052 $ 5,335 $ 26,276
Other comprehensive income (loss):
Net unrealized holding gain (loss) on residual interest ............ (2,927) 2,800 --
------------ ------------ ------------
Comprehensive income ................................................... $ 2,125 $ 8,135 $ 26,276
============ ============ ============
The accompanying notes are an integral part of the financial statements.
31
ALLIANCE LAUNDRY HOLDINGS LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Consolidated Combined
Years Ended Year Ended
December 31, December 31,
-------------------------
1999 1998 1997
---------- ---------- ------------
Cash flows from operating activities:
Net income............................................................... $ 5,052 $ 5,335 $ 26,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................... 16,969 16,671 14,445
Restructuring charges ............................................... 2,255 4,466 --
Non-cash junior subordinated note interest .......................... 1,924 1,124 --
(Gain) loss on sale of property, plant and equipment ................ 215 (306) 243
Deferred income taxes ............................................... -- 180 2,281
Changes in assets and liabilities:
Accounts and notes receivable ..................................... (16,435) 2,615 (21,751)
Inventories ....................................................... (839) 3,271 10,546
Other assets ...................................................... 1,107 (10,049) (4,468)
Accounts payable .................................................. 3,745 (7,298) (1,966)
Finance program obligation ........................................ (475) (10,254) 13,324
Other liabilities ................................................. (1,856) 1,032 724
---------- ---------- ------------
Net cash provided by operating activities ........................... 11,662 6,787 39,654
---------- ---------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment .............................. (10,947) (7,861) (19,990)
Proceeds on disposal of property, plant and equipment.................... 739 2,350 831
---------- ---------- ------------
Net cash used in investing activities ............................... (10,208) (5,511) (19,159)
---------- ---------- ------------
Cash flows from financing activities:
Transfers to Raytheon ................................................... -- (15,553) (19,249)
Increase in other long-term debt ........................................ -- -- (1,000)
Proceeds from senior term loan .......................................... -- 200,000 --
Proceeds from senior subordinated notes ................................. -- 110,000 --
Proceeds from junior subordinated note .................................. -- 9,000 --
Issuance of mandatorily redeemable preferred equity ..................... -- 6,000 --
Issuance of common units ................................................ -- 48,882 --
Debt financing costs .................................................... (686) (16,522) --
Distribution to Raytheon and related transaction costs................... (2,579) (339,452) --
---------- ---------- ------------
Net cash provided by (used in) financing activities ................. (3,265) 2,355 (20,249)
---------- ---------- ------------
Increase (decrease) in cash ............................................... (1,811) 3,631 246
Cash at beginning of year ................................................. 4,839 1,208 962
---------- ---------- ------------
Cash at end of year ....................................................... $ 3,028 $ 4,839 $ 1,208
========== ========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................. $ 27,670 $ 15,579 $ 33
Non-cash transaction:
Recapitalization price adjustment receivable .......................... 4,000 -- --
The accompanying notes are an integral part of the financial statements.
32
ALLIANCE LAUNDRY HOLDINGS LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(dollar amounts in thousands unless otherwise indicated)
Note 1 - Description of Business and Basis of Presentation:
Description of Business
Alliance Laundry Holdings LLC (the "Company") designs, manufactures and
services a full line of commercial laundry equipment for sale in the U.S. and
for export to numerous international markets. The Company also manufactures
consumer washing machines for sale to Appliance Co. (see "Sale to Appliance
Co.") and international customers. The Company produces all of its products in
the U.S. at three manufacturing plants located in Ripon, Wisconsin, Marianna,
Florida and Madisonville, Kentucky. In 1996, Raytheon Appliances, S.A. was
established to build, own and operate coin laundromats in Latin America (see
Note 4).
The Company originated from the acquisition of Speed Queen Company ("Speed
Queen") by Raytheon Company ("Raytheon") in October of 1979. Speed Queen
operated as a separate subsidiary of Raytheon until March 31, 1996 when it was
merged into Amana Refrigeration, Inc. ("Amana"), a wholly-owned subsidiary of
Raytheon, which manufactured and serviced home appliances. In connection with
this consolidation, the Speed Queen legal entity was dissolved and Amana was
renamed Raytheon Appliances, Inc. On September 10, 1997, in connection with the
sale by Raytheon of its consumer laundry business (see "Sale to Appliance Co."),
Raytheon Appliances, Inc. was dissolved. Concurrently, Raytheon Commercial
Laundry LLC was established as a limited liability company to carry on the
commercial laundry portion of Raytheon's appliance business. In addition, the
legal entity Raytheon Appliances, S.A. became a wholly-owned subsidiary of the
newly established entity, Raytheon Commercial Laundry LLC.
Sale to Appliance Co.
Historically, the Company reported as one of five operating units
comprising Raytheon's appliances division. On September 10, 1997, Raytheon sold
three of the five operating units of its appliances division to Amana Company,
L.P. ("Appliance Co." or the "Appliance Co. Transaction"). As a result of this
sale, Raytheon divested its consumer appliance (including consumer laundry),
heating and air conditioning, and commercial cooking operating units, while
retaining its commercial laundry and control systems operating units. In
connection with the sale, Raytheon also sold to Appliance Co. a laundry
manufacturing plant in Searcy, Arkansas ("Searcy"). This plant was acquired by
Raytheon as part of the Speed Queen acquisition. Searcy's operations were
predominantly related to the production of consumer laundry equipment
(approximately 80% consumer and 20% commercial).
Since 1991 the Company's operations have been managed as a strictly
commercial laundry business with the Searcy plant's consumer products managed as
an integral part of Raytheon's consumer business. Therefore the Searcy plant's
operations have been excluded from the Company's financial statements. All
assets and liabilities of Searcy have been excluded from these financial
statements, except for certain tooling and dies which are specific to the
production of commercial laundry products and which were retained by the Company
subsequent to the sale. Production of commercial product by Searcy has been
reflected as being purchased by the Company at standard cost for all periods
presented. Outstanding
33
payables associated with these purchases from Searcy of $0.5 million are
included in accounts payable at December 31, 1998 with no outstanding balance at
December 31, 1999.
Effective September 10, 1997, in connection with the Appliance Co.
Transaction, the Company and Appliance Co. entered into two supply agreements.
Under the first supply agreement, the Company agreed to purchase small chassis
front loading washing machines from Appliance Co. for one year and small chassis
dryers, stack dryers, and stack front loading washer/dryer combinations for two
years commencing on September 10, 1997. The Company agreed to purchase a minimum
of 144,000 machines over the two year period at an approximate cost of $40
million. As of September 10, 1999 the Company discontinued the purchase of all
products under this supply agreement. The Company has developed the production
capability to produce and is currently producing those products at its Ripon,
Wisconsin facility.
Under a second agreement (the "Appliance Co. Purchase Agreement"),
Appliance Co. agreed to purchase a specified quantity of top loading washing
machines from the Company annually over the term of the agreement. This
agreement was not renewed and production of washing machines under this
agreement was discontinued after September 17, 1999.
Basis of Presentation
The financial statements as of and for the years ended December 31, 1999
and 1998 present the financial position and results of operations of the Company
following the May 1998 recapitalization (the "Recapitalization") and merger
discussed in Note 3. The merger has been accounted for as a recapitalization and
accordingly, the historical accounting basis of the assets and liabilities is
unchanged. The financial statements as of and for the years ended December 31,
1999 and 1998 represent the consolidated financial position and results of
operations of the Company, including its wholly-owned direct and indirect
subsidiaries, Alliance Laundry Systems LLC and Alliance Laundry Corporation
which were formed in connection with the Recapitalization.
For periods prior to the Recapitalization, the financial statements present
the Company's results of operations and financial position as it operated as a
unit of Raytheon, including certain adjustments necessary for a fair
presentation of the business. The financial statements presented for pre-
Recapitalization periods may not be indicative of the results that would have
been achieved had the Company operated as an unaffiliated entity. Although the
Company was a stand-alone legal entity at December 31, 1997, it did not operate
as such for the majority of 1997 and therefore the financial statements for the
year then ended have been presented on a combined basis. All material
intercompany transactions have been eliminated in the preparation of these
financial statements.
Note 2 - Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
34
Reclassifications
Certain amounts in prior year financial statements have been reclassified
to conform to the current year presentation.
Cash, Cash Equivalents and Cash Management
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less at the date of purchase to be cash equivalents.
Restricted cash at December 31, 1999 and 1998 represent unremitted collections
on notes receivable sold prior to May 5, 1998.
Revenue Recognition
Commercial Laundry Revenue - Commercial laundry revenue is recognized upon
shipment. Commercial laundry revenues include sales of consumer laundry
products to international customers.
Appliance Co., Consumer Laundry Revenue - The Company sold consumer laundry
products manufactured at its Ripon, Wisconsin plant to Appliance Co. and its
predecessor Amana until the termination of the supply agreement on September 17,
1999. Revenues from consumer laundry sales to Amana have been recognized at
standard cost plus 7% for all periods presented prior to September 10, 1997.
Subsequent to September 10, 1997, sales of consumer laundry products were made
to Appliance Co. at amounts approximating 1997 standard costs in accordance with
the Appliance Co. Purchase Agreement.
Service Parts Revenue - Service parts revenue is recognized upon shipment.
Financing Program Revenue - As discussed below, the Company sells notes
receivable and accounts receivable through its special-purpose bankruptcy remote
entities. The Company, as servicing agent, retains collection and administrative
responsibilities for the notes and accounts receivable. The Company earns a
servicing fee, based on the average outstanding balance. In addition, the
Company records 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. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". The
Company also recognizes interest income on notes receivable and other 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 commercial laundry revenues. Losses on the sale of
accounts receivable are recognized in the period in which such sales occur and
are included in selling, general and administrative expense.
Sales of Accounts Receivable and Notes Receivable (See Notes 5 and 6)
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." According to SFAS No. 125, 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. Beginning in 1997, the Company sold
a significant portion of accounts receivable and notes receivable to third
parties through special-purpose bankruptcy remote entities designed to meet the
SFAS No. 125 requirements for sale treatment. Accordingly, the Company removed
these receivables from its balance sheet at the time of transfer. Prior to the
Recapitalization, the special-purpose
35
bankruptcy remote entities included Raytheon Commercial Appliances Receivables
Corporation ("RAYCAR") through which the Company sold eligible trade accounts
receivable and Raytheon Commercial Appliances Financing Corporation ("RAYCAF")
through which the Company sold eligible notes receivable. In connection with the
Recapitalization, the Company established Alliance Laundry Receivables Warehouse
LLC ("ALRW"), a special-purpose bankruptcy remote entity, to which all eligible
trade accounts receivable and eligible notes receivable are sold after May 4,
1998. In a subordinated capacity, the Company retains rights to the residual
portion of interest earned on the notes receivable sold. This retained
beneficial interest is recorded at its estimated fair value at the balance sheet
date. Unrealized gains and losses resulting from changes in the estimated fair
value of the Company's retained interests are recorded as other comprehensive
income (loss) in accordance with SFAS No. 125. 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.
Under these arrangements the Company acts as servicer or sub-servicer of
the accounts receivable and notes receivable sold. As such, the Company
continues to administer and collect amounts outstanding on such receivables. At
December 31, 1999 and December 31, 1998, the Company had collected approximately
$0.8 million and $1.9 million, respectively, of notes receivable which were
subsequently transferred to the buyers through a monthly settlement process. At
the balance sheet dates, these amounts were recorded as finance program
obligations.
Inventories
Inventories are stated at cost using the first-in, first-out method but not
in excess of net realizable value.
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 other income (expense). When events or changes in circumstances
indicate that assets may be impaired, an evaluation is performed comparing the
estimated future undiscounted cash flows associated with the asset to the
asset's carrying amount, including any related goodwill, to determine if a
write-down is required.
The straight-line method of depreciation was adopted for all property
placed into service on or after January 1, 1999. For property placed into
service prior to January 1, 1999, depreciation is computed using a combination
of accelerated and straight-line methods. The Company believes the new method
will more appropriately reflect its financial results by better allocating costs
of new property over the useful lives of these assets. The effect of the change
for 1999 was to increase net income by approximately $0.2 million, substantially
all of which arose in the fourth quarter.
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.
36
Intangibles
Goodwill represents the excess of the acquisition cost over the fair value
of the net assets acquired in purchase transactions, and is amortized using the
straight-line method over 40 years. Accumulated amortization was $7.8 million
and $6.3 million at December 31, 1999 and 1998, respectively. At each balance
sheet date, the Company evaluates the realizability of goodwill and other
intangibles based on expectations of non-discounted cash flows and operating
income. Based on its most recent analysis, the Company believes that no
impairment of recorded intangibles exists at the balance sheet date.
Debt Issuance Costs
In conjunction with the Recapitalization, the Company recorded $17.2
million of debt issuance costs. These costs are being amortized on a straight-
line basis over periods ranging from 5 to 10 years. Accumulated amortization was
$4.1 million and $1.6 million at December 31, 1999 and 1998, respectively.
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. Warranty costs were $5.3 million, $3.6 million
and $2.2 million in 1999, 1998 and 1997, respectively.
Research and Development Expenses
Research and development expenditures are expensed as incurred. Research
and development costs were $6.8 million, $8.4 million and $7.6 million in 1999,
1998 and 1997, respectively.
Advertising Expenses
The Company expenses advertising costs as incurred. The Company incurred
advertising expenses of $3.2 million, $3.1 million and $3.4 million in 1999,
1998 and 1997, respectively.
Environmental Costs
The Company adopted Statement of Position 96-1 (SOP 96-1) "Environmental
Remediation Liabilities", in 1997. SOP 96-1 provides authoritative guidance
with respect to specific accounting issues that are present in the recognition,
measurement, display and disclosure of environmental remediation liabilities.
