1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-57883
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SPINCYCLE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7215 41-1821793
(STATE OF OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JAMES R. PUCKETT
CHIEF FINANCIAL OFFICER
15990 NORTH GREENWAY/HAYDEN LOOP, SUITE 400
SCOTTSDALE, ARIZONA 85260
TELEPHONE (602) 707-9999
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
SUSAN M. HERMANN
PEDERSEN & HOUPT, P.C.
161 N. CLARK STREET, SUITE 3100
CHICAGO, ILLINOIS 60601
TELEPHONE (312) 641-6888
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) PRICE(2) REGISTRATION FEE
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12 3/4 Senior Discount Notes
Due 2005.................... $144,990,000 65.1% $94,376,053 $27,841
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[SPINCYCLE LOGO]
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1998
PRELIMINARY PROSPECTUS
SPINCYCLE, INC.
OFFER TO EXCHANGE 144,990 12 3/4%
SENIOR DISCOUNT NOTES DUE 2005,
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL OF ITS
OUTSTANDING 12 3/4% SENIOR
DISCOUNT NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN STANDARD TIME, ON
, 1998 UNLESS EXTENDED.
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SpinCycle, Inc. ("SpinCycle" or the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and accompanying letters
of transmittal (each a "Letter of Transmittal," collectively the "Letters of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange its 12 3/4% Senior Discount Notes Due 2005 (the "New Notes") which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for an equal principal amount of its outstanding 12 3/4% Senior Discount Notes
Due 2005 (the "Old Notes" and, together with the New Notes, the "Notes"), of
which, as of the date of this Prospectus, there was outstanding $144,990,000
aggregate principal amount at maturity. The sale of the Old Notes and the
warrants (the "Warrants") to purchase 26,661 shares of the Company's common
stock, par value $.01 per share ("Common Stock"), is collectively referred to
herein as the "Private Placement."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., Eastern Standard Time, on
the date the Exchange Offer expires (the "Expiration Date"), which will be
, 1998 (30 days following the commencement of the Exchange Offer),
unless the Company extends the Exchange Offer by notifying Norwest Bank
Minnesota, N.A., the exchange agent for the Exchange Offer (the "Exchange
Agent"), and by mailing to the holders of the Notes (each, a "Holder") an
announcement of such extension. The Company will not extend the Exchange Offer
beyond , 1999 (210 days following the commencement of the
Exchange Offer). Tenders of Old Notes may be withdrawn at any time prior to 5:00
p.m., Eastern Standard Time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the
Indenture dated as of April 29, 1998 (the "Indenture") between the Company and
Norwest Bank Minnesota, N.A., as trustee (the "Trustee"), which governs both the
Old Notes and the New Notes. The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes are registered under the Securities Act and, therefore, the New Notes
will not bear legends restricting the transfer thereof. See "Description of the
New Notes."
The New Notes will be issued at a substantial original issue discount ("OID"),
and the holders of the New Notes will be required to include such OID in gross
income for U.S. federal income tax purposes on a constant yield to maturity
basis, in advance of the receipt of the cash payments to which such income is
attributable. See "Federal Income Tax Consequences." The New Notes will begin to
accrue cash interest at the rate of 12 3/4% per annum on May 1, 2001, and
interest will be payable thereafter on November 1 and May 1 of each year. The
Notes will be redeemable at the option of the Company, in whole or in part, on
or after May 1, 2002, at the redemption prices set forth on page 61. In
addition, at any time and from time to time prior to 35% of the accrued value of
the Notes based on a 360-day year and an interest rate of 12 3/4% per annum (the
"Accreted Value") with the proceeds of one or more public equity offerings which
satisfy the requirements of the Indenture), at a redemption price of 112.75% of
the Accreted Value to the date of redemption; provided, however, that at least
$94.2 million of the aggregate principal amount of the Notes at maturity remain
outstanding after any such redemption. See "Description of the New
Notes -- Optional Redemption." Upon certain changes of control of the Company,
each Holder will have the right to require the Company to purchase all or any
part of such Holder's Notes at a purchase price equal to 101% of the Accreted
Value thereof, plus accrued and unpaid interest, if any, to the date of
purchase.
(continued on next page)
FOR A DISCUSSION OF MATERIAL RISKS THAT SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE NEW NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
THE NEW NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November , 1998.
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(continued from previous page)
The New Notes will be senior, unsecured obligations of the Company ranking pari
passu (i.e., without preference) in right of payment of principal and interest
with all other existing and future senior unsecured obligations of the Company
(including the Old Notes) and will rank senior to all future subordinated debt
of the Company. The New Notes will be subordinated to all secured indebtedness
of the Company, if any, to the extent of the value of the assets securing such
indebtedness and to all indebtedness and other obligations (including trade
payables) of the Company's future subsidiaries, if any. As of September 6, 1998,
after giving effect to the Private Placement, the Company had outstanding
approximately $99.0 million of total indebtedness all of which was attributable
to the Old Notes. As of the date hereof, there is no secured indebtedness
outstanding. However, the Company has a secured revolving credit facility with a
maximum borrowing capacity of $40.0 million which the Company may use to finance
its expansion or for general corporate purposes. Until March 22, 1999, the
maximum amount available under this secured revolving credit facility is $32.5
million, which limitation shall be lifted on or after that date if certain
conditions are met. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of the Heller Facility."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement, dated April
29, 1998, among the Company and the other signatories thereto (the
"Registration Rights Agreement"). Based on interpretations by the staff of the
Securities and Exchange Commission (the "SEC"), as set forth in no-action
letters issued to third parties, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by Holders thereof (other than any Holder that is an
"affiliate" of the Company as defined under Rule 405 of the Securities Act),
provided that such New Notes are acquired in the ordinary course of such
Holders' business and such Holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and have no arrangement
with any person to participate in the distribution of such New Notes.
However, the staff of the SEC has not considered the Exchange Offer in
the context of a no-action letter and there can be no assurance that the
staff of the SEC would make a similar determination with respect to the
Exchange Offer as in such other circumstances. By tendering the Old
Notes in exchange for the New Notes, each Holder, other than a
broker-dealer, will represent to the Company that (i) it is not an
affiliate of the Company (as defined in Rule 405 of the Securities
Act), (ii) any New Notes to be received by it were acquired in the
ordinary course of its business and (iii) it is not engaged in, and
does not intend to engage in, a distribution of such New Notes and
has no arrangement or understanding to participate in a distribution
of the New Notes. Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it
will deliver a Prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a Prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this Prospectus available
to any broker-dealer for use in connection with any such resale
and that during such period it will amend and supplement the
Prospectus so that it may be lawfully delivered. Each
broker-dealer that acquired Old Notes directly from the Company,
and not as a result of market-making or trading activities,
must, in the absence of an exemption, comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with the secondary resale of the
New Notes and cannot rely on the position of the staff of the
SEC enunciated in no-action letters issued to third parties.
In addition, until , 1999 (180 days after the date
of this Prospectus), all dealers effecting transactions in the
New Notes may be required to deliver a Prospectus. See "Plan
of Distribution."
Prior to this Exchange Offer, there has been no public market for the Old Notes
or the New Notes. If any market were to develop, the New Notes could trade at
prices that may be higher or lower than their principal amount or liquidation
preference, respectively. The Company does not intend to apply for listing or
quotation of the New Notes on any securities exchange or stock market.
Therefore, there can be no assurance as to the liquidity of any trading market
for the New Notes or that an active public market for the New Notes will
develop. See "Risk Factors -- Lack of Public Market."
Credit Suisse First Boston Corporation (the "Initial Purchaser") has agreed to
act as a market-maker for the New Notes. However, the Initial Purchaser is not
obligated to so act and it may discontinue any such market-making at any time
without notice. The Company will not receive any proceeds from the Exchange
Offer. The Company will pay all the expenses incident to the Exchange Offer.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS." ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING
WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE "PROSPECTUS SUMMARY," "RISK
FACTORS," "THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN
REGARDING THE COMPANY'S OPERATIONS, FINANCIAL POSITION AND BUSINESS STRATEGY,
MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ESTIMATE," "ANTICIPATE," "BELIEVE,"
OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR
TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE AT THIS TIME, IT CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS,
INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS.
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5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Certain capitalized terms used but not defined in
this summary are used herein as defined elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to "SpinCycle" or the "Company"
are to SpinCycle, Inc., a Delaware corporation, and its predecessor Spincycle,
Inc., a Minnesota corporation. As of December 1, 1997, the Company adopted a
fiscal year comprised of 13 four week periods (each, a "period"), with each four
week period comprised of four Monday through Sunday weeks. All references herein
to periods shall refer to such periods unless the context otherwise requires.
Unless otherwise indicated, all financial and store data provided in this
Prospectus are as of September 6, 1998, the end of the Company's third fiscal
quarter in 1998.
THE COMPANY
The Company was founded in October 1995 to develop and implement
SpinCycle's unique concept of a national chain of branded coin-operated
laundromats and to serve as a platform for a nationwide consolidation in the
coin-operated laundromat industry. The Company's goal is to become the leading
operator of high quality coin-operated laundromats in the United States by
establishing SpinCycle as a national brand, providing a superior level of
customer service and by exercising disciplined management control in its
expansion and business plan. In sharp contrast to many existing laundromats, a
SpinCycle laundromat is an inviting, spacious and well-equipped facility that is
conveniently located, clean and well-lighted.
Since opening its first store in April 1996, the Company as of April 30,
1997, had opened a total of 19 stores in 7 markets and as of September 6, 1998,
had opened a total of 134 stores in 25 markets. Of these 134 stores, 81 were
developed and 53 were acquired. SpinCycle stores are located in densely
populated urban markets, including Chicago, Cleveland, Albuquerque, Houston, Los
Angeles, Philadelphia, Detroit, Miami, Atlanta, Dallas and Washington, D.C. The
Company leases the real property at 132 of these locations and owns the real
estate at which two of these stores are operating.
Management believes its equipment configuration and store design is unique
and designed to maximize customer convenience and in-store experience. As
evidence of its superior concept, management believes, based upon Company
compiled survey data, that over 90% of the customers who first visit its stores
will return as customers. SpinCycle stores are between 3,500 and 5,500 square
feet, significantly larger than the 1,500 to 2,500 square feet of a typical
laundromat, and generally contain 50 washers of varied capacities and 54 large
capacity dryers. The Company installs a computer board in each washer and dryer
which allows daily monitoring of machine utilization and superior cash control.