The adoption did not have a material impact on the Company's financial position
or results of operations.
Income Taxes
Historically, the Company's operations had been included in the
consolidated income tax returns filed by Raytheon. For periods prior to the
Recapitalization, income tax expense in the Company's statement of income was
calculated on a separate tax return basis as if the Company had operated as a
stand-alone entity. The provision for income taxes was calculated in accordance
with SFAS No. 109, "Accounting for Income Taxes", which requires the recognition
of deferred income taxes using the
37
liability method. As a result of the Recapitalization, the Company is now a
stand-alone limited liability company and is not subject to federal and most
state income taxes effective May 5, 1998.
Class B and C Units
As discussed in Note 12, the Company issued Class B and C Unit interests to
certain members of management in connection with the May 5, 1998
recapitalization transaction. These units were issued for nominal consideration
based upon the subordinated nature of such interests. The Class B and C Units
are considered to represent performance-based compensatory awards for accounting
purposes. Compensation expense will be measured each period based upon the
estimated fair value of all common units and recognized over the vesting period
when it becomes probable that certain target multiples, as defined, will be
achieved. No compensation expense related to these units was recognized in 1998
or 1999.
Parent Company Investment
Prior to the Recapitalization, the Company received short-term funding from
its parent, Raytheon to meet its periodic cash flow needs. No dividends were
paid in 1998 or 1997. Interest expense associated with Raytheon's general
corporate debt has not been allocated to the Company. Prior to the
Recapitalization, the Company participated in numerous benefit plans of Raytheon
(see Note 15). Certain services were provided to the Company by Raytheon,
primarily related to treasury, taxes, legal and risk management. The estimated
costs of such services have been included in these financial statements.
Management believes these allocations are reasonable. Raytheon provided certain
supplemental services to the Company related primarily to general tax and legal,
audit and human resources which are not material and have been excluded from
these financial statements. During a portion of 1997, certain administrative
services were performed by Amana on behalf of the Company. The estimated cost
of these services, which consisted mainly of accounting and payroll services,
have been reflected in the income statement in 1997.
All transfers to and from Raytheon have been reported in the parent company
investment account.
Fair Value of Financial Instruments
The carrying amounts reported in the statement of assets, liabilities and
members' deficit 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 reprice frequently. The fair value of the
Company's senior subordinated notes at December 31, 1999 is estimated based upon
prices prevailing in recent market transactions.
Interest Rate Swaps
To limit the effect of increases in interest rates, the Company has entered
into an interest rate swap arrangement. The differential between the contract
floating and fixed rates is accrued each period and recorded as an adjustment of
interest expense.
38
Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk include trade accounts receivable 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 the Company's customer base, thus spreading the
credit risk. The Company controls credit risk through credit approvals, credit
limits and monitoring procedures.
Certain Concentrations
As discussed in Note 1, the Company had mutual supply agreements with
Appliance Co. that terminated in 1999. Consumer topload washers sold to
Appliance Co. comprised a substantial percentage of the unit volume of the Ripon
facility and represented approximately 18%, 23% and 22% of net sales in 1999,
1998 and 1997, respectively. Upon the termination of the Appliance Co. Purchase
Agreement at September 17, 1999, the Company experienced a significant decline
in unit volume. This volume decline may result in an increase in the Company's
average cost per unit, due to, among other factors, unabsorbed manufacturing
overhead and reduced procurement and manufacturing efficiencies.
Future Accounting Changes
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and was effective for all fiscal years beginning
after June 15, 1999. SFAS No. 133 was subsequently amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133," and will now be effective for fiscal years
beginning after June 15, 2000, with early adoption permitted. SFAS No. 133, as
amended, requires the Company to recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. Upon adoption, the
Company will be required to report derivative and hedging instruments at fair
value in the balance sheet and recognize changes in the fair value of
derivatives in net income or other comprehensive income, as appropriate. This
statement will be effective for the Company's first quarter of 2001. Given the
Company's current derivative and hedging activities, the statement is not
expected to have a material effect on the Company's results of operations or
financial position.
Note 3 - Recapitalization Transaction:
On May 5, 1998, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") among Bain/RCL, L.L.C., a Delaware limited liability company ("Bain
LLC"), RCL Acquisitions LLC ("MergeCo"), Raytheon Commercial Laundry LLC and
Raytheon Company ("Raytheon"), MergeCo was merged with and into Raytheon
Commercial Laundry LLC (the "Merger") with Raytheon Commercial Laundry LLC being
the surviving entity. Immediately following the merger Raytheon Commercial
Laundry LLC was renamed to "Alliance Laundry Holdings LLC". Prior to the
Merger, Raytheon owned 100% of the equity securities of Raytheon Commercial
Laundry LLC, and Bain LLC, the BRS Investors (as defined), and certain members
of management owned 100% of the equity securities of MergeCo. As a result of
the Merger (i) Raytheon's limited liability company interest in Raytheon
Commercial Laundry LLC was converted into the right to receive (a) an aggregate
amount of cash equal to $339.5 million, subject to pre-closing and post-closing
adjustments (b) a junior subordinated promissory note from the Company in the
original principal amount of $9.0 million which matures in 2009 (c) preferred
membership interests of the Company with a liquidation value of approximately
$6.0 million which are mandatorily redeemable in 2009 and (d) common membership
39
units of the Company representing 7% of the total common membership interests of
the Company and (ii) Bain LLC's, the BRS Investors' and certain management
members' limited liability company interests in MergeCo were converted into the
right to receive up to 93% of the total common membership interests of the
Company.
Simultaneous with the consummation of the Merger and each of the other
related transactions (the "Closing"), the Company contributed substantially all
of its assets and liabilities to Alliance Laundry Systems LLC, a newly formed
limited liability company ("Alliance Laundry"). Immediately after the
consummation of the transactions, Alliance Laundry became the only direct
subsidiary of the Company and succeeded to substantially all of the assets and
liabilities of the Company. Subsequent to May 4, 1998, Alliance Laundry
comprises all of the operating activities of the Company.
The transactions contemplated by the Merger Agreement (the "Transactions")
were funded by: (i) $200.0 million of term loan borrowings by Alliance Laundry;
(ii) $110.0 million of senior subordinated notes of Alliance Laundry and
Alliance Laundry Corporation due in 2008 (substantially all of the amounts in
clauses (i) and (ii) were distributed by Alliance Laundry to the Company to fund
the Merger and to fund related fees and expenses); (iii) the issuance by the
Company of a junior subordinated promissory note in the original principal
amount of $9.0 million; (iv) the issuance by the Company of the mandatorily
redeemable preferred membership interests with a liquidation value of $6.0
million; (v) the investors' equity contributions by Bain LLC, the BRS Investors
and certain members of management of $47.1 million and (vi) retained equity of
Raytheon of $3.5 million. Each of the transactions was conditioned upon
consummation of each of the others, and consummation of each of the transactions
occurred simultaneously.
Note 4 - Nonrecurring Items:
During the fourth quarter of 1998, the Company recorded a $4.5 million
restructuring charge associated with the closing of the Company's Latin American
coin laundromat operations. A decision was made to close these operations
because of continued unprofitable performance. The charge included $1.5 million
for the estimated loss on the sale of company-owned dry-cleaning and laundry
stores representing the excess of the carrying value of assets relating to these
stores over estimated proceeds from sale, $1.4 million for the write-off of the
unamortized balance of the LaveRap tradename and franchise rights which were
purchased in 1996 for use in developing coin laundromats in Latin America, $0.9
million for severance and related benefits arising from the termination of 41
employees and $0.7 million for certain other expenses associated with
discontinuing the Latin American operations. The carrying value of assets held
for disposal at December 31, 1999 is not material. At December 31, 1999, the
Company had one store remaining and remaining reserves of approximately $0.1
million are expected to be adequate to provide for related costs.
Balance at
1998 Utilized December 31,
Charge Cash Non-cash 1998
-------- -------- ---------- --------------
Estimated loss on sale of stores.................. $1,469 $ - $ - $1,469
Write-down of intangible assets................... 1,366 - (1,366) -
Write-down of other assets........................ 656 - - 656
Employee termination and severance benefits....... 893 (213) - 680
Other............................................. 82 - - 82
-------- -------- ---------- --------------
Total........................................... $4,466 $(213) $(1,366) $2,887
======== ======== ========== ==============
40
Balance at Balance at
December 31, Utilized December 31,
1998 Cash Non-cash 1999
-------------- ---------- ------------ --------------
Estimated loss on sale of stores................ $ 1,469 $ - $ (1,469) $ -
Write-down of other assets...................... 656 - (557) 99
Employee termination and severance benefits..... 680 (601) (79) -
Other........................................... 82 - (82) -
--------------- ---------- ------------ --------------
Total......................................... $ 2,887 $ (601) $ (2,187) $ 99
=============== ========== ============ ==============
The Company's Latin American operations generated net sales of $0.2 million
and $2.4 million, and an operating loss of $0.2 million and $1.6 million for the
twelve months ended December 31, 1999 and 1998, respectively.
The Company entered into retention agreements with certain key executives,
managers and commissioned sales people prior to the Recapitalization. During
1999 and 1998, the Company incurred approximately $1.5 million and $2.3 million,
respectively, in expense associated with payments under these agreements.
Payments under this program were completed in November of 1999.
During the fourth quarter of 1999, the Company recorded a $2.3 million
restructuring charge associated with the closing of the Company's Madisonville,
KY manufacturing facility. A decision was made to close the Madisonville
facility and transfer production to the Ripon, WI manufacturing facility because
of the available capacity at the Ripon facility and the operating synergies that
will be recognized. The charge includes $1.7 million in employee termination
and severance benefit charges, $0.5 million for the estimated loss on fixed
assets which were held for disposal, and $0.1 million in miscellaneous costs.
The carrying value of assets held for disposal at December 31, 1999 is $1.0
million.
Balance at
1999 Utilized December 31,
Charge Cash Non-cash 1999
--------------- ---------- ------------ --------------
Write-down of fixed assets...................... $ 485 $ - $ (485) $ -
Employee termination and severance benefits..... 1,739 (20) (1,640) 79
Other........................................... 31 - - 31
--------------- ---------- ------------ --------------
Total......................................... $ 2,255 $ (20) $ (2,125) $ 110
=============== ========== ============ ==============
The non-cash portion of employee termination and severance benefits relates
to plan curtailment losses recognized in connection with 1999 workforce
reductions and the portion of supplemental termination benefits to be funded out
of the Company's overfunded pension plans (see Note 15).
Note 5 - Customer Financing:
Since 1992, the Company offered a variety of equipment financing programs
(capital leases) to assist customers in financing equipment purchases. These
capital leases were transferred immediately to third parties who administer the
contracts and earn all associated interest revenues ("External Financing").
These External Financings have terms ranging from 2 to 7 years and carry market
interest rates as set by the third-party lender. These third parties have
recourse against the Company ranging from 15% to 100%. At December 31, 1999 and
1998, the uncollected balance of leases with recourse
41
under these programs was $11.4 million and $25.5 million, respectively. In
connection with the Recapitalization, Raytheon agreed to indemnify the Company
for any recourse obligations arising from these programs.
In 1996, the Company established an internal financing organization to
originate and administer promissory notes for financing of equipment purchases
and laundromat operations. These notes typically have terms ranging from Prime
plus 1% to Prime plus 3% for variable rate notes and 9.9% to 14.5% for fixed
rate notes. The average interest rate for all notes at December 31, 1999
approximates 10.9% with terms ranging from 2 to 7 years. All notes allow the
holder to prepay outstanding principal amounts without penalty, and are
therefore subject to prepayment risk. In connection with the Transactions, the
Company entered into a five year $250.0 million revolving loan agreement (the
"Asset Backed Facility") through ALRW, its special-purpose single member limited
liability company, to finance trade receivables and notes receivable related to
equipment loans with Lehman Commercial Paper, Inc. (the "Facility Lender"), an
affiliate of Lehman Brothers, Inc. The Asset Backed Facility is a $250.0
million facility, with sublimits of $100.0 million for loans on eligible trade
receivables and $200.0 million for loans on eligible equipment loans. With
respect to loans secured by equipment loans, the Facility Lender will make loans
up to but not exceeding the lesser of 90% of the outstanding principal balance
of eligible equipment loans or 90% of the market value with respect to eligible
equipment loans, as determined by the Facility Lender in its reasonable
discretion. The eligibility of both trade receivables and equipment loans is
subject to certain concentration and other limits. In addition, after 24 months
in the Asset Backed Facility, an otherwise eligible equipment loan will no
longer be considered an eligible equipment loan, subject to two automatic six-
month extensions upon payment of a fee if such equipment loans have not been
securitized or otherwise disposed of by ALRW. The interest rate of loans under
the Asset Backed Facility is generally equal to one-month LIBOR plus 1.0% per
annum. The Company as servicing agent retains collection and administrative
responsibilities for the notes sold. The Company sold $85.9 million and $44.2
million of notes under this agreement during 1999 and 1998, respectively. The
amount of uncollected balances on equipment loans sold to ALRW was $110.2
million and $42.4 million at December 31, 1999 and 1998, respectively.