Each store is staffed during operating hours by at least one customer service
representative who assists customers, maintains the facility and performs "wash
and fold" services, if offered. Customers can sort and fold laundry while
watching color television with cable programming at 12 to 14 folding stations
and purchase food, beverages and laundry supplies from vending machines. As a
result of its superior store design and management controls, the Company has
achieved levels of store revenues that management believes are among the highest
in the industry.
The Company plans to expand primarily within its existing markets during
the balance of 1998 and in 1999 by developing new SpinCycle stores and acquiring
existing laundromats which are consistent with the SpinCycle format. By year end
1998, management believes there will be approximately 176 SpinCycle stores. As
of October 27, 1998, the Company had 150 stores operating and ten leased stores
under construction, nine leases executed and signed letters of intent to acquire
seven stores, all of which management expects to open or acquire by year end
1998. As of October 4, 1998, the Company had executed leases for ten sites which
management expects will be completed and will open in 1999. The Company's
headquarters is located at 15990 North Greenway/Hayden Loop, Suite 400,
Scottsdale, Arizona 85260. The Company's telephone number is 602-707-9999.
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THE BUSINESS
Market Opportunity............ Based on a 1997 survey conducted on behalf of
and published by the Coin Laundry Association
for its members (the "1997 Coin Laundry
Industry Survey"), management estimates that
the coin-operated laundromat industry is a
$2.0-3.0 billion industry characterized by
steady, non-cyclical demand with approximately
25,000 laundromats nationwide. Management
believes the vast majority of these laundromats
are operated by owners of one or two stores and
contain poorly maintained, aging equipment and
are often dirty and considered unsafe by their
customers. According to the 1997 Coin Laundry
Industry Survey, the average laundromat
generates $151,000 and the median generates
approximately $93,700 of annual revenues. This
compares to an average of approximately
$253,000 and a median of approximately $254,000
of revenue and an average of approximately
$172,000 and a median of approximately $174,000
of revenue for the first nine periods of 1998
generated by the Company's 16 developed stores
and 11 acquired stores, respectively, which had
been open at least one year as of December 29,
1997.
Management believes that the Company's superior
store design, sophisticated site selection
methods, disciplined professional management
and financial resources will enable the Company
to successfully consolidate this highly
fragmented industry and deliver a superior
product to customers.
Business Strategy............. Management intends to maintain and build upon
our leading position in the national retail
coin-operated laundromat industry by:
1. consolidating the Company's position in
existing markets and developing a strong
presence in new markets which the Company
believes have a sufficient population
density to allow the Company to achieve its
targeted store economics over a short period
of time.
2. identifying development and acquisition
candidates in high profile locations within
targeted trade areas in each of the
Company's markets.
3. developing within trade areas that contain
at least 15,000 households of over two
occupants with median household incomes
between $25,000 and $35,000 and in which at
least 50% of such households rent their
homes or apartments.
Competitive Strengths......... Superior Facility and Customer Service. The
Company provides air conditioned stores that
are bright and colorful and have large windows
which optimize visibility into the store. Each
store is configured with a unique equipment mix
that optimizes customer convenience and is
designed to maximize profitability. Each store
is staffed by at least one trained customer
service representative who implements
SpinCycle's operations program which emphasizes
cleanliness, customer responsiveness and
equipment maintenance.
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Industry Leader. By being the first nationally
branded operator of superior laundromat
facilities, and by effectively promoting and
clustering stores in prime locations in its
targeted markets, we believe that the Company
will achieve a market leading position in each
of its markets. As the Company has grown, it
has begun to experience benefits in name
recognition such as increased leverage with
landlords and receiving unsolicited offers from
laundromat owners who wish to sell their
stores. Furthermore, the Company's size has
resulted in reduced costs on equipment and
supplies.
Advanced Systems and Controls. SpinCycle's
advanced management information systems ("MIS")
allow it to monitor, on a store by store basis,
daily revenue and the frequency of use of each
of its washers and dryers. Based upon this
information, SpinCycle has refined the mix of
machines in its stores, implemented reduced
pricing during off-peak hours and implemented a
daily cash reconciliation program to reduce
annual shrinkage.
Experienced Management. The Company has
assembled a management team with experience in
finance, development, operations and nationwide
multi-unit rollouts. We believe that our
experience in coordinating the rollout and
operation of other multi-unit concepts, will be
a competitive advantage even though none of
management's prior experience involved managing
a nationwide chain of coin-operated
laundromats.
Recent Mature Store
Performance................... The Company defines a "Mature Store" as a store
which has been (1) developed by the Company
("Developed Store") and operated by the Company
for at least 13 complete and continuous periods
or (2) purchased by the Company ("Acquired
Store") and operated by the Company or the
prior owner for at least 13 complete and
continuous periods, at least four of which have
been since the Company acquired the store. For
the nine periods ended September 6, 1998, on
average, the 16 Developed Mature Stores which
have been mature since December 29, 1997
generated approximately $28,107 of per period
revenue, approximately $9,208 of per period
Store EBITDA (defined as EBITDA before
allocation of any selling, general and
administrative expenses; EBITDA is defined as
earnings before interest, taxes, depreciation
and amortization) and approximately $3,097 of
per period gross operating profit after
depreciation of approximately $5,987. The
average size of these 16 Developed Mature
Stores was 5,680 square feet. There can be no
assurance that these results are indicative of
future results.
For the nine periods ended September 6, 1998,
on average, the 11 Acquired Mature Stores,
which have been mature since December 29, 1997,
generated approximately $19,837 of per period
revenue, $4,058 of per period Store EBITDA and
approximately $1,755 of per period gross
operating profit after depreciation of
approximately $2,065. There can be no assurance
that these results are indicative of future
results.
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THE EXCHANGE OFFER
Registration Agreement........ The Old Notes were sold by the Company on April
29, 1998 (the "Issue Date"), to the Initial
Purchaser which placed such Old Notes with
institutional investors. In connection
therewith, the Company executed and delivered
for the benefit of the Holders of the Old Notes
the Registration Rights Agreement obligating
the Company to file with the SEC within 60 days
after the date of issuance of the Old Notes, a
registration statement under the Securities Act
relating to an exchange offer for the Old Notes
and to use its best efforts to cause such
registration statement to become effective
within 150 days after the Issue Date.
The Exchange Offer............ New Notes are being offered in exchange for an
equal principal amount at maturity of Old
Notes. As of the date hereof, Old Notes with an
aggregate principal amount at maturity of
$144,990,000 were outstanding. Because the New
Notes will be recorded in the Company's
accounting records at the same carrying value
as the Old Notes, no gain or loss will be
recognized by the Company upon the consummation
of the Exchange Offer. See "The Exchange
Offer -- Accounting Treatment." Holders of the
Old Notes do not have appraisal or dissenter's
rights in connection with the Exchange Offer
under the General Corporation Law of the State
of Delaware, the governing law of the state of
incorporation of the Company.
Based on interpretations by the staff of the
SEC, as set forth in no-action letters issued
to third parties, the Company believes that the
New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any
Holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act; provided, however, that
such New Notes are acquired in the ordinary
course of the Holders' business and such
Holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes
and have no arrangement with any person to
participate in a distribution of such New
Notes. The staff of the SEC has not considered
the Exchange Offer in the context of a
no-action letter and there can be no assurance
that the staff of the SEC would make a similar
determination with respect to the Exchange
Offer. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by
such broker-dealer for its own account as a
result of market-making activities or other
trading activities, must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of such New Notes.
See "Plan of Distribution." To comply with the
securities laws of certain jurisdictions, it
may be necessary to qualify for sale or
register the New Notes prior to offering or
selling such New Notes. The Company has agreed,
pursuant to the Registration Rights Agreement
and subject to certain specified limitations
therein, to register or qualify the New Notes
for offer or sale under the securities or "blue
sky" laws of such jurisdictions as
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9
may be necessary to permit the Holders of New
Notes to trade such New Notes without any
restrictions or limitations under the
securities laws of the several states of the
United States. If a Holder of Old Notes does
not exchange such Old Notes for New Notes
pursuant to the Exchange Offer, such Old Notes
will continue to be subject to the restrictions
on transfer contained in the legend thereon. In
general, the Old Notes may not be offered or
sold, unless registered under the Securities
Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities
Act and applicable state securities laws. See
"Risk Factors -- Consequences of Failure to
Exchange."
Expiration Date............... 5:00 p.m. Eastern Standard Time, on
, 1998 (30 days following the
commencement of the Exchange Offer), unless the
Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date
and time to which the Exchange Offer is
extended.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange
Offer -- Conditions." Except for the
requirements of applicable federal and state
securities laws, there are no federal or state
regulatory requirements to be complied with or
obtained by the Company in connection with the
Exchange Offer. NO VOTE OF THE COMPANY'S
SECURITY HOLDERS IS REQUIRED TO EFFECT THE
EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY
THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering Old
Notes......................... Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date a
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver the Letter of Transmittal, or such
facsimile, together with the Old Notes to be
exchanged and any other required documentation
to the Exchange Agent (as defined) at the
address set forth herein and therein. See "The
Exchange Offer -- Procedures for Tendering."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., Eastern Standard Time,
on the Expiration Date. To withdraw a tender of
Old Notes, a written or facsimile transmission
notice of withdrawal must be received by the
Exchange Agent at its address set forth below
under "Exchange Agent" prior to 5:00 p.m.,
Eastern Standard Time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes......... Subject to certain conditions, the Company will
accept for exchange any and all Old Notes which
are properly tendered in the Exchange Offer
prior to 5:00 p.m., Eastern Standard Time, on
the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly following the Expiration
Date. See "The Exchange Offer -- Terms of
Exchange Offer."
Exchange Agent................ Norwest Bank Minnesota, N.A. is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
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Use of Proceeds............... The net proceeds to the Company from the
Private Placement were used to repay a total of
$46.9 million of indebtedness, consisting of
(i) the outstanding balance of an equipment and
acquisition facility with Raytheon Commercial
Laundry LLC that was approximately $42.7
million (the "Senior Credit Facility"), (ii)
the outstanding balance of a credit facility
with LaSalle National Bank that was
approximately $3.3 million (the "LaSalle
Facility") and (iii) certain other secured
indebtedness. There will be no proceeds to the
Company from the Exchange Offer. The net
proceeds to the Company from the Private
Placement were approximately $96.8 million
(after deduction of discounts and estimated
offering expenses). The Company will continue
using its remaining proceeds from the Private
Placement to fund development and acquisition
of laundromats through 1998 and for general
corporate purposes.
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of Old Notes for an equal
principal amount at maturity of New Notes. The New Notes will be obligations of
the Company evidencing the same indebtedness as the Old Notes and will be
entitled to the benefits of the Indenture, which governs both the Old Notes and
the New Notes. The form and terms of the New Notes are substantially identical
to the form and terms of the Old Notes, except that the offer of the New Notes
will have been registered under the Securities Act and, therefore, the New Notes
will not bear legends restricting the transfer thereof.
COMPARISON WITH OLD NOTES
Freely Transferable........... Generally, the New Notes will be freely
transferable under the Securities Act by
Holders who are not affiliates of the Company.
The New Notes otherwise will be substantially
identical in all material respects to the Old
Notes. See "The Exchange Offer -- Terms of
Exchange Offer."
Registration Rights........... The Holders of Old Notes currently are entitled
to certain registration rights pursuant to a
registration rights agreement (the
"Registration Rights Agreement") dated as of
April 29, 1998, between the Company and the
Initial Purchaser. However, upon consummation
of the Exchange Offer, subject to certain
exceptions, Holders of Old Notes who do not
exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to
registration rights and will not be able to
offer or sell their Old Notes, unless such Old
Notes are subsequently registered under the
Securities Act (which, subject to certain
limited exceptions, the Company will have no
obligation to do), except pursuant to an
exemption from, or in a transaction not subject
to, the Securities Act and applicable state
securities laws. See "Risk Factors --
Consequences of Failure to Exchange."
TERMS OF THE NEW NOTES
Notes Offered................. $144,990,000 aggregate principal amount at
maturity of 12 3/4% Senior Discount Notes due
2005.
Maturity Date................. May 1, 2005.
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Yield and Interest............ 12 3/4% per annum (computed on a semi-annual
bond equivalent basis). Except as described
herein, no cash interest will accrue on the New
Notes prior to May 1, 2001. The New Notes will
begin to accrue cash interest on May 1, 2001,
and cash interest will be payable thereafter on
May 1 and November 1 of each year, commencing
November 1, 2001.
Sinking Fund.................. None.
Original Issue Discount....... The New Notes will bear original issue discount
("OID") and the Holders of the New Notes will
be required to include such OID in gross income
for U.S. federal income tax purposes in advance
of the receipt of the cash payments to which
such income is attributable. See "Federal
Income Tax Consequences."
Optional Redemption........... Pursuant to the Indenture, the Company, at its
option, may redeem the Notes from May 1, 2002
to April 30, 2003 for 106.375%, from May 1,
2003 to April 30, 2004 for 103.188% and after
May 1, 2004 for 100% of the principal plus any
accrued interest to the date of redemption.
In addition, at any time and from time to time
prior to May 1, 2001, the Company may redeem in
the aggregate up to 35% of the Accreted Value
of the Notes with the proceeds of one or more
Public Equity Offerings following which there
is a Public Market at a redemption price of
112.75% of the Accreted Value to the date of
redemption; provided, however, that at least
$94.2 million of the aggregate principal amount
at maturity of the Notes remains outstanding
after any such redemption. The Accreted Value
is calculated by determining the amount of
interest accrued on the Notes from the date of
issuance, April 29, 1998, to the redemption
date. Because the Notes were issued at a
discount, this amount is less than the
principal amount of each Note, $1,000.
Change of Control............. Upon the occurrence of certain events
delineated by the Indenture (each, a "Change of
Control"), each Holder shall have the right to
require that the Company purchase such Holder's
New Notes at a purchase price in cash equal to
101% of the Accreted Value thereof, plus
accrued and unpaid interest, if any, to the
date of purchase. "Changes of Control" include:
(i) with certain exceptions, beneficial
ownership of 35% or more of the Company's
outstanding voting shares by one person or
group; (ii) with certain exceptions, changes in
the membership of the Board of Directors in the
two years following an underwritten public
offering such that the members at the beginning
of the two year period no longer constitute a
majority of the Board of Directors; and (iii)
with certain exceptions, the merger or
consolidation of the Company or the sale of all
or substantially all of the Company's assets.
There can be no assurance that the Company will
have sufficient funds available when necessary
to make any required repurchases. Furthermore,
this restriction may inhibit the Company's
ability to enter into or likelihood of entering
into a transaction resulting in a Change of
Control.
Ranking....................... Pursuant to the Indenture, the New Notes will
be senior, unsecured obligations of the Company
ranking pari passu in right of
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payment of principal and interest with all
other existing and future senior unsecured
obligations of the Company and will rank senior
to all future subordinated debt of the Company.
The New Notes will be subordinated to all
secured indebtedness of the Company, if any, to
the extent of the value of the assets securing
such indebtedness and to all indebtedness and
other obligations (including trade payables) of
the Company's future subsidiaries, if any. The
Company does not presently intend to operate
through subsidiaries and the ability of such
subsidiaries to incur any indebtedness is
restricted by the Indenture.
Certain Covenants............. The Indenture also contains certain covenants
that will, among other things, limit the
ability of the Company and its subsidiaries to
incur additional indebtedness, make investments
and certain other restricted payments,
consummate certain asset sales, enter into
certain transactions with affiliates, incur
liens, impose restrictions on the ability of a
subsidiary to make certain payments to the
Company and its subsidiaries, or merge or
consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the
assets of the Company. Subject to certain
exceptions, covenants contained in the
Indenture may not be amended, waived or
modified without the consent of the holders of
a majority of the accrued value of the Notes.
RISK FACTORS
The most significant material risk factors associated with an investment in
the Company include (1) its history of significant net operating losses and
negative cash flow from operations, (2) its high degree of leverage
(approximately $99.0 million of indebtedness compared to approximately $23.3
million in stockholders' equity), (3) the amount of OID includable in a Holder's
income for U.S. federal income tax purposes, (4) the lack of an established
public market for New Notes and (5) uncertain ability to achieve planned growth.
Prospective investors should carefully consider all of the information set forth
in this Prospectus and, in particular, should evaluate the specific risk factors
set forth under "Risk Factors," beginning on page 15, for a discussion of
material risks involved with an investment in the Notes.
For additional information regarding the New Notes, see "Description of the
New Notes."
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SUMMARY HISTORICAL FINANCIAL AND CERTAIN OTHER DATA
The following table reflects summary historical consolidated financial and
certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements, including the related notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The Company's 1995 fiscal year is for the period
from October 10, 1995 (inception) through December 31, 1995. On December 1,
1997, the Company changed its financial reporting to a 13 period fiscal year,
comprised of 13 four week periods. The Company's 1997 fiscal year was the period
from January 1, 1997 through December 28, 1997. The following summary historical
statement of operations data, insofar as it relates to each of the years 1995-
1997, has been derived from audited annual consolidated financial statements
included elsewhere in this Prospectus.
The summary financial and other data as of and for the nine months ended
September 30, 1997 and for the nine periods ended September 6, 1998 have been
derived from the unaudited financial statements of the Company and, in the
opinion of the Company, include all adjustments necessary for a fair
presentation of such information. These adjustments are of a normal and
recurring nature. Operating results for the nine periods ended September 6, 1998
are not necessarily indicative of the results that may be expected for the
entire year. For a discussion of factors affecting the comparability of this
data, see "Selected Financial and Other Data."
FISCAL YEAR ENDED NINE MONTHS NINE PERIODS
------------------------------------------ ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 28, SEPTEMBER 30, SEPTEMBER 6,
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ -- $ 1,015 $ 8,653 $ 4,740 $ 18,400
---------- -------- -------- -------- --------
Operating income (loss)......... (5) (3,873) (13,337) (7,665) (8,506)
---------- -------- -------- -------- --------
Net income (loss) before
extraordinary loss............ (5) (3,894) (13,796) (7,861) (13,736)
---------- -------- -------- -------- --------
Extraordinary loss from early
extinguishment of debt........ -- -- -- -- (334)(1)
Net income (loss)............... (5) (3,894) (13,796) (7,861) (14,070)
---------- -------- -------- -------- --------
Repricing of Series C preferred
stock(2)...................... -- -- -- -- (1,459)
Accretion of mandatorily
redeemable preferred stock.... -- -- (1,941) (1,381) (756)
---------- -------- -------- -------- --------
Net income (loss) applicable to
holders of common stock....... $ (5) $ (3,894) $(15,737) $ (9,242) $(16,285)
========== ======== ======== ======== ========
PRO FORMA DATA(3):
Interest expense, net........... (9,210)(4)
Net income (loss) before
extraordinary loss............ (17,137)
Deficiency of earnings to fixed
charges....................... (17,241)(5)
SELECTED OPERATING DATA:
Cash flows provided by (used in)
operating activities.......... (33) 2,380 (8,973) (11,144) (10,206)
Cash flows provided by (used in)
investing activities.......... (18) (8,504) (22,862) (11,758) (30,435)
Cash flows provided by (used in)
financing activities.......... 56 6,479 39,724 30,914 59,469
EBITDA(6)(7).................... (5) (3,305) (10,516) (6,261) (4,211)
Store EBITDA(8)................. -- (651) 213 (183) 2,922
Depreciation and amortization... -- 568 2,341 1,404 4,295
Capital expenditures(9)......... 18 13,391 53,892 16,380 34,348
Stores open at end of period.... -- 14 71 37 134
Net loss per common share....... $(1,362.75) $(117.42) $(412.76) $(243.18) $(560.45)
========== ======== ======== ======== ========
Weighted average number of
common shares outstanding..... 4 33,162 38,127 38,009 29,056
========== ======== ======== ======== ========
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AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 28, SEPTEMBER 6,
1995 1996 1997 1998
------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Property and equipment....................... $18 $12,841 $ 53,969 $ 76,537
Total assets................................. 55 13,809 75,496 129,708
Total debt................................... -- 4,592 35,926 98,941
Total liabilities............................ 60 10,890 46,330 106,448
Mandatorily redeemable preferred stock....... -- 6,810 48,793 --(10)
Convertible preferred stock.................. -- -- -- 50,846(10)
Shareholders' equity (deficit)............... (5) (3,891) (19,627) 23,260
- ---------------
(1) The Company's net loss for the nine periods ended September 6, 1998,
includes the extraordinary loss associated with the writeoff of
approximately $334 of unamortized deferred financing costs related to the
Senior Credit Facility and the LaSalle Facility.