ALRW provides additional credit enhancement to the Facility Lender
(consisting of an irrevocable letter of credit, an unconditional lending
commitment of the Lenders under the Senior Credit Facility or a cash collateral
account) in an amount not to exceed 10% of the aggregate principal amount of
loans outstanding under the Asset Backed Facility up to $125.0 million and 5% of
the aggregate principal amount of loans outstanding above $125.0 million. The
Company is obligated under the reimbursement provisions of the Senior Credit
Facility to reimburse the Lenders for any drawings on the credit enhancement by
the Facility Lender. If the credit enhancement is not replenished by the
Company after a drawing, the Facility Lender will not be obligated to make
further loans under the Asset Backed Facility and the Asset Backed facility will
begin to amortize. In addition, at any time when (i) the aggregate principal
amount of loans outstanding under the Asset Backed Facility exceeds $125.0
million and (ii) the delinquency or default ratios with respect to trade
receivables or equipment loans exceed certain specified levels (an "Excess
Spread Sweep Event"), and for four months after a cure of such excess
delinquency or default ratios, the collections on the equipment loans (after
payment of accrued interest on the loans under the Asset Backed Facility) will
be directed into an excess spread sweep account in the name of the Facility
Lender until the amount on deposit in such account is equal to five percent of
the aggregate principal amount of loans outstanding under the Asset Backed
Facility.
Early repayment of the loans under the Asset Backed Facility will be
required upon the occurrence of certain "events of default," which include: (i)
default in the payment of any principal of or interest on any loan under the
Asset Backed Facility when due, (ii) the bankruptcy of ALRW, Alliance Laundry or
42
the issuer of the letter of credit or provider of the line of credit, (iii) any
materially adverse change in the properties, business, condition or prospects
of, or any other condition which constitutes a material impairment of ALRW's
ability to perform its obligations under the Asset Backed Facility and related
documents, (iv) specified defaults by ALRW or Alliance Laundry on certain of
their respective obligations, (v) delinquency, dilution or default ratios on
pledged receivables exceeding certain specified ratios in any given month, (vi)
the ratio of (a) the indebtedness of Alliance Laundry and its subsidiaries minus
indebtedness subordinated to the loans under the Asset Backed Facility to (b)
the sum of the tangible net worth of Alliance Laundry and its subsidiaries and
the amount of debt subordinated to the loans under the Asset Backed Facility
exceeding a specified amount and (vii) a number of other specified events.
Prior to the Transactions, the Company through its special-purpose
bankruptcy remote entity, RAYCAF, had entered into an agreement with Falcon
Asset Securitization Corporation (the "Bank"), a wholly-owned subsidiary of
First Chicago/NBD, under which it sold defined pools of notes receivable. Under
the terms of the agreement with the Bank, the Bank is paid interest based on the
30-day commercial paper rate plus 0.3% and has recourse against the Company
ranging from 15% to 100%. The Company, as servicing agent, retains collection
and administrative responsibilities for the notes. In 1998 and 1997 under this
financing program, the Company sold $28.7 million and $105.0 million,
respectively. Notes were no longer sold under this program after May 4, 1998.
The total amount uncollected at December 31, 1999 and 1998, was $57.2 million
and $89.1 million, respectively.
Gains on sales of notes receivable in 1999, 1998, and 1997 of approximately
$7.4 million, $7.7 million, and $5.9 million, respectively, are included in
commercial laundry revenues. At December 31, 1999 and 1998, the Company has
included in notes receivable $11.0 million and $4.2 million, respectively,
related to its retained interest in notes sold to ALRW. In addition, at
December 31, 1999 and 1998, included in other assets is $6.6 million and $8.2
million, respectively, related to the Company's beneficial interest in the
residual portion of interest earned on notes sold.
Note 6 - Sales of Accounts Receivable:
As described in Note 5 above, in connection with the Transactions, the
Company entered into the Asset Backed Facility through ALRW to finance trade
receivables and notes receivable related to equipment loans. With respect to
loans secured by trade receivables, the Facility Lender will make loans up to
but not exceeding 85% of the outstanding amount of eligible trade receivables.
The interest rate of loans under the Asset Backed Facility is generally equal to
one-month LIBOR plus 1.0% per annum. The Company as servicing agent retains
collection and administrative responsibilities for the accounts receivable sold.
Under this agreement, the Company sold $325.0 million and $210.4 million of
accounts receivable during 1999 and 1998, respectively. The total amount of
uncollected balances on trade accounts receivable sold at December 31, 1999 and
1998 totaled $33.2 million and $43.4 million, respectively.
Prior to the Transactions, the Company had entered into an agreement
through its special-purpose bankruptcy remote entity, RAYCAR, with the Preferred
Receivables Funding Corporation, a wholly-owned subsidiary of First Chicago/NBD
to sell certain defined pools of trade accounts receivable. Under the terms of
the agreement, interest was charged based on the 30-day commercial paper rate
plus 0.3%. The interest rates were adjusted based on Raytheon's debt rating. The
Company, as servicing agent, retained collection and administrative
responsibility for the accounts receivable. Under this agreement, the Company
sold $92.2 million and $284.5 million of accounts receivable in 1998, and
43
1997, respectively. Accounts receivable were no longer sold under this agreement
after May 4, 1998. At December 31, 1997, $74.6 million was uncollected or had
not been remitted to the Bank. No receivables under this agreement were
uncollected as of December 31, 1998.
Losses on sales of trade accounts receivable of $2.6 million, $4.1 million
and $3.4 million in 1999, 1998 and 1997, respectively, are included in selling,
general and administrative expense. The Company's retained interest in trade
accounts receivable sold to ALRW, which is included in other current assets, at
December 31, 1999 and 1998 is $5.1 million and $6.9 million, respectively.
Note 7 - Inventories:
Inventories consisted of the following at:
December 31,
-----------------------
1999 1998
--------- ---------
Materials and purchased parts......................... $ 14,506 $ 14,296
Work in process....................................... 3,688 3,280
Finished goods........................................ 16,736 16,571
Less: inventory reserves.............................. (3,648) (3,704)
--------- ---------
$ 31,282 $ 30,443
========= =========
Note 8 - Property, Plant and Equipment:
Property, plant and equipment consisted of the following at:
December 31,
-----------------------
1999 1998
--------- ---------
Land.................................................. $ 767 $ 773
Buildings and leasehold improvements.................. 27,529 26,215
Machinery and equipment............................... 144,978 137,279
--------- ---------
173,274 164,267
Less: accumulated depreciation........................ (117,788) (107,135)
--------- ---------
55,486 57,132
Construction in process............................... 2,129 5,132
--------- ---------
$ 57,615 $ 62,264
========= =========
Depreciation expense was $12.5 million, $13.3 million and $12.9 million for
the years ended December 31, 1999, 1998 and 1997, respectively.
44
Note 9 - Other Current Liabilities:
The major components of other current liabilities consisted of the
following at:
December 31,
-----------------------
1999 1998
--------- ---------
Warranty reserve.................................... $ 5,504 $ 4,626
Accrued sales promotion and cooperative
advertising........................................ 3,871 4,381
Salaries, wages and other employee benefits......... 4,909 5,297
Accrued interest.................................... 2,817 2,931
Accrued restructuring............................... 201 2,887
Other current liabilities........................... 4,503 4,416
--------- ---------
$ 21,805 $ 24,538
========= =========
Note 10 - Long-Term Debt:
Long-term debt at December 31, 1999 consisted of.the following:
December 31,
-----------------------
1999 1998
--------- ---------
Term Loan Facility.................................. $ 200,000 $ 200,000
Senior Subordinated Notes........................... 110,000 110,000
Junior Subordinated Note............................ 12,048 10,124
--------- ---------
Gross long-term debt................................ 322,048 320,124
Less: current portion............................... (500) --
--------- ---------
$ 321,548 $ 320,124
========= =========
Senior Credit Facility
In connection with the Transactions, the Company entered into a credit
agreement (the "Senior Credit Facility") with a syndicate of financial
institutions (the "Lenders") for which Lehman Brothers, Inc. acted as arranger
and Lehman Commercial Paper, Inc. acted as syndication agent. The Senior Credit
Facility is comprised of a term loan facility aggregating $200.0 million (the
"Term Loan Facility") and a $75.0 million revolving credit facility (the
"Revolving Credit Facility"), which was made available in conjunction with the
issuance of the Company's senior subordinated notes. The Term Loan Facility
requires no principal payments during the first two years followed by payments
of $250,000 per quarter for years three through five, beginning September 2000,
$40.0 million for year six and $157.0 million for year seven. The Company is
required to make prepayments with the proceeds from the disposition of certain
assets and from excess cash flow, as defined. No excess cash flow payment was
required for 1999.
The Term Loan Facility bears interest, at the Company's election, at either
the Lenders' Base Rate plus a margin ranging from 1.125% to 1.625% or the
Eurodollar Rate plus a margin ranging from 2.125% to 2.625%. The Revolving
Credit Facility bears interest, at the Company's election, at either the
45
Base Rate plus a margin ranging from 0.625% to 1.375% or the Eurodollar Rate
plus a margin ranging from 1.625% to 2.375%.
The interest rate on borrowings outstanding at December 31, 1999 and 1998 was
8.8% and 8.4%, respectively. Borrowings outstanding under the Senior Credit
Facility are secured by substantially all of the real and personal property of
the Company and its domestic subsidiaries (other than the financing
subsidiaries).
Effective March 10, 1999, the Company entered into a $67 million interest
rate swap agreement with a financial institution to hedge a portion of its
interest rate risk related to its term loan borrowings under the Senior Credit
Facility. Under the swap, which has a term of three years, the Company pays a
fixed rate of 4.962% and receives quarterly interest payments based upon LIBOR.
The differential between the fixed and floating interest rates under the swap is
accrued and is recorded as an adjustment of interest expense. The effect of
this agreement on the Company's interest expense during 1999 was a reduction of
$0.2 million. The fair value of this interest rate swap agreement which
represents the amount that the Company would receive to settle the instrument is
$2.4 million at December 31, 1999. The Company is exposed to credit loss in the
event of non-performance by the financial institution. However, management does
not anticipate such non-performance.
Senior Subordinated Notes
Also on May 5, 1998, the Company and its wholly-owned subsidiary, Alliance
Laundry Corporation, issued $110.0 million of 9 5/8% senior subordinated notes
due in 2008 (the "Notes") to Lehman Brothers, Inc. and Credit Suisse First
Boston Corporation (the "Initial Purchasers"). The Initial Purchasers
subsequently resold the Notes to qualified institutional buyers pursuant to Rule
144A of the Securities and Exchange Act and to a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions.
The Notes are general unsecured obligations and are subordinated in right of
payment to all current and future senior debt, including permitted borrowings
under the Senior Credit Facility.
Interest on the Notes accrues at the rate of 9 5/8% per annum and is payable
semi-annually in arrears on May 1 and November 1, commencing on November 1,
1998. The fair value of the Notes at December 31, 1999 and 1998 was
approximately $93.5 million and $105.6 million, respectively, based upon prices
prevailing in recent market transactions.
The Notes are not redeemable prior to May 1, 2003. Thereafter, the Notes are
subject to redemption at any time at the option of the Company, in whole or in
part, upon not less that 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 May 1 of the years
indicated below:
Year Redemption Price
----
2003........................... 104.813%
2004........................... 103.208%
2005........................... 101.604%
2006 and thereafter............ 100.000%
46
Notwithstanding the foregoing, at any time prior to May 1, 2001, the Company
may on any one or more occasions redeem up to 35% of the aggregate principal
amount of the Notes at a redemption price of 109.625% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the redemption
date, with the net cash proceeds of any equity offerings, as defined by the
indenture governing the Notes; provided that at least 65% of the aggregate
principal amount of Notes remains outstanding immediately after each occurrence
of such redemption; and provided, further, that each such redemption shall occur
within 45 days of the date of the closing of such equity offering.
The Company is required under the terms of the Notes to offer to redeem the
Notes at a redemption price of 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the redemption date, upon a
change of control, as defined. Further, the Company is required to offer to
redeem the Notes at a redemption price of 100% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, to the redemption date, when
the amount of excess proceeds from asset sales, as defined, exceeds $10 million,
up to the maximum principal amount that may be purchased out of such excess
proceeds.
Junior Subordinated Promissory Note
Upon the consummation of the Merger, the Company issued a junior subordinated
promissory note (the "Junior Note") in the principal amount of $9.0 million due
August 21, 2009, to Raytheon. Pursuant to the terms of the Junior Note,
interest accrues at the rate of 19.0% per annum until the eighth anniversary of
the date of issuance of the Junior Note and at a rate of 13.0% thereafter. The
Junior Note is subordinated in priority and subject in right and priority of
payment to certain indebtedness described therein. Interest which accrues on
the Junior Note is payable in-kind.
The Senior Credit Facility and the indenture governing the Notes contain a
number of covenants that, among other things, restrict the ability of the
Company to dispose of assets, repay other indebtedness (including, in the case
of the Senior Credit Facility, the Notes), incur liens, make capital
expenditures and make certain investments or acquisitions, engage in mergers or
consolidation and otherwise restrict the activities of the Company. In
addition, under the Senior Credit Facility, the Company will be 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.
The aggregate scheduled maturities of long-term debt in subsequent years are
as follows:
2000 500
2001 1,000
2002 1,000
2003 20,500
2004 98,500
Thereafter 200,548
---------------
$322,048
===============
Note 11 - Income Taxes:
Prior to May 5, 1998, the Company's financial statements reflect a provision
for federal, state and foreign income taxes based on income as if the Company
had been subject to income tax on a separate return basis. The charge was
computed in accordance with SFAS No. 109 and the charge was based on
47
current tax rates. Effective May 5, 1998, in connection with the Transactions,
the Company became a stand-alone limited liability company and is no longer
subject to federal and most state income taxes.
48
Years Ended December 31,
1999 1998 1997
-------- -------- --------
Current income tax expense:
Federal and foreign $ -- $ 1,809 $ 11,576
State 29 402 2,574
-------- -------- --------
29 2,211 14,150
Deferred income tax expense -- 180 2,281
-------- -------- --------
Income tax provision $ 29 $ 2,391 $ 16,431
======== ======== ========
The provision for income taxes differs from the U.S. Federal statutory rate
due primarily to state income taxes in 1997 and to state income taxes and the
change to a non-tax paying entity effective May 5, 1998. Current income tax
expense amounts are included as a transfer to Raytheon, in the parent company
investment account. Deferred tax account balances which existed at the date of
the Merger were transferred to Raytheon as part of the Recapitalization.