(2) The Company has recognized the fair value of the 7,295 shares of Common
Stock issued pursuant to the repricing of the Series C Convertible
Preferred Stock. Accordingly, this amount has been deducted from the
Company's net loss in determining the net loss available to common
stockholders for purposes of calculating basic and diluted earnings per
share. See also Note 7 to the Unaudited Consolidated Financial Statements
included elsewhere in this Prospectus.
(3) The pro forma data for the nine periods ended September 6, 1998 gives
effect to the issuance of the Old Notes and the application of the net
proceeds therefrom as if such transactions had occurred on December 29,
1997. It does not, however, include the extraordinary loss described in
Note 1, above.
(4) On a pro forma basis, interest expense, net includes amortization of
deferred financing costs (which includes underwriting discount and related
fees and expenses) as well as amortization of the original issue discount
on the Notes. It does not include historical interest expense on the Senior
Credit Facility and the LaSalle Facility.
(5) For purposes of computing the deficiency of earnings to fixed charges,
fixed charges consists of interest expense on total debt and that portion
of rental expense that the Company believes to be representative of
interest (one-third of total rental expense). Earnings is defined as the
Company's net loss before fixed charges and extraordinary loss. On a pro
forma basis during the nine periods ended September 6, 1998, earnings were
insufficient to cover fixed charges by approximately $17,200.
(6) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because management believes it is a
widely accepted financial indicator of an entity's ability to incur and
service debt. While EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles (GAAP)
and should not be considered as an indicator of operating performance or an
alternative to cash flow (as measured by generally accepted accounting
principles) as a measure of liquidity, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditures and working capital
requirements.
(7) EBITDA for the fiscal year ended December 28, 1997, excludes the loss on
disposal of property and equipment of $480.
(8) Store EBITDA is EBITDA before allocation of any selling, general and
administrative expenses ("Store EBITDA"). While Store EBITDA is not
intended to represent operating income or loss as defined by GAAP (as GAAP
operating income or loss includes such allocation of selling, general and
administrative expenses and should not be considered as an indicator of
operating performance as measured by GAAP), it is included herein to
provide additional information with respect to store-level cash operating
margins.
(9) Capital expenditures includes the purchase of laundromat equipment pursuant
to an existing supply agreement and financed with borrowings in connection
with the Senior Credit Facility of approximately $31,358 and $4,887 in
fiscal 1997 and 1996, respectively, and approximately $1,998 and $4,622 for
the
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three fiscal quarters ended September 6, 1998 and September 30, 1997,
respectively. The capital expenditures for 1997 include approximately
$11,485 of laundromat equipment for use in stores to be opened in 1998 and
approximately $4,120 for land acquired and held for sale-leaseback
transactions. Capital expenditures also includes the cash outlay to acquire
new businesses (net of cash acquired). Such outlays totaled approximately
$12,100 and $14,875 for the year ended December 28, 1997 and for the
year-to-date period ended September 6, 1998, respectively.
(10) Concurrently with the closing of the Private Placement, the put rights
previously associated with the preferred stock were terminated and
therefore, the preferred stock is no longer mandatorily redeemable.
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RISK FACTORS
Holders of Old Notes should carefully consider the specific risk factors
set forth below, as well as the other information appearing in this Prospectus,
before tendering the Old Notes in the Exchange Offer. The risk factors below
(other than "Consequences of Failure to Exchange") are generally applicable to
the Old Notes as well as the New Notes (together, the "Notes").
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
the untendered and the tendered but unaccepted Old Notes could be adversely
affected. Based on interpretations by the staff of the SEC, as set forth in
no-action letters to third parties, the Company believes that the New Notes
issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for resale, resold or otherwise transferred by the Holders thereof
(other than any such Holder that is an "affiliate" of the issuer within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such New Notes are acquired in the ordinary course of such Holders'
business and such Holders are not engaged in, and do not intend to engage in, a
distribution of such New Notes. The staff of the SEC has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a Prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letters of Transmittal state
that by so acknowledging and by delivering a Prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired for its
own account by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. Each broker-dealer
that acquired Old Notes directly from the Company, and not as a result of
market-making or trading activities, must, in the absence of an exemption,
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with the secondary resale of the New Notes and
cannot rely on the position of the staff of the SEC enunciated in no-action
letters issued to third parties. See "Plan of Distribution." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the New
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdictions or an exemption for registration or qualification
is available and is complied with.
UNCERTAIN ABILITY TO ACHIEVE AND MANAGE PLANNED GROWTH
The Company's future success and continued growth will depend on its
ability to open and operate its stores profitably. The Company plans to have
approximately 176 stores open by December 27, 1998. As of October 27, 1998, the
Company had 150 stores opened, of which 86 stores were developed and 64 were
acquired, and intends to open another approximately 26 stores, approximately 20
of which it expects to develop and six of which it expects to acquire. The
Company's expansion is dependent upon a number of factors, including its ability
to hire, train, retain and assimilate competent management and store-level
employees, the adequacy of the Company's financial resources, the Company's
ability to identify new markets in which it can successfully compete, the
ability to locate suitable sites and negotiate acceptable lease terms
15
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and to adopt purchasing and MIS and other systems to accommodate expanded
operations. The Company may enter new markets in which it has no prior
experience. The Company's expansion is also dependent on timely fulfillment by
landlords and others of their contractual obligations to the Company, the
maintenance of construction schedules and the speed with which local zoning and
construction permits can be obtained. No assurance can be given that the Company
will be able to achieve its planned expansion or that such expansion will be
profitable. The Company's planned expansion will place increasing pressure on
the Company's management and resources. A failure to successfully manage its
planned expansion would adversely affect the Company's business. No assurance
can be given that the Company's new stores will achieve sales and profitability
comparable to the Company's existing stores or to its strategic plan. If the
Company achieves its plans for growth over the next five years, no Company
executive will have had significant experience operating a company as large, in
terms of stores or annual sales, as the Company.
The Company's growth strategy includes acquiring existing laundromats
consistent with the Company's strategic plan. No assurance can be given that the
Company will successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired operations into its existing operations or
expand to new markets through acquisitions. No assurance can be given that
future acquisitions will not have a material adverse effect upon the Company's
operating results while the operations of the Acquired Stores are being
integrated into the Company's operations. Notwithstanding its own due diligence
investigation, management will have limited knowledge about the specific
operating history, trends and customer buying patterns of laundromats acquired.
Furthermore, the cost of acquiring or developing stores may increase from the
levels the Company has experienced and may make additional acquisitions or
developments difficult or impractical. Consequently, no assurance can be given
that the Company will be able to make future acquisitions at favorable prices,
that Acquired Stores will perform as well as they have performed historically or
as budgeted to perform or that the Company will have sufficient information to
analyze accurately the markets in which it elects to make acquisitions. The
price paid and financing for the laundromats acquired or developed by the
Company could have a material adverse effect on the Company's financial
condition and results of operations. Although the Company will endeavor to
integrate and assimilate the operations of any Acquired Stores in an effective
and timely manner, no assurance can be given that the Company will be successful
in such integration attempts. Further, no assurance can be given that the
Company will successfully integrate its future acquired businesses into the
Company's purchasing, marketing and MIS.
NEW CONCEPT AND LACK OF EXPERIENCE IN THE LAUNDRY INDUSTRY
A national concept has not, to the knowledge of the Company, been attempted
in the retail coin-operated laundromat industry. There can be no assurance that
a national branding strategy can be successfully applied to the coin-operated
laundromat industry. In addition, prior to joining the Company, none of the
executive officers or directors of the Company had experience in laundromat
operations or management.
HISTORICAL AND ANTICIPATED LOSSES AND NEGATIVE CASH FLOW
The Company has never been profitable and has incurred significant net
operating losses and negative cash flow from operations to date in connection
with developing, owning and operating laundromats. For the year ended December
28, 1997, the Company had a net loss of approximately $13.8 million. For the
nine periods ended September 6, 1998, the Company had a net loss applicable to
holders of Common Stock of approximately $16.3 million. At September 6, 1998,
the Company had a recorded accumulated deficit of $34.7 million. See "Selected
Financial and Other Data." Losses and negative cash flow from operations will
continue until the Company has established a sufficient revenue-generating base
of laundromats, if ever. There can be no assurance that an adequate revenue base
will be established or that the Company will generate positive cash flow from
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
SUBSTANTIAL LEVERAGE; POTENTIAL INABILITY TO SERVICE DEBT
The Company is highly leveraged with indebtedness that is substantial in
relation to its stockholders' equity. After giving effect to the Private
Placement, as of September 6, 1998, the Company had total
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outstanding indebtedness of approximately $99.0 million, all of which relates to
the Notes, and the Company had total stockholders' equity of $23.3 million. For
the nine periods ended September 6, 1998, the Company's earnings would have been
insufficient to cover fixed charges by approximately $17.2 million.
The Company's high degree of leverage could have important consequences to
Holders of the Notes, including that (i) a substantial portion of the Company's
cash flow from operations, if any, after May 1, 2001, will be required to be
dedicated to the Company's interest expense obligations and will not be
available to the Company for its operations, working capital, capital
expenditures or other purposes, (ii) the Company's ability to obtain financing
in the future may be limited, (iii) the Company's flexibility to adjust to
changing market conditions and ability to withstand competitive pressures as
compared to less highly-leveraged competitors could be limited (including by
reason of the covenants contained in the Indenture and the Heller Facility) and
(iv) the Company may be more vulnerable to downturns in general economic
conditions or in its business or be unable to undertake capital expenditures
that are important for its growth strategy, any of which could have a material
adverse effect on the Company and its ability to make payments of principal of,
and interest on, the Notes.