Note 12 - Mandatorily Redeemable Preferred Equity and Members' Equity:
The following table summarizes the authorized, issued and outstanding
preferred and common units by class and the related dollar amounts for each
class as of May 5, 1998. During the year ended December 31, 1998, the only
activity relating to the preferred and common units was the issuance of such
units in connection with the Recapitalization. Certain members of management
entered into promissory notes totaling $1.8 million to help finance the purchase
of the common units.
Units Dollars
----------- -----------
Preferred Units.......................... 6,000.00 $ 6,000,000
Common Units:
Class A........................... 50,645.16 $ 5,064,516
Class B........................... 3,232.67 32
Class C........................... 3,439.01 34
Class L........................... 5,627.24 45,580,645
----------- -----------
Total Common Units............. 62,944.08 50,645,227
===========
Management Investor Promissory Notes..... 1,762,901
-----------
Net Proceeds............................. $48,882,326
===========
Bain LLC, the BRS Investors, certain management investors and Raytheon
(collectively, the "Members") have entered into an Amended and Restated Limited
Liability Company Agreement (the "LLC Agreement"). The LLC Agreement governs the
relative rights and duties of the Members.
The ownership interests of the Members in the Company consist of preferred
units (the "Preferred Units") and common units (the "Common Units"). Holders of
the Preferred Units are entitled to a return of capital contributions prior to
any distributions made to holders of the Common Units. The Common Units
represent the common equity of the Company.
49
Preferred Units - Upon consummation of the Merger, the Company issued
mandatorily redeemable preferred membership interests (the "Seller Preferred
Equity") with a liquidation value of $6.0 million to Raytheon. The Seller
Preferred Equity does not accrete, accrue or pay dividends and is redeemable at
the earlier of (i) a change of control (as defined in the LLC Agreement), (ii)
any initial public offering or (iii) 2009. The holders of the Seller Preferred
Equity are entitled to receive distributions from the Company in an amount equal
to their unreturned capital (as defined in the LLC Agreement) prior to
distributions in respect of any other membership interests of the Company.
Common Units - The Common Units of the Company are divided into the following
four classes:
Class L Units - These units provide a yield of 12% on the unreturned capital
and unpaid yield (as defined), compounded quarterly. Such accumulated and
unpaid amounts totaled $9.9 million and $3.7 million at December 31, 1999 and
1998, respectively. Class L Units do not provide any voting rights to the
holders.
Class A Units - These units are the primary vehicle of equity ownership in
the Company. Class A Units are the only units that provide voting rights.
Decisions made by a majority of the voting holders of Class A Units are binding
on the Company, provided that members holding at least 20% of the Class A Units
are present.
Class B and C Units - Class B Units and Class C Units do not provide any
voting rights to the holders. These units are not eligible to receive
distributions until the Company achieves the defined target multiple applicable
to each class of units. The target multiple is calculated as the sum of all
distributions to all holders of Class L and Class A Units divided by the sum of
all capital contributions made by such holders. Class B Units become eligible
to receive distributions when vested and the target multiple reaches or exceeds
1.0 and the Class C Units become eligible when vested and the target multiple
reaches or exceeds 3.0. Pursuant to agreements entered into with the members of
management who participated in the purchase of membership interests (see Note
16), the Class B and Class C Units vest ratably from the Closing to May 5 of
each year through 2003. Such agreements also provide for accelerated vesting in
certain circumstances.
Distributions - Subject to any restrictions contained in any financing
agreements to which the Company or any of its affiliates (as defined in the LLC
Agreement) is a party, the Board of Managers (the "Board") may make
distributions, whether in cash, property, or securities of the Company, at any
time in the following order of priority:
First, to the holders of Preferred Units, an amount determined by the
aggregate unreturned capital.
Second, to the holders of Class L Units, the aggregate unpaid yield accrued
on such Class L Units.
Third, to the holders of Class L Units, an amount equal to the aggregate
unreturned capital.
Fourth, ratably to the holders of Common Units, an amount equal to the amount
of such distribution that has not been distributed pursuant to the clauses
described above.
The Company may distribute to each holder of units within 75 days after the
close of each fiscal year such amounts as determined by the Board to be
appropriate to enable each holder of units to pay estimated income tax
liabilities. There were no distributions to holders of units during 1999.
50
Allocations - Profits and losses of the Company are allocated among the
various classes of units in order to adjust the capital accounts of such holders
to the amount to be distributed upon liquidation of the Company.
Restrictions on transfer of securities - No holder of securities may sell,
assign, pledge or otherwise dispose of any interest in the holder's securities
except that (i) Bain LLC may transfer its securities to other security holders
in the same class, (ii) holders may transfer their securities through applicable
laws of descent and distribution, (iii) transfers of securities may be made to
an affiliate, and (iv) Raytheon may transfer its Preferred Units with the
consent of the Board.
Note 13 - Employee Stock Plans:
As an operating unit of its parent, Raytheon, the Company had no employee
stock option plan; however, certain employees of the Company participated in
Raytheon's stock option plans.
Raytheon had three stock option plans. The 1976 Stock Option Plan provided
for the grant of both incentive and nonqualified stock options at an exercise
price which was 100% of the fair market value on the date of grant. The 1991
Stock Plan provided for the grant of incentive stock options at an exercise
price which was 100% of the fair market value, and nonqualified stock options at
an exercise price which may be less than the fair market value on the date of
grant. The 1995 Stock Option Plan provided for the grant of both incentive and
nonqualified stock options at an exercise price which was not less than 100% of
the fair market value on the date of grant.
The plans also provided that all stock options could be exercised in their
entirety 12 months after the date of grant. Incentive stock options terminate
10 years from the date of grant, and those stock options granted after December
31, 1986 became exercisable to a maximum of $100,000 per year. Nonqualified
stock options terminate 11 years from the date of grant or 10 years and a day if
issued in connection with the 1995 Stock Option Plan.
The following stock option information relates to options granted to the
Company's employees under Raytheon's plans. Shares exercisable at the
corresponding weighted average exercise price at December 31, 1997 were 95,928
at $44.19.
Information for 1997 follows:
Weighted Average
Shares Option Price
--------------- --------------------
Outstanding at December 31, 1996..................... 122,811 $41.53
Granted........................................... 115,000 51.69
Exercised......................................... (26,883) 32.60
--------------- ----------------
Outstanding at December 31, 1997..................... 210,928 $48.20
=============== ================
51
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------------------------------------------
Shares Weighted
Outstanding at Weighted Average Weighted Shares Average
Exercise December 31, Contractual Average Exercisable at Exercisable
Price Range 1997 Remaining Life Exercise Price December 31, 1997 Price
- -------------------------------------- ----------------- --------------- -------------------- ----------------
$22.98 to $28.44 6,040 5.2 $28.40 6,040 $28.40
$32.88 to $39.03 40,938 7.1 36.52 40,938 36.52
$51.69 to $52.56 163,950 9.2 51.95 48,950 52.56
------------- -------------
Total 210,928 95,928
============= =============
Raytheon applied Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
plans. Raytheon adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and accordingly, no compensation
expense is recognized for the stock option plans in these financial statements.
Had compensation cost for the stock options awarded to the Company's employees
been determined based on the fair value at the grant date for awards under these
plans, consistent with the methodology prescribed under SFAS No. 123, and had
such compensation expense been reflected in net income, the Company's net income
would have approximated the pro forma amounts indicated below:
1997
---------------
Net income-as reported................. $26,276
Net income-pro forma................... $25,819
The weighted-average fair value of each option granted in 1997 was estimated
as $9.95 on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
Expected life......................................................... 4 years
Assumed annual dividend growth rate (5 year historical rate).......... 6%
Expected volatility................................................... 15%
Risk free interest rate (month-end yields on 4 year treasury strips
equivalent zero coupon).......................................... 5% to 7.5% range
Assumed annual forfeiture rate........................................ 5%
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
Options which had not vested at the time of the Recapitalization were settled
by Raytheon at a cost of $0.4 million. Employees holding vested options were
given a period of one year following the date of the Recapitalization to
exercise these options.
52
Note 14 - Commitments and Contingencies:
At December 31, 1999, the Company had commitments under long-term operating
leases requiring approximate annual rentals in subsequent years as follows:
2000 $ 625
2001 313
2002 188
2003 169
2004 50
Thereafter 4
------------
$1,349
============
Rental expense for 1999, 1998 and 1997 amounted to $1.7 million, $1.5
million and $1.2 million, respectively.
The Company's 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, 2005 and may be renewed at
the Company's option for five additional consecutive ten year terms.
The 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 disposal of
hazardous wastes. The Company is also subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at the properties it owns or operates and
at other properties where the Company or predecessors have arranged for the
disposal of hazardous substances. As a result, the Company is involved, from
time to time, in administrative and judicial proceedings and inquiries relating
to environmental matters. There can be no assurance that the Company will not
be involved in such proceedings in the future and that the aggregate amount of
future clean-up costs and other environmental liabilities will not have a
material adverse effect on the Company's business, financial position and
results of operations. However, in the opinion of management, any liability
related to matters presently pending will not have a material effect on the
Company's financial position, liquidity or results of operations after
considering provisions already recorded.
Pursuant to the Merger Agreement, and subject to a three year notice period
following the Closing, Raytheon has agreed to indemnify the Company for certain
environmental liabilities in excess of $1.5 million in the aggregate arising
from the operations of the Company and its predecessors prior to the Merger,
including with respect to environmental liabilities at the Ripon and Marianna
facilities. In addition to the Raytheon indemnification, with respect to the
Marianna, Florida facility, a former owner of the property has agreed to
indemnify the Company for certain environmental liabilities. In the event that
Raytheon or the former owner fail to honor their respective obligations under
these indemnifications, such liabilities could be borne directly by the Company
and could be material.
In April 1998, Amana Company, L.P. ("Appliance Co.") filed suit in the
United States District Court for the Southern District of New York seeking, in
pertinent part, to prohibit the Company from competing in the U.S. consumer
retail distribution laundry market until July 2012. The Company currently does
not participate in this market. In June 1998, Appliance Co. added allegations
asserting that the Company, Alliance Laundry and Bain Capital, Inc. had
tortiously interfered with the non-
53
compete agreement that Appliance Co. claimed that Alliance Laundry had inherited
from Raytheon. In January 1999, Appliance Co. added claims against Raytheon and
the Company in connection with the Horizon washing machine, a "single-pocket"
frontload washing machine that was being readied for volume production as of the
time when Raytheon (the former parent of the Company) was completing the sale of
its consumer appliances business to Appliance Co. (the "Appliance Co.
Transaction"). In January 1999, Alliance Laundry filed a counterclaim against
Appliance Co. seeking payment of sums owed for certain top-load washing machines
and parts sold pursuant to a Supply Agreement between the companies. In May
1999, Appliance Co. filed a Reply Counterclaim for breach of the Supply
Agreement. In October 1999, Appliance Co. added another claim that sought to
revise the cross-license agreement between the two companies to restrict the
degree to which the Company can use intellectual property whose ownership was
retained by the Company as part of the 1997 transaction between Appliance Co.
and Raytheon to compete against Appliance Co. in the U.S. consumer retail
distribution laundry market.
In December 1999, the parties to this lawsuit agreed to settle all of their
claims, and all claims in the action against all parties were dismissed with
prejudice. Under the terms of the settlement agreement, the Company will be
allowed to compete in the U.S. home laundry market beginning in October 2004.
The Company will also be permitted to compete in the U.S. home laundry market
beginning in October 2004 with both the intellectual property whose ownership
was retained by the Company as part of the 1997 transaction between Appliance
Co. and Raytheon and the intellectual property that was cross-licensed to the
Company by Appliance Co. pursuant to the cross-license agreement. Likewise,
Appliance Co. will be permitted to compete against the Company in the commercial
laundry market beginning in October 2004 and will be able to do so using both
the intellectual property that Appliance Co. acquired as part of the Appliance
Co. Transaction and the intellectual property to which Alliance received a
cross-license under the cross-license agreement. Additionally, pursuant to the
terms of the settlement agreement, Appliance Co. satisfied all outstanding
invoices owed to the Company for certain top-load washing machines and parts
sold pursuant to the Supply Agreement between the companies, and the Company was
required to pay Appliance Co. $3.0 million for certain Appliance Co.
manufactured inventory. The Company estimates that such inventory has a net
realizable value of approximately $1.7 million and has recorded the difference
($1.3 million) as a legal settlement cost in other income (expense), net.
On February 8, 1999, Raytheon commenced an arbitration under the Commercial
Arbitration Rules of the American Arbitration Association in Boston,
Massachusetts against the Company, seeking damages of $12.2 million plus
interest thereon and attorney's fees for breach of the Merger Agreement based on
Raytheon's claim for indemnification for a payment made to a third party
allegedly on behalf of the Company and Alliance Laundry following the Closing.
An arbitration was conducted pursuant to the terms of the Merger Agreement
("Arbitration"). The Company asserted in the Arbitration that Raytheon owed the
$12.2 million to the third party and that neither the Company nor Alliance
Laundry is liable for such amount. In addition, the Company and Bain LLC filed
counterclaims and claims, respectively, seeking damages in excess of $30 million
from Raytheon. The Arbitration was concluded on January 12, 2000. The decision
and award of the Arbitration panel is currently pending. Any ultimate liability
of the Company, on a consolidated basis, pursuant to such proceedings will not,
in the opinion of management, have a material effect on the Company's financial
position, liquidity or results of operations.