Since inception, the Company has not generated positive cash flow from
operations. As a result, the Company has been required to pay its fixed charges
(including interest on existing indebtedness) and operating expenses with the
proceeds from sales of its equity securities, loans from stockholders and other
credit arrangements. As of November 1, 2001, the Company will be required to
satisfy substantially higher periodic cash debt service obligations because as
of that date cash interest on the Notes will be payable semi-annually at the
rate of 12 3/4% per annum (approximately $18.5 million per year). The principal
amount at maturity of the Notes of approximately $145.0 million will become due
on May 1, 2005. In addition, to the extent the Company draws on the Heller
Facility, it may have substantial additional secured indebtedness outstanding in
1999.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to the Notes (including its obligation to purchase the
Notes at 101% of the Accreted Value plus accrued and unpaid interest, if any, at
the time of a Change of Control (each as defined in the Indenture)), the Heller
Facility (when incurred) and its other indebtedness will ultimately depend on
its financial and operating performance, which in turn is subject to prevailing
economic and competitive conditions and to certain financial, business and other
factors that may be beyond its control, including operating difficulties,
increased operating costs, prices it can charge its customers, the response of
competitors and delays in implementing its strategy. The Company's ability to
meet its debt service and other obligations will depend largely on the extent to
which the Company can successfully implement its business strategy and manage
its operations. There can be no assurance that the Company will be able to
implement fully its strategy or that the anticipated results of its strategy
will be realized. There can be no assurance that the Company will be able to
generate sufficient cash flow or otherwise obtain funds in the future to cover
interest and principal payments associated with the Notes and any other debt of
the Company and its subsidiaries. See "Business -- Business Strategy."
In the event the Company is unable to meet its obligations with respect to
its existing indebtedness, it may be required to reduce or delay capital
expenditures, refinance or restructure all or a portion of its indebtedness,
sell material assets or operations or seek to raise additional debt or equity
capital. There can be no assurance that the Company will be able to effect any
such refinancing or restructuring or sell assets or obtain any such additional
capital on satisfactory terms or at all, or that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future. The Heller Facility and the Indenture impose
significant restrictions on the Company's ability to incur additional
indebtedness. Such restrictions may limit the ability of the Company to meet its
obligations. See "-- Substantial Restrictions and Covenants." See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the New
Notes -- Certain Covenants."
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NOTES ARE SUBORDINATED AND UNSECURED
The Notes are not secured and, therefore, will be subordinated to all
existing and future secured indebtedness of the Company to the extent of the
value of the assets securing such indebtedness. Subject to certain conditions
specified therein, the Indenture permits the Company to incur additional
indebtedness, including capital lease obligations and secured indebtedness,
which obligations and secured indebtedness would rank senior to the Notes to the
extent of the assets subject thereto. See "Description of the New Notes." See
also "Description of the Heller Facility."
COMPETITIVE INDUSTRY
SpinCycle faces considerable competition from many local and regional
operators in all of its markets. These operators typically own one or two stores
and operate their facilities with a lower cost structure than SpinCycle,
typically employing fewer people and offering less service. These operators
often own the real estate where they are located and have the ability to lower
prices significantly in order to compete. In addition to the local and regional
operators, at least one laundromat chain has recently been formed with the
intention of becoming a national branded chain and the Company anticipates more
competition from this and future national laundromat chains. In addition, the
Company competes with route service operators, who provide coin-operated laundry
facilities in multi-unit apartment complexes. There are two publicly traded
companies currently consolidating the route business, Coinmach Corporation and
Mac-Gray Corporation. Both of these entities have substantially greater
resources than the Company and could enter the retail laundromat business on a
national scale at any time. There can be no assurance that the Company will be
able to compete effectively with current or future competitors or that, when
faced with such competitive pressures, the Company will be able to generate
sufficient cash flow or otherwise obtain funds in the future to cover interest
and principal payments associated with the Notes and any other debt of the
Company and its subsidiaries. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on the
continued contributions of key members of management. The loss of the services
of any of these employees could have a material adverse effect on the Company.
The Company's future growth and profitability also depends on its ability to
attract, motivate and retain other management personnel. No assurance can be
given that the Company will be successful in attracting, motivating and
retaining such personnel. The Company has no employment agreements with its
officers or key personnel other than with Messrs. Ax and Lombardi. See
"Management."
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Indenture contains numerous financial and operating covenants,
including, but not limited to, restrictions on the Company's ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in certain
mergers and acquisitions, make investments and enter into new lines of business.
Such covenants could materially limit or exclude potentially profitable
activities in which the Company might otherwise engage. The ability of the
Company to comply with the covenants and other terms of the Indenture, to make
cash payments with respect to the Notes and to satisfy its other debt
obligations will depend on the future performance of the Company. In addition,
in the event of a Change of Control, the Company will be required, subject to
certain conditions, to offer to purchase all outstanding Notes at a price equal
to 101% of the Accreted Value of the Notes at such time plus accrued interest,
if any. There can be no assurance that the Company would be able to raise
sufficient funds to meet this obligation. Furthermore, this restriction may
inhibit the Company's ability to enter into or likelihood of entering into a
transaction resulting in a Change of Control. In the event the Company fails to
comply with the various covenants contained in the Indenture, it would be in
default thereunder and the maturity of substantially all of its long-term debt
(including the Notes) could be accelerated. See "Description of the New
Notes -- Defaults."
The Heller Facility also restricts the Company's ability to incur
additional debt, pay dividends, create liens, enter into transactions with its
affiliates or Change of Control transactions, engage in certain mergers and
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acquisitions, enter into new lines of business or make payments under the
Indenture that are neither regularly scheduled nor a prepayment of 35% of the
principal, interest and fees on the Notes following an underwritten public
offering of the Company's common stock. Such covenants could materially limit or
exclude potentially profitable activities in which the Company might otherwise
engage. Furthermore, such restrictions limit the ability of the Company to meet
its obligations to purchase the Notes at any time other than their regularly
scheduled maturity. See "Description of the Heller Facility."
SEASONALITY
The coin-operated laundromat industry may be subject to seasonal
fluctuations in quarterly results of operations. As a result, the Company's
results of operations during periods including the warmer spring and summer
months may be significantly lower than its operating results during the balance
of the year. Management believes this decrease may result from the fact that
customers are wearing lighter weight clothing during those periods and changing
less often due to school being out of session. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality."
DEPENDENCE ON EQUIPMENT SUPPLIER
To date, the Company has acquired substantially all of its equipment from
Alliance Laundry Systems LLC ("Alliance") the successor in interest to Raytheon
Commercial Laundry LLC ("Raytheon") pursuant to a supply agreement between
Alliance and the Company originally entered into in connection with the
Company's former Senior Credit Facility from Raytheon. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." While the Company repaid the
Senior Credit Facility with some of the proceeds of the Private Placement, the
Company will continue to be obligated to purchase substantially all of its
washers, dryers and replacement parts for its Developed Stores from Alliance
until August 31, 2001 and thus will be substantially dependent on Alliance until
such time to provide it with commercial laundry equipment to successfully
complete its planned rollout. Any disruptions in the supply of commercial
laundry equipment and parts to the Company would have a material adverse effect
on the Company's business, financial condition and results of operations.
ACTUAL RESULTS MAY VARY FROM FINANCIAL PROJECTIONS
Financial and other projections included in this Prospectus are based upon
certain assumptions, not all of which are stated herein, and any or all of which
may not materialize. In particular, there can be no assurance that statements
regarding the future results of the Company's current stores and the stores the
Company expects to develop or acquire and the Store EBITDA the Company has
projected, including the assumption that any or all such stores will generate
Mature Store revenues, will prove to have been correct or that the actual
results will not differ materially from what such statements contemplate.
Unanticipated events, over some or all of which the Company may not have any
control, are likely to occur as the Company develops its business. Such events
may well affect the Company at the dates and during the periods covered by the
projections, with the result that the actual financial condition, financial
results and cash flow of the Company may vary from the projections. Such
variations may be material. Consequently, prospective investors in the Company
are cautioned not to base their investment decisions on the projections. No
independent accountants have examined or compiled the projections and are not
associated with the projections in any manner whatsoever.
NEED FOR ADDITIONAL FINANCING
The Company used a portion of the net proceeds of the Private Placement to
pay down existing indebtedness, and is using the balance to fund its expansion
plan, operating expenses and such capital expenditures not funded by other
sources, and for general corporate purposes, including working capital. In
addition to the net proceeds of the Private Placement, the Company has obtained
a $40.0 million secured credit facility with Heller Financial, Inc. ("Heller").
The amounts available to the Company under the Heller Facility are determined on
the basis of various asset and revenue based tests. As of September 6, 1998,
management estimated that the Company had approximately $14.3 million available
to it under the Heller
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Facility. Until March 22, 1999, the maximum amount available under the Heller
Facility is $32.5 million which limitation shall be lifted on or after that date
if certain conditions are met. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of the Heller Facility." Management expects to fund
the Company's expansion in 1998 to 176 stores with the proceeds of the Private
Placement. The addition of the ten committed stores in 1999 will require cash
provided by operating activities or borrowings under the Heller Facility.
Further expansion would require additional borrowings under the Heller Facility
and/or additional capital to finance its expansion and, accordingly, the Company
will be required to raise additional funds through public and private
financings, including equity financing, or through other collaborative
arrangements. There can be no assurances that additional financing will be
available on favorable terms, or at all. Any collaborative arrangements may
require the Company to operate subject to additional restrictions. If funding is
not available when needed, or on acceptable terms, the Company may be forced to
curtail its development and acquisition activities. In such event, investors may
lose their entire investment.
ORIGINAL ISSUE DISCOUNT INCLUDABLE IN HOLDER'S INCOME
The Old Notes have been and the New Notes will be issued at a substantial
discount from their stated principal amount at maturity. Consequently, although
cash interest on the Notes will generally not be payable prior to November 1,
2001, OID will be includable in the gross income of a Holder of the Notes, for
U.S. federal income tax purposes, in advance of the receipt of such cash
payments on the Notes. Since a portion of the issue price of the Units will be
allocated for U.S. federal income tax purposes to the Warrants issued with the
Old Notes, the amount of OID will be greater than the difference between the
principal amount at maturity of the New Notes and the purchase price of the
Units. See "Federal Income Tax Consequences" for a more detailed discussion of
the U.S. federal income tax consequences of the purchase, ownership and
disposition of the Notes.
If a case is commenced by or against the Company under federal bankruptcy
law after the issuance of the Notes, the claim of a Holder of a Note with
respect to the principal amount at maturity thereof may be limited to an amount
equal to the sum of (i) the imputed initial offering price of such Note and (ii)
that portion of the OID that is not deemed to constitute "unmatured interest"
for purposes of federal bankruptcy law. Any OID that was not amortized as of any
such bankruptcy filing would constitute "unmatured interest."
POTENTIAL LOSS OF NOLS
For U.S. federal income tax purposes, the Company had net operating loss
carryforwards ("NOLs") of approximately $17.6 million as of December 28, 1997
and approximately $31.0 million as of September 6, 1998. These NOLs, if not
utilized to offset taxable income in future periods, will begin to expire in
2011. Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
and regulations promulgated thereunder, impose limitations on the ability of
corporations to use NOLs, if the corporation experiences a more than 50% change
in ownership during any three-year period. It is likely that the Company has
experienced one or more ownership changes in 1996 and 1997 as a result of the
Company raising various rounds of private equity or that such an ownership
change may have occurred or be deemed to have occurred due to events beyond the
control of the Company (such as transfers of Common Stock by certain
stockholders or the exercise or treatment of warrants, conversion rights or
stock options issued by the Company). There can also be no assurance that the
Company will not take additional actions, such as the issuance of additional
stock, that would cause an ownership change to occur. In addition, the NOLs are
subject to examination by the Internal Revenue Service (the "IRS"), and are thus
subject to adjustment or disallowance resulting from any such IRS examination.
Accordingly, prospective purchasers of the Notes should not assume the
unrestricted availability of the Company's currently existing or future NOLs, if
any, in making their investment decisions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Potential Loss of NOLs."
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SECURITY OF STORES
Because individual stores operate in large urban centers and involve public
access and cash on the premises, there is a material risk of robbery and other
crimes. Although the Company has attempted to address this by investing in
systems and procedures to enhance security for its employees and customers,
there can be no assurance that the Company will not experience security problems
in its stores.
NEED TO OBTAIN PERMITS AND CONSENTS
The Company is required to obtain permits, approvals and licenses from
appropriate governmental authorities in order to open additional stores. The
Company is required to obtain the landlord's approval of construction plans in
order to construct the leasehold improvements for each facility. Although the
Company has significant expertise in building out multi-unit enterprises,
obtaining these permits and approvals can be subject to delays which could
ultimately affect the new store rollout schedule. The Company also must obtain
landlords' consents in order to maximize access to funds under the Heller
Facility.
ENVIRONMENTAL LIABILITY
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and similar state laws, impose
strict, joint and several liability on current and former owners and operators
of facilities from which releases of hazardous substances have occurred and on
generators and transporters of the hazardous substances that come to be located
at such facilities. Responsible parties may be liable for substantial waste site
investigation and clean-up costs and natural resource damages, regardless of
whether they exercised due care and complied with applicable laws and
regulations. If the Company was found to be a responsible party for a particular
site, it could be required to pay the entire cost of waste site investigation
and clean-up costs. There can be no assurance that the Company will not face
claims under CERCLA or similar state laws, or under other laws, resulting in a
substantial liability for which the Company is unable to obtain contribution
from other responsible parties and for which the Company is uninsured or only
partially insured. The Company's pollution liability insurance excludes
liabilities under CERCLA. The Company may experience difficulty in obtaining
adequate insurance coverage on acceptable terms. A successful claim against the
Company for which it is uninsured or only partially insured, and for which it is
unable to obtain contribution from other responsible parties, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ABSENCE OF PUBLIC TRADING MARKET FOR NOTES; RESTRICTIONS ON RESALE
The New Notes are new issues of securities for which there is currently no
established market. There can be no assurance as to (i) the liquidity of any
such market that may develop, (ii) the ability of the Holders of Notes to sell
any of their Notes or (iii) the price at which the Holders of Notes would be
able to sell any of their Notes. The Company does not presently intend to apply
for listing of the New Notes on any national securities exchange or on The
Nasdaq Stock Market, Inc. The Initial Purchaser has advised the Company that it
presently intends to make a market in the Old Notes and the New Notes. The
Initial Purchaser is not obligated, however, to make a market in any of the
Notes, and any such market making may be discontinued at any time at the sole
discretion of the Initial Purchaser and without notice. Accordingly, no
assurance can be given as to the development or liquidity of any market for any
of the Notes. If a market for any of the Notes were to develop, such Notes could
trade at prices that may be higher or lower than reflected by their initial
offering price depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities.
Historically, the market for securities such as the Notes has been subject to
disruptions that have caused substantial volatility in the prices of similar
securities. There can be no assurance that, if a market for any of the Notes
were to develop, such a market would not be subject to similar disruptions.
The Old Notes were sold pursuant to an exemption from registration under
the Securities Act and applicable state securities law and may not be resold by
purchasers thereof unless such Old Notes are subsequently registered under the
Securities Act or an exemption from such registration requirements is
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available, and such resales are otherwise in compliance with applicable state
securities law. See "Transfer Restrictions."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS; YEAR 2000 COMPLIANCE
The Company depends on its MIS to monitor daily revenue and machine
utilization in each of its stores, exercise centralized cash and management
control and compile and analyze critical marketing and operations data. Any
disruption in the operation of the Company's MIS, the loss of employees
knowledgeable about such systems or the Company's failure to continue to
effectively modify such systems as its business expands would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Competitive Strengths."
Certain of the Company's MIS use two digit data fields which recognize
dates using the assumption that the first two digits are "19" (i.e., the number
97 is recognized as the year 1997). Therefore, the Company's date critical
functions relating to the year 2000 and beyond may be adversely affected unless
changes are made to these computer systems. The Company does not expect that
costs resulting from upgrades to its MIS or from the Company's failure to
continue to effectively modify such systems as its business expands would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company does not believe that it has a material exposure to Year 2000
issues. Initial testing of the Company's MIS for Year 2000 compliance was
completed in March 1998. The Company also requested that suppliers of its
essential MIS certify to the Company that such MIS are Year 2000 compliant.
Based on the Company's initial tests and certifications received from MIS
suppliers, the Company believes that its critical software systems are currently
Year 2000 compliant and that its store hardware systems will be compliant by the
end of the first quarter of 1999. The Company does not expect that costs
associated with Year 2000 compliance will have a material adverse effect on the
Company. However, no assurance can be given that these issues can be resolved in
a cost-effective or timely manner or that the Company will not incur
significantly greater expense in resolving these issues. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Dependence on Management Information Systems; Year 2000
Compliance."
USE OF PROCEEDS
The net proceeds to SpinCycle from the Private Placement were approximately
$96.8 million, after deducting underwriting discounts, fees and expenses. A
portion of the net proceeds were used to repay all amounts outstanding under the
Company's Senior Credit Facility and the LaSalle Facility. At the time of
retiring the Senior Credit Facility, the Company had outstanding borrowings of
approximately $42.7 million at a weighted average interest rate of 10.375%. The
borrowings were incurred primarily for the opening and equipping of new stores,
acquiring existing stores and for other general corporate purposes. At the time
of retiring the Senior Credit Facility, the Company had outstanding borrowings
under the LaSalle Facility of approximately $3.3 million at a weighted average
interest rate of 9.5%. Additional secured indebtedness of approximately $900,000
was retired.
No proceeds will be received by the Company from the Exchange Offer.
Management believes the remaining net proceeds from the Private Placement,
together with existing liquidity, will be sufficient to fund the 1998 expansion
plan. The proceeds of the Heller Facility together with funds from operations
are expected to fund additional expansion. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Risk Factors -- Need for Additional Financing."
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CAPITALIZATION
The following table sets forth at September 6, 1998, the actual
capitalization of the Company.
SEPTEMBER 6, 1998
-----------------
(IN THOUSANDS)
Cash and cash equivalents................................. $ 27,077
========
Notes(1).................................................. 98,919
Miscellaneous Debt........................................ 22
--------
Total long-term debt.............................. 98,941
--------
Stockholders' equity:
Convertible preferred stock(2)......................... 50,846
Common stock........................................... --
Additional paid-in-capital............................. 1,442
Common stock warrants(3)............................... 5,625
Accumulated deficit(4)................................. (34,653)
--------
Total stockholders' equity........................... 23,260
--------
Total capitalization.............................. $122,201
========
- ---------------
(1) Reflects the accreted value ascribed to the Notes net of the value ascribed
to the Warrants.
(2) Concurrently with the closing of the Private Placement, the put rights
previously associated with the preferred stock were terminated and
therefore, the preferred stock is no longer mandatorily redeemable.
(3) Reflects the gross proceeds ascribed to the Warrants from the sale of the
Units.
(4) Reflects the extraordinary loss associated with the write-off of
approximately $334 of unamortized deferred financing costs related to the
Senior Credit Facility and the LaSalle Facility.