Pursuant to the Merger Agreement, Bain LLC, the Company and Raytheon have
agreed on a partial settlement of claims by the Company for monies due to the
Company from Raytheon in the amount of $4 million plus interest thereon as a
result of disputes arising under the Merger Agreement. The parties
54
have agreed this amount will not be paid to the Company until the outcome of the
Arbitration is known and the final award is rendered. This amount will either be
offset against any amount due to Raytheon from the Company as a result of the
Arbitration award, or will be added to any other amount due to the Company from
Raytheon as a result of the Arbitration. This $4 million plus interest thereon,
net of related costs, has been reflected in the accompanying financial
statements.
Various claims and legal proceedings generally incidental to the normal
course of business are pending or threatened against the Company. While the
ultimate liability from these proceedings is difficult to determine, in the
opinion of management, any additional liability will not have a material effect
on the Company's financial position, liquidity or results of operations.
Note 15 - Pensions and Other Employee Benefits:
The Company has several pension and retirement plans covering the majority
of its employees. The pension plan covering salaried and management employees is
a defined benefit cash balance plan whereby an account is established for each
participant, in which pay credits and interest credits are earned as the
participant provides service. 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 Treasury Bill, as of the
last day of the prior plan year, plus 1%. The pension plan covering hourly and
union employees generally provides benefits of stated amounts for each year of
service. The Company's funding policy for the salaried plan is to contribute
annually at a rate that is intended to remain at a level percentage of
compensation for the covered employees. The Company's funding policy for the
hourly and union plan is to contribute annually at a rate that is intended to
remain level for the covered employees. Unfunded prior service costs under the
funding policy are generally amortized over periods from 10 to 30 years.
Total pension expense (benefit) for the Company's plans was $0.3 million,
($0.8) million and $0.2 million in 1999, 1998, and 1997, respectively, including
the following components:
Years Ended December 31,
------------------------
1999 1998 1997
--------------- -------------- ---------------
Service cost of benefits earned during the period $ 1,455 $ 1,391 $ 1,118
Interest cost on projected benefit obligation.... 2,197 2,086 1,650
Actual gain on assets........................... (7,387) (6,261) (2,278)
Net amortization and deferral................... 2,688 1,942 (315)
Curtailment losses and termination benefits...... 1,390 -- --
--------------- -------------- ---------------
Net periodic pension cost (benefit)............ $ 343 $ (842) $ 175
=============== ============== ===============
Assumptions used in the accounting were:
Discount rate.................................. 8.00% 6.75% 7.25%
Expected long-term rate of return on assets.... 9.25% 9.25% 9.25%
Rate of increase in compensation levels........ N/A 4.00% 4.50%
In 1999, various plan curtailments and supplemental termination benefits
were recognized as a result of workforce reductions.
55
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans at December 31:
1999 1998
-------------- --------------
Change in benefit obligation:
Benefit obligation at beginning of year.......................... $ 33,870 $ 28,355
Service cost..................................................... 1,455 1,391
Interest cost.................................................... 2,197 2,086
Amendments....................................................... (1,079) --
Curtailments..................................................... (93) --
Termination benefits............................................. 992 --
Actuarial (gain) loss............................................ (4,232) 3,368
Benefits paid.................................................... (1,502) (1,330)
-------------- --------------
Benefit obligation at end of year.............................. 31,608 33,870
-------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year................... 44,811 39,880
Actual return on plan asset...................................... 7,387 6,261
Benefits paid.................................................... (1,502) (1,330)
-------------- --------------
Fair value of plan assets at end of year....................... 50,696 44,811
-------------- --------------
Funded status.................................................... 19,088 10,941
Unrecognized transition asset.................................... (144) (287)
Unrecognized prior service cost.................................. 764 2,178
Unrecognized net gains........................................... (19,558) (12,339)
-------------- --------------
Prepaid benefit cost........................................... $ 150 $ 493
============== ==============
Plan assets primarily include equity and fixed income securities.
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all of the Company's employees may become eligible for these benefits if they
reach normal retirement age while working for the Company. Retiree health plans
are paid for in part by employee contributions, which 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, their covered dependents, and beneficiaries.
Retiree life insurance plans are noncontributory and cover the retiree only.
The net postretirement benefit cost for the Company in 1999, 1998 and 1997
included the following components:
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Service cost benefits earned during the period........ $ 51 $ 58 $ 52
Interest cost on projected benefit obligation......... 106 142 107
Net amortization and deferral......................... 84 91 63
Curtailment losses.................................... 250 -- --
-------------- -------------- --------------
Net postretirement benefit cost..................... $ 491 $ 291 $ 222
============== ============== ==============
Assumptions used in the accounting were:
Discount rate....................................... 8.00% 6.75% 7.25%
Rate of increase in compensation levels............. 4.00% 4.00% 4.50%
Health care cost trend rate in the first year....... 6.50% 6.00% 6.50%
Gradually declining to a trend rate in the
year 2001 & beyond of.............................. 5.00% 5.00% 5.00%
56
The following provides a reconciliation of benefit obligations, plan assets
and the funded status of the plan at December 31:
1999 1998
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ....... $ 1,870 $ 1,523
Service cost .................................. 51 58
Interest cost ................................. 106 142
Curtailments .................................. (258) --
Actuarial (gain) loss ......................... (173) 562
Benefits paid ................................. (382) (415)
------- -------
Benefit obligation at end of year ........... 1,214 1,870
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year. -- --
Employer contributions ........................ 382 415
Benefits paid ................................. (382) (415)
------- -------
Fair value of plan assets at end of year .... -- --
------- -------
Funded status ................................. (1,214) (1,870)
Unrecognized transition obligation ............ 589 899
Unrecognized net loss ......................... 150 605
. ------- -------
Accrued benefit cost ........................ $ (475) $ (366)
======= =======
A one percentage point increase in the assumed health care cost trend rate
would increase the accumulated postretirement benefit obligation as of December
31, 1999 by approximately $60,000 and the interest cost by approximately $5,000.
A one percentage point decrease in the assumed health care cost trend rate would
increase the accumulated postretirement benefit obligation as of December 31,
1999 by approximately $54,000 and the interest cost by approximately $4,000.
Prior to the Recaptialization, eligible employees were able to participate
in Raytheon's Savings and Investment Plan and Raytheon's Employee Stock
Ownership Plan. Subsequent to the Recapitalization, eligible employees are able
to participate in the Alliance Laundry Systems Capital Appreciation Plan
("ALCAP"). The provisions of ALCAP are substantially the same as those of
Raytheon's Savings and Investment Plan. In addition, the Company makes an 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 such defined contribution plans, covered employees are
allowed to contribute up to 17 percent of their pay on a pre-tax basis up to the
limit established by the Internal Revenue Service. The Company contributes
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. Total
expense for the Savings and Investment and ALCAP plans totaled $1.1 million,
$1.1 million and $1.0 million for 1999, 1998 and 1997, respectively.
57
The Company's annual contribution to Raytheon Employee Stock Ownership Plan
was approximately one half of one percent of salaries and wages, subject to
statutory limits, of substantially all United States salaried and a majority of
hourly employees. The expense was $0.1 million and $0.3 million for 1998 and
1997, respectively.
Prior to May 5, 1998, the Company's employees were covered under Raytheon's
workers' compensation program. The Company's allocated expense for workers
compensation during the period ended May 4, 1998 and the year ended December 31,
1997 was $0.4 million and $0.8 million, respectively.
Deferred Compensation Agreements
In connection with the Merger, the Company and Raytheon entered into
deferred compensation agreements with certain executives, whereby the Company
assumed certain long-term compensation obligations earned by management under
programs established by Raytheon. Such agreements provide for the deferral of
compensation until the earlier of (i) the payment of a lump sum (the "Benefit
Amount") to the executive ten years after the date of such agreement, regardless
of whether the executive is employed by the Company as of such date or (ii) the
payment of the Benefit Amount upon the occurrence of certain events described
therein. The balance sheet at December 31, 1999 and 1998 includes a long-term
liability of $1.9 million and $1.1 million, respectively, related to such
agreements.
Note 16 - Related Party Transactions:
Securityholders Agreement
Upon the consummation of the Merger, the Company, Raytheon and certain
securityholders entered into a securityholders agreement (the "Securityholders
Agreement"). The Securityholders Agreement (i) restricts the transfer of the
equity interests of the Company; (ii) grants tag-along rights on certain
transfers of equity interests of the Company; (iii) requires the securityholders
to consent to a sale of the Company to an independent third party if such sale
is approved by certain holders of the then outstanding equity interests of the
Company; and (iv) grants preemptive rights on certain issuances of equity
interests of the Company. Certain of the foregoing provisions of the
Securityholders Agreement will terminate upon the consummation of an initial
public offering or a liquidity event (each as defined in the Securityholders
Agreement).
Management Investor Promissory Notes
In connection with the Transactions, the Company 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. The Promissory Notes bear interest at a rate of 5.94% per annum
and mature on June 5, 2008. The Promissory Notes are classified as a component
of members' deficit at December 31, 1999 and 1998.
Executive Unit Purchase Agreements
In connection with the Merger, MergeCo entered into executive unit purchase
agreements (the "Purchase Agreements") with certain members of management of the
Company (each an "Executive"). Such agreements govern the sale to the
Executives of common membership interests of MergeCo in
58
exchange for cash and/or a promissory note from the Executive and provide for
repurchase rights and restrictions on transfer of the common units. In
connection with the Merger, the Executives' membership interests in MergeCo were
converted into common membership interests of the Company.
The Purchase Agreements provide the Company with a repurchase option upon
the termination of each Executive. If the Executive's termination is the result
of death, permanent disability or without cause, as defined, Class A and Class L
Units, and vested Class B and Class C Units may be repurchased by the Company at
a price per unit equal to fair market value, as defined, and unvested Class B
and Class C Units may be repurchased at a price per unit equal to the lower of
fair market value or original value, as defined. If an Executive's termination
is voluntary or for cause, as defined, all units may be repurchased at a price
equal to the lower of fair market value or original value, unless an Executive's
voluntary termination occurs seven and one-half years from May 5, 1998, in which
case the repurchase price shall be fair market value. The Class B and Class C
Units were purchased by the Executives at a nominal value based upon the
subordinated nature of such interests (see Note 12).
Management Services Agreement
In connection with the Transactions, the Company 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 the Company and Bain LLC.
In exchange for services, Bain LLC will receive (i) an annual management fee,
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 the Company and of each financing or refinancing (currently approximately
1.0% of total financings). In connection with the Recapitalization, Bain LLC
also received a transaction fee from the Company. The Management Services
Agreement has an initial term of ten years subject to automatic one-year
extensions unless the Company or Bain LLC provides written notice of
termination.
Note 17 - Condensed Financial Information of Alliance Laundry Systems LLC:
As discussed more fully in Note 3, substantially all of the assets and
liabilities of the Company were transferred to Alliance Laundry, a wholly-owned
subsidiary of the Company, in connection with the Merger. Therefore, the
historical financial statements of Alliance Laundry are the same as the
historical financial statements of the Company prior to the Merger inasmuch as
Alliance Laundry did not exist prior to that time. Subsequent to the Merger,
Alliance Laundry is the only direct subsidiary of the Company and comprises all
of the Company's operating activities.
In connection with the Merger, and as discussed in Note 10, Alliance
Laundry and its wholly-owned subsidiary, Alliance Laundry Corporation, issued
the $110.0 million senior subordinated notes. Alliance Laundry Corporation was
incorporated for the sole purpose of serving as a co-issuer of the Notes in
order to facilitate their issuance. Alliance Laundry Corporation does not have
any substantial operations or assets of any kind. Alliance Laundry Holdings LLC
has provided a full and unconditional guarantee of the Notes and has no
operating activities independent of Alliance Laundry. Separate financial
statements of Alliance Laundry are not presented because Company management has
determined that they would not be material to investors. Summarized information
for Alliance Laundry as of December 31, 1999 and 1998 and for the years then
ended is presented below.
59
December 31,
----------------------------
1999 1998
------------- -------------
(in millions) (in millions)
Current assets ............................ $ 75.0 $ 67.7
Noncurrent assets ......................... 144.9 146.5
----------- ---------
$ 219.9 $ 214.2
=========== =========
Current liabilities ....................... $ 38.2 $ 38.3
Long-term debt ............................ 309.5 310.0
Other long-term obligations ............... 1.9 1.1
Member's deficit .......................... (129.7) (135.2)
----------- ---------
$ 219.9 $ 214.2
=========== =========
For the Year Ended December 31,
----------------------------------
1999 1998
------------- -------------
(in millions) (in millions)
Net sales ................................. $ 312.4 $ 330.3
Gross profit .............................. 83.7 79.1
Selling, general and administrative
expense.................................... 41.7 43.5
Plant restructuring costs ................. 2.3 --
Other nonrecurring costs .................. 1.4 6.8
------------- -------------
Operating income .......................... 38.3 28.8
Interest expense .......................... 29.6 20.3
Other income (expense), net ............... (1.7) 0.3
------------- -------------
Income before taxes ....................... $ 7.0 $ 8.8
============= =============
Note 18 - Segment Information:
Based upon the information used by management for making operating
decisions and assessing performance, the Company has organized its business into
categories based upon products and services broken down primarily by markets.