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SELECTED FINANCIAL AND OTHER DATA
The selected financial data presented below under the captions "Statement
of Operations Data" and "Balance Sheet Data" have been derived from the
historical consolidated financial statements of the Company. The Company's 1995
fiscal year is for the period from October 10, 1995 (inception) through December
31, 1995. On December 1, 1997, the Company changed its financial reporting to a
13 period fiscal year, comprised of 13 four week periods. The Company's 1997
fiscal year was the period January 1, 1997 through December 28, 1997. The "Pro
Forma Data" presented below give effect to the Private Placement and the
application of the net proceeds therefrom and certain pro forma adjustments as
described in the accompanying footnotes. Such data do not purport to represent
what the Company's results of operations or financial position would have been
had the Private Placement been consummated on the date specified or to project
the Company's results of operations or financial position for any future period
or date. The summary financial and other data as of and for the nine months
ended September 30, 1997 and for the nine periods ended September 6, 1998 have
been derived from the unaudited financial statements of the Company and, in the
opinion of the Company, include all adjustments necessary for a fair
presentation of such information. These adjustments are of a normal and
recurring nature. Furthermore, operating results for the nine periods ended
September 6, 1998 are not necessarily indicative of the results that may be
expected for the entire year or for any future period. The selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
FISCAL YEAR ENDED NINE MONTHS NINE PERIODS
------------------------------------------ ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 28, SEPTEMBER 30, SEPTEMBER 6,
1995 1996 1997 1997 1998
------------ ------------ ------------ -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ 1,015 $ 8,653 $ 4,740 $ 18,400
Store operating expenses,
excluding depreciation and
amortization................... -- 1,193 7,983 4,676 15,111
---------- -------- -------- -------- --------
Gross operating profit (loss).... -- (178) 670 64 3,289
Preopening costs................. -- 473 457 247 364
Depreciation and amortization.... -- 568 2,341 1,404 4,295
Selling, general and
administrative expenses........ 5 2,654 10,729 6,078 7,133
Loss on disposal of property and
equipment...................... -- -- 480 -- 3
---------- -------- -------- -------- --------
Operating income (loss).......... (5) (3,873) (13,337) (7,665) (8,506)
Interest income.................. -- 29 433 366 975
Interest expense, net............ -- (50) (892) (562) (6,205)
---------- -------- -------- -------- --------
Net income (loss) before
extraordinary loss............. (5) (3,894) (13,796) (7,861) (13,736)
---------- -------- -------- -------- --------
Extraordinary loss from early
extinguishment of debt......... -- -- -- -- (334)(1)
---------- -------- -------- -------- --------
Net income (loss)................ (5) (3,894) (13,796) (7,861) (14,070)
Repricing of Series C preferred
stock.......................... -- -- -- -- (1,459)(2)
Accretion of mandatorily
redeemable preferred stock..... -- -- (1,941) (1,381) (756)
---------- -------- -------- -------- --------
Net income (loss) applicable to
holders of common stock........ $ (5) $ (3,894) $(15,737) $ (9,242) $(16,285)
========== ======== ======== ======== ========
PRO FORMA DATA:(3)
Interest expense, net............ (9,210)(4)
Net income (loss) before
extraordinary loss............. (17,137)
Deficiency of earnings to fixed
charges........................ (17,241)(5)
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FISCAL YEAR ENDED NINE MONTHS NINE PERIODS
------------------------------------------ ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 28, SEPTEMBER 30, SEPTEMBER 6,
1995 1996 1997 1997 1998
------------ ------------ ------------ -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Cash flows provided by (used in)
operating activities........... (33) 2,380 (8,973) (11,144) (10,206)
Cash flows provided by (used in)
investing activities........... (18) (8,504) (22,862) (11,758) (30,435)
Cash flows provided by (used in)
financing activities........... 56 6,479 39,724 30,914 59,469
EBITDA(6)(7)..................... (5) (3,305) (10,516) (6,261) (4,211)
Store EBITDA(8).................. -- (651) 213 (183) 2,922
Capital expenditures(9).......... 18 13,391 53,892 16,380 40,495
Deficiency of earnings to fixed
charges(5)..................... -- (3,894) (14,124) (4,245) (14,173)
Stores open at end of period..... -- 14 71 37 134
Net loss per common share........ $(1,362.75) $(117.42) $(412.76) $(243.18) $(560.45)
========== ======== ======== ======== ========
Weighted average number of common
shares outstanding............. 4 33,162 38,127 38,009 29,056
========== ======== ======== ======== ========
AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 28, SEPTEMBER 6,
1995 1996 1997 1998
------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Property and equipment........... $18 $12,841 $ 53,969 $ 76,537
Total assets..................... 55 13,809 75,496 129,708
Total debt....................... -- 4,592 35,926 98,941
Total liabilities................ 60 10,890 46,330 106,448
Mandatorily redeemable preferred
stock.......................... -- 6,810 48,793 --(10)
Convertible preferred stock...... -- -- -- 50,846(10)
Shareholders' equity (deficit)... (5) (3,891) (19,627) 23,260
- ---------------
(1) The Company's net loss for the nine periods ended September 6, 1998,
includes the extraordinary loss associated with the writeoff of
approximately $334 of unamortized deferred financing costs related to the
Senior Credit Facility and the LaSalle Facility.
(2) The Company has recognized the fair value of the 7,295 shares of Common
Stock issued pursuant to the repricing of the Series C Convertible
Preferred Stock. Accordingly, this amount has been deducted from the
Company's net loss in determining the net loss available to common
stockholders for purposes of calculating basic and diluted earnings per
share. See also Note 7 to the Unaudited Consolidated Financial Statements
included elsewhere in this Prospectus.
(3) The pro forma data for the nine periods ended September 6, 1998 gives
effect to the issuance of the Old Notes and the application of the net
proceeds therefrom as if such transactions had occurred on December 29,
1997. It does not, however, include the extraordinary loss described in
Note 1, above.
(4) On a pro forma basis, interest expense, net includes amortization of
deferred financing costs (which includes underwriting discount and related
fees and expenses) as well as amortization of the original issue discount
on the Notes. It does not include historical interest expense on the Senior
Credit Facility and the LaSalle Facility borrowings.
(5) For purposes of computing the deficiency of earnings to fixed charges,
fixed charges consists of interest expense on total debt, and that portion
of rental expense that the Company believes to be representative of
interest (one-third of total rental expense). Earnings is defined as the
Company's net loss before fixed charges and extraordinary loss. On a
historical basis, earnings were insufficient to cover fixed charges by
approximately $3,900 and $14,100 for the fiscal years ended December 31,
1996 and December 28,
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1997, respectively, and by approximately $7,900 and $14,200 for the three
fiscal quarters ended September 30, 1997 and September 6, 1998,
respectively. On a pro forma basis during the nine periods ended September
6, 1998, earnings were insufficient to cover fixed charges by approximately
$17,200.
(6) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because management believes it is a
widely accepted financial indicator of an entity's ability to incur and
service debt. While EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an indicator of operating performance or an
alternative to cash flow (as measured by generally accepted accounting
principles) as a measure of liquidity, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditures and working capital
requirements.
(7) EBITDA for the fiscal year ended December 28, 1997, excludes the loss on
disposal of property and equipment of $480.
(8) Store EBITDA is EBITDA before allocation of any selling, general and
administrative expenses. While Store EBITDA is not intended to represent
operating income or loss as defined by GAAP (as GAAP operating income or
loss includes such allocation of selling, general and administrative
expenses and should not be considered as an indicator of operating
performance as measured by GAAP), it is included herein to provide
additional information with respect to store-level cash operating margins.
(9) Capital expenditures includes the purchase of laundromat equipment pursuant
to an existing supply agreement and financed with borrowings in connection
with the Senior Credit Facility of approximately $31,358 and $4,887 in
fiscal 1997 and 1996, respectively, and approximately $1,998 and $4,622 for
the three fiscal quarters ended September 6, 1998 and September 30, 1997,
respectively. The capital expenditures for 1997 include approximately
$11,485 of laundromat equipment for use in stores to be opened in 1998 and
approximately $4,120 for land acquired and held for sale-leaseback
transactions. Capital expenditures also includes the cash outlay to acquire
new businesses (net of cash acquired). Such outlays totaled approximately
$12,100 and $14,875 for the year ended December 28, 1997 and for the
year-to-date period ended September 6, 1998, respectively.
(10) Concurrently with the closing of the Private Placement, the put rights
previously associated with the preferred stock were terminated and
therefore, the preferred stock is no longer mandatorily redeemable.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, all references to years in this section of the
Prospectus refer to the Company's fiscal years, which ran as follows: from
October 10, 1995 (inception) through December 31, 1995, January 1, 1996 through
December 31, 1996 and January 1, 1997 through December 28, 1997. As of December
1, 1997, the Company adopted a fiscal year comprised of 13 four week periods,
each four week period comprised of four Monday through Sunday weeks. All
references herein to periods shall refer to such four week periods unless the
context otherwise requires. Unless otherwise indicated, all financial and store
data provided in this Prospectus are as of September 6, 1998, the end of the
Company's third quarter in 1998.
OVERVIEW
SpinCycle, Inc. (the "Company") is a specialty retailing company engaged in
the coin laundry business. The Company was founded in October 1995 to initiate a
nationwide consolidation in the retail coin-operated laundromat industry. The
Company intends to be the largest owner and operator of coin-operated
laundromats in the United States. The Company brings professional management and
controls to a highly fragmented industry that has been historically dominated by
"mom and pop" operators. The Company opened its first spacious, attractive,
well-equipped and attended facility in Chicago, Illinois in April 1996. By the
year ended December 31, 1996, SpinCycle had opened 14 stores and had two under
construction. Such stores formed the platform for the Company's rapid expansion
by providing valuable information on a number of variables, including optimum
store size, combination and count of laundry equipment, equipment utilization,
staffing levels and customer service.
Because of the significant capital required to develop and acquire
coin-operated laundromats, the Company's rollout rate has generally increased
after the Company raised each round of capital. In November 1996, the Company
procured the first $20.0 million of its former Senior Credit Facility.
Borrowings under this facility allowed the Company to significantly accelerate
its plans to develop and acquire additional stores. In January 1997, SpinCycle
closed its first round of private equity with proceeds of approximately $9.6
million. Such funds were utilized primarily for the payment of construction
costs for developed stores. By April 30, 1997, the Company had opened a total of
19 stores.
In April 1997, the Company closed a second round of private equity, raising
$25.0 million, which allowed the Company to again significantly accelerate its
development and acquisition efforts. Thereafter, SpinCycle developed the
corporate infrastructure to achieve and accommodate a national rollout and
consolidation. Specifically, the Company hired additional professionals to
provide for nationwide operations and real estate development and to establish a
dedicated acquisitions department. Further, the Company added support in the
areas of accounting, MIS and administration. In 1997, the Company increased the
maximum amount of its former Senior Credit Facility to $35.0 million. With the
corporate infrastructure in place and increased liquidity between May 1, 1997
and December 31, 1997, the Company opened 52 stores (25 Developed Stores and 27
Acquired Stores) finishing 1997 with 71 stores.
As the Company has continued to raise capital and develop the corporate
infrastructure to manage its growth, the Company has, through a careful analysis
of its targeted markets, embarked upon a development and acquisition plan to
finish 1998 with approximately 176 stores. In February 1998, the Company
procured a $10.0 million increase in its former Senior Credit Facility for a
total facility of $45.0 million, and on April 14, 1998 closed its most recent
private equity offering in which it raised approximately $16.0 million to
accommodate such expansion plans. On April 29, 1998, the Company closed the
Private Placement. The net proceeds of approximately $96.8 million of that
offering were used to repay approximately $46.9 million, representing all of the
Company's outstanding secured indebtedness. The balance was then available to
pursue the Company's planned roll out.