Commercial laundry equipment and service parts, including sales to international
markets, are combined to form the commercial laundry segment. Commercial laundry
net sales include amounts related to the Company's finance program which
supports its commercial laundry operations. The Company's primary measure of
operating performance is gross profit which does not include an allocation of
any selling or product distribution expenses. Such amounts are reviewed on a
consolidated basis by management. In determining gross profit for its operating
units, the Company also does not allocate certain manufacturing costs, including
manufacturing variances and warranty and service support costs. Gross profit is
determined by subtracting cost of sales from net sales. Cost of sales is
comprised of the costs of raw materials and component parts, plus costs
incurred at the manufacturing plant level, including, but not limited to, labor
and related fringe benefits, depreciation, tools, supplies, utilities, property
taxes and insurance. The Company does not allocate assets internally
60
in assessing operating performance. Net sales and gross profit as determined by
the Company for its operating segments are as follows:
1999 1998 1997
------------------- ------------------- --------------------
Net Gross Net Gross Net Gross
Sales Profit Sales Profit Sales Profit
--------- -------- --------- -------- -------- ----------
Commercial laundry .................................... $ 257,677 $ 94,269 $ 253,083 $ 91,145 $270,856 $ 94,048
Appliance Co. consumer laundry ........................ 54,682 1,523 77,184 2,642 76,853 3,926
--------- -------- --------- -------- -------- ----------
$ 312,359 95,792 $ 330,267 93,787 $347,709 97,974
========= ========= ========
Other manufacturing costs ............................. (12,125) (14,679) (14,197)
-------- -------- ----------
Gross profit as reported .......................... $ 83,667 $ 79,108 $ 83,777
======== ======== ==========
Depreciation expense allocations for each segment are presented below:
1999 1998 1997
-------- -------- ----------
Commercial laundry ........................................ $ 7,113 $ 6,078 $ 5,975
Appliance Co. consumer laundry ............................ 4,242 5,957 5,754
-------- -------- ----------
$ 11,355 $ 12,035 $ 11,729
======== ======== ==========
The Company sells its products primarily to independent distributors. The
Company's largest customer (excluding Appliance Co.) accounted for 11.6% of 1999
net sales.
Note 19 - Subsequent Event
On March 6, 2000, the Company completed the acquisition of selected assets
of American Laundry Machinery Inc.'s pressing and finishing equipment division
(d/b/a "Ajax"). Ajax, located in Cincinnati, Ohio, designs and markets a full
line of presses and finishers serving the dry cleaning and industrial laundry
markets. Cash consideration for the transaction was $13.5 million. The purchase
will be financed through the proceeds of trade receivable sales and use of the
Revolving Credit Facility.
61
Alliance Laundry Holdings LLC
Schedule II - Valuation and Qualifying Accounts
(Dollars in Thousands)
Accounts Receivable:
Balance at
Beginning Charges to Balance at
of Period Expense Deductions End of Period
---------------- ---------------- ---------------- ----------------
Year ended:
December 31, 1997........... $ 590 -- 139 $ 451
December 31, 1998........... $ 451 347 106 $ 692
December 31, 1999........... $ 692 412 641 $ 463
Inventory:
Balance at
Beginning Charges to Balance at
of Period Expense Deductions End of Period
---------------- ---------------- ---------------- ----------------
Year ended:
December 31, 1997........... $3,968 1,625 1,284 $4,309
December 31, 1998........... $4,309 1,806 2,411 $3,704
December 31, 1999........... $3,704 1,151 1,207 $3,648
62
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Managers and Executive Officers
The representatives to the Board of Managers (each, a "Manager") and
executive officers of the Company following the Merger are as follows:
Name Age Position
---- --- --------
Thomas F. L'Esperance........... 51 Chief Executive Officer and Manager
Jeffrey J. Brothers............. 53 Senior Vice President, Sales and Marketing
Bruce P. Rounds................. 43 Vice President, Chief Financial Officer
Herman W. Beach................. 53 Vice President, Washer-Extractor Operations
R. Scott Gaster................. 47 Vice President, Washer, Dryer and Tumbler Operations
Robert T. Wallace............... 44 Vice President, Controller
Scott L. Spiller................ 49 Vice President, Law and Human Resources
Edward W. Conard................ 43 Manager
Robert C. Gay................... 48 Manager
Stephen C. Sherrill............. 46 Manager
Philip S. Taymor................ 44 Manager
Thomas F. L'Esperance has been Chief Executive Officer of the Company since
March 1996. He had served as President of the Amana Home Appliance Company from
1993 to 1996 and was President of Caloric Corporation, a manufacturer of
appliances, for two years prior thereto.
Jeffrey J. Brothers has been Senior Vice President of Sales and Marketing
of the Company since October 1989. He has been employed with the Company since
1977. Mr. Brothers has been involved in sales for the Company since 1983 and has
held other positions such as Manager of Distribution Development, Plant
Controller and Financial Analyst.
Bruce P. Rounds joined the Company in 1989 as Vice President of Finance and
was promoted to his current position in February 1998. He held the position of
Vice President, Business Development, for the Company from 1996 to 1998. Before
coming to the Company, 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.
Herman W. Beach has worked for Raytheon and the Company for nearly 20 years
and has held his current position since April 1996. His employment with Raytheon
began in the Missile Systems Company for two years. His career with the Company
began in 1980 with positions in Human Resources and Strategic Planning. Mr.
Beach's prior work experiences include the Tennessee Valley Authority and H.D.
Lee Company.
63
R. Scott Gaster joined the Company as Vice President, Procurement and
Materials, in June 1995. He took on the added responsibility of Vice President
of Washer and Dryer Operations in July 1997 and Tumbler Operations in August
1998. Mr. Gaster has also retained his former purchasing responsibilities. Prior
to joining the Company, 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 T. Wallace has been Vice President, Controller, of the Company since
June 1996. He held positions as Controller and Manager-Reporting and Analysis
for the Company from 1990 to 1996. Mr. Wallace's previous experience includes
two years as Controller of Alcolac (chemicals), four years as Manager of
Reporting and Analysis with Mueller Company, five years with Ohmeda and two
years with Price Waterhouse. He is a Certified Public Accountant.
Scott L. Spiller has been Vice President of Law & Human Resources, and
General Counsel of the Company since February 1998. From April 1996 to February
1998, Mr. Spiller was practicing law as a sole practitioner. Prior to that, he
was General Counsel and Secretary of the Company for ten years.
Edward W. Conard serves as a Manager following the Merger. He has been a
Managing Director of Bain LLC since March 1993. From 1990 to 1992, Mr. Conard
was a director of Wasserstein Perella, an investment banking firm that
specializes in mergers and acquisitions. Previously, he was a Vice President of
Bain & Company, where he headed the management consulting firm's operations
practice area. Mr. Conard also serves as a director of Cambridge Industries,
Waters Corporation, Medical Specialties, Inc., ChipPac, DynamicDetails, Inc. and
US Synthetic.
Robert C. Gay serves as a Manager following the Merger. Mr. Gay has been a
Managing Director of Bain LLC since 1993 and has been a General Partner of Bain
Venture Capital since 1989. From 1988 through 1989, Mr. Gay was a principal of
Bain Venture Capital. Mr. Gay is Vice Chairman of the Board of Directors of IHF
Capital, Inc., parent of ICON Health & Fitness Inc. Mr. Gay also serves as a
director of Alliance Entertainment Corp., GT Bicycles, Inc., Physio-Control
International Corporation, Cambridge Industries, Inc., Nutraceutical
Corporation, American Pad & Paper Company, GS Technologies and Small Fry Snack
Foods Limited.
Stephen C. Sherrill serves as a Manager following the Merger. Mr. Sherrill
has been a principal of Bruckmann, Rosser, Sherrill & Co., L.P. since its
formation in 1995. Mr. Sherrill was an officer of Citicorp Venture Capital, Ltd.
from 1983 through 1994. Mr. Sherrill is a director of Galey & Lord, Inc.,
Jitney-Jungle Stores of America, Inc., Mediq Incorporated, B & G Foods, Inc.,
Doane Pet Care Enterprises, Inc. and HealthPlus Corporation.
Philip S. Taymor serves as a Manager. Mr. Taymor has been Senior Vice
President and Chief Financial Officer of Waters Corporation since August 1994.
Previously, he held various positions at Millipore Corporation, including
Corporate Controller, Director of Finance of Millipore's Membrane Division and
Manager of Corporate Accounting. Mr. Taymor joined Millipore from Grant Thornton
& Company, Certified Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company or its
predecessor for 1999 and 1998 of those persons who served as (i)
64
the chief executive officer during 1999 and (ii) the other four most highly
compensated executive officers of the Company or its predecessor for 1999
(collectively, the "Named Executive Officers"):
Summary Compensation Table
Annual Compensation
-----------------------------------------------------
Other Annual
Name and Principal Position Year Salary($) Bonus($) Compensation($)
- --------------------------- --------- -------------- ------------- -----------------
Thomas F. L'Esperance...................... 1999 265,008 25,000 2,339 /(1)/
Chief Executive Officer 1998 310,003 94,615 6,529 /(2)/
R. Scott Gaster............................ 1999 131,700 13,170 6,986 /(1)/
VP, Washer, Dryer and Tumblers 1998 131,700 31,780 -
Jeffrey J. Brothers........................ 1999 129,000 12,900 6,200 /(1)/
Senior VP, Sales and Marketing 1998 126,006 21,775 -
Herman W. Beach............................ 1999 124,320 12,432 4,582 /(1)/
VP, Washer-Extractor Operations 1998 120,696 30,294 -
Bruce P. Rounds............................ 1999 124,448 12,449 6,751 /(1)/
VP, Chief Financial Officer 1998 119,700 25,160 -
Scott L. Spiller 1999 120,000 27,000 6,794 /(1)/
VP, Law and Human Resources 1998 82,137 - 8,184 /(2)/
/(1)/ Represents gross-up amounts paid for non-deductible fringe benefits
provided by the Company.
/(2)/ Represents payments for moving expenses.
Retention Agreements
In connection with the Merger, the Company has succeeded to retention
agreements originally entered into by the prior parent, Raytheon in connection
with the sale of its commercial laundry business. The retention agreements were
with certain key executives, managers and commissioned salespeople, including
Mr. L'Esperance, Mr. Gaster, Mr. Brothers, Mr. Beach, Mr. Rounds and Mr.
Wallace. The retention agreements concluded in the fourth quarter of 1999.
Employment Agreement
In connection with the Merger, the Company entered into an employment
agreement with Thomas F. L'Esperance. Such agreement provides for: (i) a five
year employment term; (ii) a minimum base salary and bonus following the end of
each fiscal year so long as the Company employs Mr. L'Esperance; (iii) severance
benefits; (iv) non-competition, non-solicitation and confidentiality agreements;
and (v) other terms and conditions of Mr. L'Esperance's employment.
65
Executive Unit Purchase Agreement
In connection with the Merger, MergeCo entered into Executive Unit
Purchase Agreements with the Management Investors (each, an "Executive"),
including Mr. L'Esperance, Mr. Gaster, Mr. Brothers, Mr. Beach, Mr. Rounds, Mr.
Spiller and Mr. Wallace. Such agreements govern the sale to the Executives of
common membership interests of MergeCo in exchange for cash and/or a promissory
note from the Executive and provide for repurchase rights and restrictions on
transfer of the common units. In connection with the Merger, the Executives'
membership interests in MergeCo were converted into common membership interests
of the Parent.
Deferred Compensation Agreement
In connection with the Merger, Raytheon, the Company and the Parent entered
into Deferred Compensation Agreements with certain Executives, including Mr.
L'Esperance, Mr. Gaster, Mr. Brothers, Mr. Beach, Mr. Rounds and Mr. Wallace
whereby the Company assumed certain long-term compensation obligations earned by
management under programs established by Raytheon. Such agreements provide for
the deferral of compensation until the earlier of (i) the payment of a lump sum
(the "Benefit Amount") to the Executive ten years after the date of such
agreement, regardless of whether the Executive is employed by the Company as of
such date or (ii) the payment of the Benefit Amount upon the occurrence of
certain events described therein.
Pension Plan
Substantially all eligible salaried employees of the Company, including
executive officers of the Company, are covered under the Alliance Laundry
Systems Retirement Accumulation Plan (the "Pension Plan"). The cost of the
Pension Plan is borne entirely by the Company. The Pension Plan is a defined
benefit cash balance plan. Under this plan, an account is established for each
participant in which pay credits and interest credits are earned as the
participant provides service. Pay credits are calculated as a percentage of the
participant's remuneration adjusted for age and years of service in accordance
with the following table:
Pension Plan Pay Credits Table
-----------------------------------------------------------
Total of Age and Base Remuneration
Years of Service 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 $50,000 (indexed for years after 1999) at the lesser of 5% or the percentage
used per the above table. 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 5.33%
for 1999. The amount
66
of earnings that can be recognized for plan purposes is limited by the IRS to
$160,000 in 1999. A participant vests in his benefits accrued under the Pension
Plan after five years of service.
Respective years of benefit service under the Pension Plan, through
December 31, 1999, are as follows: Mr. L'Esperance 1; Mr. Gaster 2; Mr. Brothers
21; Mr. Beach 20; and Mr. Rounds 10. Mr. L'Esperance was covered under Raytheon
plans through April 1998, at which time he became a participant under the
Company's Pension Plan.
Savings Plans
Substantially all of the salaried employees, including executive officers
of the Company, participate in a 401(k) savings plan established by the Company
(the "Company 401(k) Plan"). Prior to the Merger, such employees participated in
a 401(k) plan and an ESOP sponsored by Raytheon. As part of the Merger, Raytheon
transferred the account balances associated with the Company employees in the
Raytheon 401(k) plan to the Company 401(k) Plan. Employees are permitted to
defer a portion of their income under the Company 401(k) Plan and the Company
will match such contribution. The matching contribution is consistent with that
under the prior Raytheon plan which provided a matching contribution equal to
50% of the first 6% of the employee's contribution. In addition, employees
received a contribution under the Raytheon ESOP equal to 0.5% of W-2 pay. This
contribution is made as a supplemental contribution to the Company 401(k) Plan
in the form of a discretionary cash contribution (instead of membership
interests).
Compensation of Managers
The Company will reimburse Managers for any out-of-pocket expenses incurred
by them in connection with services provided in such capacity. In addition, the
Company may compensate Managers for services provided in such capacity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Parent owns all of the outstanding equity interests of the Company. The
following table sets forth certain information regarding the approximate
beneficial ownership of the Parent's common equity interests held by (i) each
person (other than Managers and executive officers of the Company) known to the
Company to own more than 5% of the outstanding common membership interests of
the Company, (ii) certain Managers of the Company and (iii) the Named Executive
Officers of the Company. The Parent's common equity interests are comprised of
four classes of membership units including Class A, Class L, Class B and Class
C.
Percentage of
Common
Membership
Name and Address of Beneficial Owner Interests
- ------------------------------------ ------------------
Bain Funds/(1)(2)/............................................................... 54.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
BRS Investors/(3)/............................................................... 27.7%
67
Percentage of
Common
Membership
Name and Address of Beneficial Owner Interests
- ------------------------------------ ------------------
c/o Bruckmann, Rosser, Sherrill & Co., L.P.
126 East 56th Street, 29th Floor
New York, NY 10022
Management Investors/(4)/......................................................... 9.4%
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
Raytheon Company................................................................. 7.0%
141 Spring Street
Lexington, MA 02173
Edward Conard/(1)(2)(5)/......................................................... 54.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Robert Gay/(1)(2)(5)/............................................................ 54.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Stephen Sherrill/(3)(6)/......................................................... 27.7%
c/o Bruckmann, Rosser, Sherrill & Co., L.P.
126 East 56th Street, 29th Floor
New York, NY 10022
Stephen Zide/(1)(2)/............................................................. 16.3%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Thomas F. L'Esperance/(4)/....................................................... 3.8%
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
Philip S. Taymor/(7)/............................................................ 0.5%
c/o Maple Street Partners
34 Maple Street
Milford, MA 01757
R. Scott Gaster/(4)/............................................................. 0.7%
68
Percentage of
Common
Membership
Name and Address of Beneficial Owner Interests
- ------------------------------------ --------------
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
Jeffrey J. Brothers/(4)/.......................................................... 0.8%
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
Herman W. Beach/(4)/.............................................................. 0.9%
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
Bruce P. Rounds/(4)/.............................................................. 0.8%
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
Scott L. Spiller /(4)/............................................................ 0.4%
c/o Alliance Laundry Systems LLC
P.O. Box 990
Ripon, WI 54971-0990
All Managers and executive officers as a group (21 persons)/(1)(2)(3)(4)/........ 91.9%
(1) Amounts shown reflect interests in Bain/RCL, L.L.C. which beneficially owns
55.9% of the outstanding common membership interests of the Company through its
ownership of Class A and Class L membership units in the Parent.
(2) Amounts shown reflect the aggregate interests held by Bain Capital Fund V,
L.P. ("Fund V"), Bain Capital Fund V-B, L.P. ("Fund V-B"), BCIP Trust Associates
II ("BCIP Trust"), BCIP Trust Associates II-B ("BCIP Trust II-B"), BCIP
Associates II ("BCIP") and BCIP Associates II-B ("BCIP II-B") (collectively, the
"Bain Funds"), for the Bain Funds and Messrs. Conard and Gay and the aggregate
interests held by BCIP Trust, BCIP Trust II-B, BCIP and BCIP II-B for Mr. Zide.
(3) Amounts shown reflect the aggregate interests held by Bruckmann, Rosser,
Sherrill & Co., L.P. ("BRS"), BCB Family Partners, L.P., NAZ Family Partners,
L.P., Paul D. Kaminski, Bruce C. Bruckmann, Donald J. Bruckmann, Harold O.
Rosser, Stephen C. Sherrill, H. Virgil Sherrill, Nancy A. Zweng, John Rice
Edmonds, Susan Kaider, Marilena Tibrea, Walker C. Simmons and MLPF&S Custodian
FBO Paul Kaminski (collectively, the "BRS Investors").
(4) Includes Class A and Class L membership units in the Parent but excludes
Class B and Class C membership units which are subject to vesting and generally
have no voting rights, representing on a
69
fully diluted basis approximately 10.6% of Parent's membership units for the
Management Investors, 3.1% for Mr. L'Esperance, 1.3% for Mr. Gaster, 1.4% for
Mr. Brothers, 1.3% for Mr. Beach, 1.3% for Mr. Rounds and 1.2% for Mr. Spiller.
(5) Messrs. Conard and Gay are each Managing Directors of Bain Capital
Investors V, Inc., the sole general partner of Bain Capital Partners V, L.P.
("BCPV"), and are limited partners of BCPV, the sole general partner of Fund V
and Fund V-B. Accordingly Messrs. Conard and Gay may be deemed to beneficially
own the interests owned by Fund V and Fund V-B. Messrs. Conard and Gay are each
general partners of BCIP, BCIP II-B, BCIP Trust and BCIP Trust II-B and,
accordingly, may be deemed to beneficially own the interests owned by BCIP, BCIP
II-B, BCIP Trust and BCIP Trust II-B. Each such person disclaims beneficial
ownership of any such shares in which he does not have a pecuniary interest.
(6) Mr. Sherrill is a director of BRSE Associates, Inc., the sole general
partner of BRS Partners, L.P., the sole general partner of BRS and, accordingly,
may be deemed to beneficially own the interests owned by BRS. Mr. Sherrill
disclaims beneficial ownership of any such shares in which he does not have a
pecuniary interest.
(7) Mr. Taymor is a partner of Maple Street Partners LLC, and accordingly, may
be deemed to beneficially own the interests owned by Maple Street Partners. Mr.
Taymor disclaims beneficial ownership of any such shares in which he does not
have a pecuniary interest.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Parent Securityholders Agreement
Upon the consummation of the Merger, the Parent, Raytheon and the
securityholders entered into a securityholders agreement (the "Securityholders
Agreement"). The Securityholders Agreement: (i) restricts the transfer of the
equity interests of the Parent; (ii) grants tag-along rights on certain
transfers of equity interests of the Parent; (iii) requires the securityholders
to consent to a sale of the Parent to an independent third party if such sale is
approved by certain holders of the then outstanding equity interests of the
Parent; and (iv) grants preemptive rights on certain issuances of equity
interests of the Parent. Certain of the foregoing provisions of the
Securityholders Agreement will terminate upon the consummation of an Initial
Public Offering or a Liquidity Event (each as defined in the Securityholders
Agreement).
Management Services Agreement
In connection with the Merger, the Company 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 the Company and Bain LLC.
In exchange for such services, Bain LLC will 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 the Company and of each financing or refinancing (currently
approximately 1.0% of total financings). The Management Services Agreement has
an initial term of ten years subject to automatic one-year extensions unless the
Company or Bain LLC provides written notice of termination.
70
Parent Registration Rights Agreement
Upon the consummation of the Merger, the Parent, Raytheon and the
securityholders, entered into a registration rights agreement (the "Parent
Registration Rights Agreement"). Under the Parent Registration Rights Agreement,
the holders of a majority of the Registrable Securities (as defined in the
Parent Registration Rights Agreement) owned by Bain LLC have the right, subject
to certain conditions, to require the Parent to register any or all of their
common equity interests of the Parent under the Securities Act at the Parent's
expense. In addition, all holders of Registrable Securities are entitled to
request the inclusion of any common equity interests of the Parent subject to
the Parent Registration Rights Agreement in any registration statement at the
Parent's expense whenever the Parent proposes to register any of its common
equity interests under the Securities Act. In connection with all such
registrations, the Parent has agreed to indemnify all holders of Registrable
Securities against certain liabilities, including liabilities under the
Securities Act.
Parent Amended and Restated Limited Liability Company Agreement
Bain LLC, the BRS Investors, the Management Investors and Raytheon
(collectively, the "Members") have entered into an Amended and Restated Limited
Liability Company Agreement (the "LLC Agreement"). The LLC Agreement governs the
relative rights and duties of the Members.
Membership Interests. The ownership interests of the members in the Parent
consist of preferred units (the "Preferred Units") and common units (the "Common
Units"). The Common Units represent the common equity of the Company. Holders of
the Preferred Units are entitled to the return of capital contributions prior to
any distributions made to holders of the Common Units.
Distributions. Subject to any restrictions contained in any financing
agreements to which the Company or any of its Affiliates (as defined in the LLC
Agreement) is a party, the Board of Managers (the "Board") may make
distributions, whether in cash, property or securities of the Company, at any
time or from time to time in the following order of priority:
First, to the holders of Preferred Units, an amount determined by the
aggregate unreturned capital.
Second, to the holders of Class L Common Units, the aggregate unpaid yield
accrued on such Class L Units.
Third, to the holders of Class L Units, an amount equal to the aggregate
unreturned capital.
Fourth, ratably to the holders of Common Units, an amount equal to the
amount of such distribution that has not been distributed pursuant to clauses
described above.
The Company may distribute to each holder of units within 75 days after the
close of each fiscal year such amounts as determined by the Board to be
appropriate to enable each holder of units to pay estimated income tax
liabilities. There were no distributions to holders of units during 1999.
Management. The Board consists of five individuals (each a
"Representative"). Pursuant to the Securityholders Agreement, the holder of the
majority of the Common Units held by the BRS Investors appointed one
Representative. The members of the Parent holding a majority of the Bain Units
(as
71
defined in the LLC Agreement) appointed the remaining Representatives. The
current Board consists of Messrs. L'Esperance, Conard, Gay, Sherrill and Taymor.
Junior Subordinated Promissory Note
Upon the consummation of the Merger, the Parent issued a Junior
Subordinated Promissory Note (the "Junior Note") in the principal amount of $9.0
million due August 21, 2009, to Raytheon. Pursuant to the terms of the Junior
Note, interest accrues at the rate of 19.0% per annum until the eighth
anniversary of the date of issuance of the Junior Note and at a rate of 13.0%
thereafter. The Junior Note is subordinated in priority and subject in right and
priority of payment to certain indebtedness described therein.
Parent Seller Preferred Equity
Upon the consummation of the Merger, the Parent issued mandatorily
redeemable preferred membership interests (the "Seller Preferred Equity") with a
liquidation value of $6.0 million to Raytheon. The Seller Preferred Equity does
not accrete, accrue or pay dividends and is redeemable at the earlier of (i) a
Change of Control (as defined therein), (ii) any initial public offering or
(iii) 2009. The holders of the Seller Preferred Equity are entitled to receive
distributions from the Parent in an amount equal to their Unreturned Capital (as
defined therein) prior to distributions in respect of any other membership
interests of the Parent.
Management Investor Promissory Notes
In connection with the Merger, the Parent entered into promissory notes
(the "Promissory Notes") aggregating approximately $1.8 million with Mr.
L'Esperance, Mr. Gaster, Mr. Brothers, Mr. Beach, Mr. Rounds and Mr. Wallace to
help finance the purchase of Common Units in the Parent. The Promissory Notes
bear interest at a rate of 5.94% per annum and mature on June 5, 2008.
72
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Index to Exhibits are filed as a part of
this report
(b) Reports on 8-K. None.
INDEX TO EXHIBITS:
Incorporated Herein By
Exhibit Description Reference To
------- ----------- ------------
2.1 Agreement and Plan of Merger, dated as of February 21, 1998, Exhibit 2.1 to the Registrant's Form
by and among Bain/RCL, L.L.C., RCL Acquisitions, L.L.C., S-4, Amendment #1, dated July 2,
Raytheon Commercial Laundry LLC and Raytheon Company. 1998 (file no. 333-56857)
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of Exhibit 2.2 to the Registrant's Form
May 2, 1998, by and among Bain/RCL, L.L.C., RCL Acquisitions, S-4, Amendment #1, dated July 2,
L.L.C., Raytheon Commercial Laundry LLC and Raytheon Company. 1998 (file no. 333-56857)
3.1 Certificate of Formation of Alliance Laundry Systems LLC. Exhibit 3.1 to the Registrant's Form
S-4, Amendment #1, dated July 2,
1998 (file no. 333-56857)
3.2 Amended and Restated Limited Liability Company Agreement of Exhibit 3.2 to the Registrant's Form
Alliance Laundry Systems LLC. S-4, Amendment #1, dated July 2,
1998 (file no. 333-56857)
3.3 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)
3.4 Bylaws of Alliance Laundry Corporation. Exhibit 3.4 to the Registrant's Form
S-4, Amendment #1, dated July 2,
1998 (file no. 333-56857)
4.1 Indenture, dated as of May 5, 1998, among Alliance Laundry Exhibit 4.1 to the Registrant's Form
Systems LLC, Alliance Laundry Corporation, the Guarantors and S-4, Amendment #1, dated July 2,
United States Trust Company of New York. 1998 (file no. 333-56857)
10.1 Purchase Agreement, dated as of April 29, 1998, by and among Exhibit 10.1 to the Registrant's
Alliance Laundry Systems LLC, Alliance Laundry Corporation and Form S-4, Amendment #1, dated July
the Initial Purchasers. 2, 1998 (file no. 333-56857)
73
10.2 Registration Rights Agreement, dated as of May 5, 1998, by and Exhibit 10.2 to the Registrant's
among Alliance Laundry Systems LLC, Alliance Laundry Form S-4, Amendment #1, dated July
Corporation, Alliance Laundry Holdings LLC, and Lehman 2, 1998 (file no. 333-56857)
Brothers Inc. and Credit Suisse First Boston Corporation.
10.3 Credit Agreement, dated as of May 5, 1998, among Alliance Exhibit 10.3 to the Registrant's
Laundry Holdings LLC, Alliance Laundry Systems LLC, the Form S-4, Amendment #1, dated July
several banks or other financial institutions or entities from 2, 1998 (file no. 333-56857)
time to time parties to this Agreement, Lehman Brothers Inc.,
Lehman Commercial Paper Inc., and General Electric Capital
Corporation.
10.4 Loan and Security Agreement, dated May 5, 1998, between Exhibit 10.4 to the Registrant's
Alliance Laundry Receivables Warehouse LLC, the Lenders and Form S-4, Amendment #1, dated July
Lehman Commercial Paper Inc. 2, 1998 (file no. 333-56857)
10.5 Amended and Restated Limited Liability Agreement of Alliance Exhibit 10.5 to the Registrant's
Laundry Holdings LLC, dated as of May 5, 1998. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.6 Alliance Laundry Holdings LLC, Securityholders Agreement, Exhibit 10.6 to the Registrant's
dated as of May 5, 1998, between Alliance Laundry Holdings LLC Form S-4, Amendment #1, dated July
and the Securityholders. 2, 1998 (file no. 333-56857)
10.7 Alliance Laundry Holdings LLC, Registration Rights Agreement, Exhibit 10.7 to the Registrant's
made as of May 5, 1998, by and among Alliance Laundry Holdings Form S-4, Amendment #1, dated July
LLC, Raytheon Company, Bain/RCL and the Securityholders. 2, 1998 (file no. 333-56857)
10.8 Employment Agreement, made as of May 5, 1998, by and between Exhibit 10.8 to the Registrant's
Alliance Laundry Systems LLC and Thomas F. L'Esperance. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.9 IRA and Executive Unit Purchase Agreement, made as of May 5, Exhibit 10.9 to the Registrant's
1998, by and between RCL Acquisitions, LLC, Thomas F. Form S-4, Amendment #1, dated July
L'Esperance and Stifel, Nicolaus Custodian for Thomas F. 2, 1998 (file no. 333-56857)
L'Esperance IRA and Stifel, Nicolaus Custodian for Paula K.
L'Esperance IRA.
10.10 IRA and Executive Unit Purchase Agreement, made as of May 5, Exhibit 10.10 to the Registrant's
1998, by and between RCL Acquisitions, LLC, R. Scott Gaster Form S-4, Amendment #1, dated July
and Robert W. Baird & Co. Inc. TTEE for R. Scott Gaster IRA. 2, 1998 (file no. 333-56857)
10.11 IRA and Executive Unit Purchase Agreement, made as of May 5, Exhibit 10.11 to the Registrant's
1998, by and between RCL Acquisitions, L.L.C., Jeffrey J. Form S-4, Amendment #1, dated July
Brothers and Delaware Charter Guarantee and Trust Company, 2, 1998 (file no. 333-56857)
TTEE for Jeffrey J. Brothers, IRA.
74
10.12 Executive Unit Purchase Agreement, made as of May 5, 1998, by Exhibit 10.12 to the Registrant's
and between RCL Acquisitions, L.L.C., and Herman Beach. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.13 IRA and Executive Unit Purchase Agreement, made as of May 5, Exhibit 10.13 to the Registrant's
1998, by and between RCL Acquisitions, L.L.C., Bruce P. Rounds Form S-4, Amendment #1, dated July
and Stifel, Nicolaus Custodian for Bruce P. Rounds IRA. 2, 1998 (file no. 333-56857)
10.14 IRA and Executive Unit Purchase Agreement, made as of May 5, Exhibit 10.14 to the Registrant's
1998, by and between RCL Acquisitions, L.L.C., Scott L. Form S-4, Amendment #1, dated July
Spiller and Stifel, Nicolaus Custodian for Scott Spiller IRA. 2, 1998 (file no. 333-56857)
10.15 IRA and Executive Unit Purchase Agreement, made as of May 5, Exhibit 10.15 to the Registrant's
1998, by and between RCL Acquisitions, L.L.C., Robert T. Form S-4, Amendment #1, dated July
Wallace and Edward Jones, Cust FBO Robert T. Wallace, IRA. 2, 1998 (file no. 333-56857)
10.16 Deferred Compensation Agreement, made and entered into as of Exhibit 10.16 to the Registrant's
May 5, 1998, by and among Thomas F. L'Esperance, Raytheon Form S-4, Amendment #1, dated July
Company, Alliance Laundry Holdings LLC, and Alliance Laundry 2, 1998 (file no. 333-56857)
Systems LLC.
10.17 Deferred Compensation Agreement, made and entered into as of Exhibit 10.17 to the Registrant's
May 5, 1998, by and among R. Scott Gaster, Alliance Laundry Form S-4, Amendment #1, dated July
Holdings LLC, and Alliance Laundry Systems LLC. 2, 1998 (file no. 333-56857)
10.18 Deferred Compensation Agreement, made and entered into as of Exhibit 10.18 to the Registrant's
May 5, 1998, by and among Jeffrey J. Brothers, Alliance Form S-4, Amendment #1, dated July
Laundry Holdings LLC, and Alliance Laundry Systems LLC. 2, 1998 (file no. 333-56857)
10.19 Deferred Compensation Agreement, made and entered into as of Exhibit 10.19 to the Registrant's
May 5, 1998, by and among Herman W. Beach, Alliance Laundry Form S-4, Amendment #1, dated July
Holdings LLC, and Alliance Laundry Systems LLC. 2, 1998 (file no. 333-56857)
10.20 Deferred Compensation Agreement, made and entered into as of Exhibit 10.20 to the Registrant's
May 5, 1998, by and among Bruce P. Rounds, Alliance Laundry Form S-4, Amendment #1, dated July
Holdings LLC, and Alliance Laundry Systems LLC. 2, 1998 (file no. 333-56857)
10.21 Deferred Compensation Agreement, made and entered into as of Exhibit 10.21 to the Registrant's
May 5, 1998, by and among Robert T. Wallace, Alliance Laundry Form S-4, Amendment #1, dated July
Holdings LLC, and Alliance Laundry Systems LLC. 2, 1998 (file no. 333-56857)
75
10.22 Retention Agreement, dated as of September 30, 1997, by and Exhibit 10.22 to the Registrant's
between Thomas F. L'Esperance and Raytheon Commercial Laundry Form S-4, Amendment #1, dated July
LLC. 2, 1998 (file no. 333-56857)
10.23 Amendment No. 1 to Retention Agreement, dated as of April, Exhibit 10.23 to the Registrant's
1998, by and between Thomas F. L'Esperance and Raytheon Form S-4, Amendment #1, dated July
Commercial Laundry LLC. 2, 1998 (file no. 333-56857)
10.24 Retention Agreement, dated as of September 30, 1997, by and Exhibit 10.24 to the Registrant's
between R. Scott Gaster and Raytheon Commercial Laundry LLC. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.25 Amendment No. 1 to Retention Agreement, dated as of April, Exhibit 10.25 to the Registrant's
1998, by and between R. Scott Gaster and Raytheon Commercial Form S-4, Amendment #1, dated July
Laundry LLC. 2, 1998 (file no. 333-56857)
10.26 Retention Agreement, dated as of September 30, 1997, by and Exhibit 10.26 to the Registrant's
between Jeffrey J. Brothers and Raytheon Commercial Laundry Form S-4, Amendment #1, dated July
LLC. 2, 1998 (file no. 333-56857)
10.27 Amendment No. 1 to Retention Agreement, dated as of April, Exhibit 10.27 to the Registrant's
1998, by and between Jeffrey J. Brothers and Raytheon Form S-4, Amendment #1, dated July
Commercial Laundry LLC. 2, 1998 (file no. 333-56857)
10.28 Retention Agreement, dated as of September 30, 1997, by and Exhibit 10.28 to the Registrant's
between Herman W. Beach and Raytheon Commercial Laundry LLC. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.29 Amendment No. 1 to Retention Agreement, dated as of April, Exhibit 10.29 to the Registrant's
1998, by and between Herman W. Beach and Raytheon Commercial Form S-4, Amendment #1, dated July
Laundry LLC. 2, 1998 (file no. 333-56857)
10.30 Retention Agreement, dated as of September 30, 1997, by and Exhibit 10.30 to the Registrant's
between Bruce P. Rounds and Raytheon Commercial Laundry LLC. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.31 Amendment No. 1 to Retention Agreement, dated as of April, Exhibit 10.31 to the Registrant's
1998, by and between Bruce P. Rounds and Raytheon Commercial Form S-4, Amendment #1, dated July
Laundry LLC. 2, 1998 (file no. 333-56857)
10.32 Retention Agreement, dated as of September 30, 1997, by and Exhibit 10.32 to the Registrant's
between Robert T. Wallace and Raytheon Commercial Laundry LLC. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.33 Amendment No. 1 to Retention Agreement, dated as of April, Exhibit 10.33 to the Registrant's
1998, by and between Robert T. Wallace and Raytheon Commercial Form S-4, Amendment #1, dated July
Laundry LLC. 2, 1998 (file no. 333-56857)
76
10.34 Promissory Note, dated as of May 5, 1998, from Thomas F. Exhibit 10.34 to the Registrant's
L'Esperance to RCL Acquisitions, L.L.C. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.35 Promissory Note, dated as of May 5, 1998, from R. Scott Gaster Exhibit 10.35 to the Registrant's
to RCL Acquisitions, L.L.C. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.36 Promissory Note, dated as of May 5, 1998, from Jeffrey J. Exhibit 10.36 to the Registrant's
Brothers to RCL Acquisitions, L.L.C. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.37 Promissory Note, dated as of May 5, 1998, from Herman W. Beach Exhibit 10.37 to the Registrant's
to RCL Acquisitions, L.L.C. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.38 Promissory Note, dated as of May 5, 1998, from Bruce P. Rounds Exhibit 10.38 to the Registrant's
to RCL Acquisitions, L.L.C. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.39 Promissory Note, dated as of May 5, 1998, from Robert T. Exhibit 10.39 to the Registrant's
Wallace to RCL Acquisitions, L.L.C. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.40 Advisory Agreement, dated as of May 5, 1998, by and between Exhibit 10.40 to the Registrant's
Alliance Laundry Systems LLC, and Bain Capital, Inc. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.41 Transition Services Agreement, dated as of May 5, 1998, by and Exhibit 10.41 to the Registrant's
among Bain/RCL, L.L.C., RCL Acquisitions, L.L.C., Raytheon Form S-4, Amendment #1, dated July
Company, and Raytheon Commercial Laundry LLC. 2, 1998 (file no. 333-56857)
10.42 Junior Subordinated Promissory Note, dated as of May 5, 1998, Exhibit 10.42 to the Registrant's
from Alliance Laundry Holdings LLC to Raytheon Company. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.43 Supply Agreement, dated as of September 10, 1997, between Exhibit 10.43 to the Registrant's
Appliance Co. and Raytheon Commercial Laundry LLC. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.44 Supply Agreement II, dated as of September 10, 1997, between Exhibit 10.44 to the Registrant's
Appliance Co. and Raytheon Commercial Laundry LLC. Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
10.45 Supply Agreement, dated as of May 1, 1998, by and among Exhibit 10.45 to the Registrant's
Coinmach Corporation, Super Laundry Equipment Corporation and Form S-4, Amendment #2, dated August
Raytheon Commercial Laundry LLC (incorporated by reference 4, 1998 (file no. 333-56857)
from exhibit 10.57 to
77
Coinmach Corporation's Annual Report on
Form 10-K dated as of June 29, 1998, file number 033-49830).
10.46 Receivables Purchase Agreement, dated as of May 5, 1998, Exhibit 10.46 to the Registrant's
between Alliance Laundry Systems LLC and Alliance Laundry Form S-4, Amendment #4, dated
Receivables Warehouse LLC. February 17, 1999 (file no.
333-56857)
10.47 Letter Agreement, dated as of April 29, 1998, by and among Exhibit 10.47 to the Registrant's
Bain/RCL, L.L.C. and RCL Acquisitions, L.L.C., Raytheon Form S-4, Amendment #5, dated March
Company and Raytheon Commercial Laundry LLC. 3, 1999 (file no. 333-56857)
10.48 First Amendment, dated as of March 26, 1999, to Credit Exhibit 10.48 to the Registrant's
Agreement, dated as of May 5, 1998, among Alliance Laundry Form S-4, Amendment #5, dated March
Holdings LLC, Alliance Laundry Systems LLC, the several banks 3, 1999 (file no. 333-56857)
on other financial institutions or entities from time to time
parties to this Agreement, Lehman Brothers Inc., Lehman
Commercial Paper Inc., and General Electric Capital
Corporation.
18.1* Letter from auditors, dated February 25, 2000 regarding change
in accounting principle regarding a change in depreciation
methods.
21.1 Subsidiaries of Alliance Laundry Systems LLC. Exhibit 21.1 to the Registrant's
Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
24.1 Powers of Attorney. Exhibit 24.1 to the Registrant's
Form S-4, Amendment #1, dated July
2, 1998 (file no. 333-56857)
27.1* Financial Data Schedule.
_____________
* Filed herewith
78
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 8th day of March 2000.
Signature Title Date
--------- ----- ----
Chairman and CEO
_____________________________ _____________________
Thomas L'Esperance
Vice President and Chief Financial Officer
_____________________________ _____________________
Bruce P. Rounds
Date: March 8, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 8, 2000, by the following persons on
behalf of the registrant and in the capacities indicated:
___________________________________ __________________________________
Thomas F. L'Esperance Philip S. Taymor
Chief Executive Officer and Manager Manager
___________________________________ __________________________________
Edward W. Conard Robert C. Gay
Manager Manager
___________________________________
Stephen C. Sherrill
Manager
79