During the latter portion of the Company's 1998 first quarter and
continuing until the closing of the Private Placement, the Company continued to
actively identify acquisition candidates and development sites, but did not
execute leases or asset purchase agreements until the Company had the capital
required to complete such transactions. As of September 6, 1998, the Company had
134 stores open, having opened
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27 stores in the three periods ended September 6, 1998. As of October 27, 1998,
it had 150 stores opened, ten leased stores under construction, nine leases
executed and signed letters of intent to acquire seven stores, all of which the
Company expects to open or acquire by year end 1998. Additionally, as of October
4, 1998, the Company had executed contracts to develop ten stores which
management expects will open in 1999.
The Company had intended to access the public equity markets in late 1998
or early 1999 to provide additional growth capital for the Company's planned
expansion. Given the current condition of the U.S. capital markets, the Company
has elected to proceed cautiously with its planned expansion, slowing such
expansion through development or acquisition to judiciously utilize available
cash. The Company has tailored its 1998 planned expansion to include 176 stores
open by year end, without incurring additional indebtedness, including drawing
on the Heller Facility. Additionally, the Company intends to fund the
development of the ten Developed Stores the Company is currently committed to
complete in 1999 with positive cash flow provided by operating activities or
borrowings from available sources. See "-- Liquidity and Capital Resources."
Coin-operated laundromat industry data indicates that a slight reduction in
revenue for the Company may occur during the later spring and summer seasons.
Management believes this seasonality is a result of the reduced volume of
heavier clothing worn during the spring and summer months, which results in
lower laundry machine usage. See "-- Seasonality."
During the quarter ended June 14, 1998, the Company experienced operational
difficulties largely due to facilities and equipment maintenance issues which
have affected the performance of certain stores. These issues impacted certain
markets more significantly than others. Management believes it has identified
the issues and has addressed or is in the process of addressing these issues,
through, among other things, (i) the addition of senior field operations
management in affected markets, (ii) the implementation of a national facilities
and laundry equipment repair and maintenance program with centralized management
and dispatch functions, (iii) the introduction of a standard operating
procedures program and training of personnel therein and (iv) the changing of
senior management, including the Company's Chief Operating Officer.
In an effort to expand the SpinCycle brand, the Company has instituted a
nationwide "wash and fold" drop-off laundry service. The Company began this
nationwide rollout on July 3, 1998, and as of September 6, 1998, had 71 stores
participating in the program. The Company is also preparing to roll out a test
of a dry cleaner depot service in the fourth quarter of 1998 pursuant to which
it will provide laundry service to a dry cleaner's customers. The Company
believes that these services will allow it to increase awareness of the Company
brand, better utilize its assets during off-peak hours and generate incremental
revenue.
RESULTS OF OPERATIONS
As of December 1, 1997, SpinCycle changed its basis of fiscal year
reporting from 12 calendar months to 13 periods per annum. This change allows
the Company to report and compare results on 13 equivalent periods, with each
period containing four Monday through Sunday weeks. The Company's fiscal third
quarter included 12 weeks in 1998 and 13 weeks in 1997. The first three quarters
of the Company's fiscal year included 36 weeks in 1998 and 39 weeks in 1997.
Third Quarter 1998 and Nine Periods (Three Quarters) Ended September 6, 1998
Compared to Third Quarter 1997 and Three Quarters Ended September 30, 1998
Revenues. The Company's revenues were approximately $6.9 million for the
third quarter of 1998, an increase of approximately $4.9 million from
approximately $2.0 million in the corresponding period in 1997. Revenues were
approximately $18.4 million for year-to-date 1998, an increase of approximately
$13.7 million from approximately $4.7 million in the corresponding period in
1997. This growth in revenue was primarily attributable to the addition of 97
stores since the end of the third quarter of 1997 and the maturation of
developed stores.
Store Operating Expenses, excluding depreciation and amortization. Store
operating expenses, excluding depreciation and amortization ("store operating
expenses") were approximately $5.9 million in the third quarter of 1998, an
increase of approximately $4.0 million from approximately $1.9 million in the
correspond-
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ing period in 1997. Store operating expenses for year-to-date 1998 were
approximately $15.1 million, an increase of approximately $10.4 million from
approximately $4.7 million in the corresponding period in 1997. The increase in
store operating expenses was primarily attributable to the addition of 97 stores
since the end of the third quarter of 1997. Third quarter 1997 and year-to-date
1997 store operating expenses as a percentage of revenues were approximately 93%
and 99%, respectively. For the third quarter of 1998 and year-to-date 1998, this
ratio decreased to approximately 85% and 82%, respectively, which is a result of
the maturation of certain developed stores, the acquisition of additional stores
and the implementation of initiatives designed to reduce store operating
expenses, particularly labor expense commencing in the first quarter of 1998.
Gross Operating Profit. Gross operating profit was approximately $1.0
million in the third quarter of 1998, an increase of approximately $883,000 from
approximately $141,000 in the corresponding period in 1997. Gross operating
profit was approximately $3.3 million year-to-date 1998, an increase of
approximately $3.2 million from a profit of approximately $64,000 in the
corresponding period in 1997. These increases were primarily attributable to the
aforementioned increase in revenues during the period and successful initiatives
to reduce store operating expenses, particularly labor expenses.
Preopening Costs. Preopening costs were approximately $162,000 in the
third quarter of 1998, an increase of approximately $59,000 from approximately
$103,000 in the corresponding period in 1997. Preopening costs were
approximately $363,000 year-to-date 1998, an increase of approximately $116,000
from approximately $247,000 in the corresponding period in 1997. The Company
expenses preopening costs as incurred. These increases were the result of
acquisition and development of additional stores in the quarter and year-to-date
periods ended September 6, 1998.
Depreciation and Amortization. Depreciation and amortization expense was
approximately $1.4 million in the third quarter of 1998, an increase of
approximately $860,000 from approximately $591,000 in the corresponding period
in 1997. Depreciation and amortization expense was approximately $4.3 million
year-to-date 1998, an increase of approximately $2.9 million compared to
approximately $1.4 million in the corresponding period in 1997. These increases
were principally due to property and equipment acquired in connection with the
Company's expansion.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $2.7 million in the third quarter of
1998, a decrease of approximately $285,000 from approximately $2.9 million in
the corresponding period in 1997. Selling, general and administrative expenses
were approximately $7.1 million year-to-date 1998, an increase of approximately
$1.0 million from approximately $6.1 million in the corresponding period in
1997. The year-to-date increase was primarily attributable to the Company
building its corporate infrastructure in order to allow the Company to manage
its anticipated nationwide expansion. Specifically, the Company hired additional
professionals to provide for nationwide operations and real estate development
and to establish a dedicated acquisitions department primarily in the first two
quarters of 1998. Third quarter selling, general and administrative expenses
decreased as a percentage of revenues from 146% in 1997 to 38% in 1998 while
year-to-date selling, general and administrative expenses decreased as a
percentage of revenues from 128% in 1997 to 39% in 1998. These decreases were
due to the maturation of stores opened in 1997, the acquisition of additional
stores and the implementation of certain initiatives to reduce these costs.
Interest Income and Interest Expense, net. Interest income increased to
approximately $514,000 in the third quarter of 1998 an increase of approximately
$379,000 from approximately $135,000 in the corresponding period in 1997.
Interest income increased to approximately $975,000 year-to-date 1998, an
increase of approximately $609,000 from approximately $366,000 in the
corresponding period in 1997. The increases in interest income were primarily
attributable to the investment of proceeds from the Private Placement. Interest
expense, net of capitalized interest was approximately $3.2 million in the third
quarter of 1998, an increase of approximately $2.9 million from approximately
$257,000 in the corresponding period in 1997. Interest expense, net was
approximately $6.2 million year-to-date 1998, an increase of approximately $5.6
million from approximately $562,000 in the corresponding period in 1997. The
increase in interest expense, net was primarily attributable to accretion of the
original issue discount related to the Notes.
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Net Loss before Extraordinary Loss. The net loss before extraordinary loss
recorded in the third quarter of 1998 was $5.9 million, an increase of
approximately $2.3 million from the $3.6 million net loss recorded in the
corresponding period in 1997. The net loss before extraordinary loss recorded
year-to-date 1998 was $13.7 million, an increase of approximately $5.8 million
from the $7.9 million net loss recorded in the corresponding period in 1997.
These increased losses were primarily attributable to depreciation and
amortization associated with the number of new stores both acquired and
developed since the end of the third quarter of 1997 and the increase in
selling, general and administrative expenses and interest expense discussed
above.
Extraordinary Loss from Early Extinguishment of Debt. The extraordinary
loss relates to the write-off of the unamortized balance of debt issue costs
that were paid in connection with the LaSalle Facility and, to a lesser extent,
the Senior Credit Facility. These costs were written off as a result of the
early repayment and termination of those facilities.
Repricing of Series C Preferred Stock. On April 14, 1998, 7,295 shares of
the Company's Common Stock were issued to Series C stockholders in connection
with the repricing of the Series C Convertible Preferred Stock offering,
originally priced at $220 per share. Pursuant to a written stockholder consent
dated March 18, 1998, the Series C offering was converted to a unit offering,
whereby each Series C unit offered was comprised of ten shares of Series C
preferred stock and one share of Common Stock for $2,200 per unit. The requisite
consents were obtained as of April 14, 1998. See also Note 7 to the Unaudited
Consolidated Financial Statements.
Year Ended December 28, 1997 Compared with Year Ended December 31, 1996
Revenues. The Company's revenues were approximately $8.6 million in fiscal
1997, an increase of approximately $7.6 million from approximately $1.0 million
in fiscal 1996. This growth in revenue was primarily attributable to an increase
in the number of stores from 14 at fiscal year end 1996 to 71 at fiscal year end
1997, and the continued maturation of certain Developed Stores. Specifically,
the 27 stores acquired during fiscal 1997, 24 of which were acquired after
September 1, 1997, contributed incremental revenue of approximately $2.0 million
to fiscal 1997 revenues. The remaining increase in revenue of approximately $5.6
million in fiscal 1997 is primarily attributable to revenue generated from the
opening of Developed Stores and the continued maturation of such existing
stores. Sixteen of the Company's Developed Stores were mature as of fiscal year
end 1997.
Store Operating Expenses, excluding depreciation and amortization. Store
operating expenses, excluding depreciation and amortization ("store operating
expenses") were approximately $8.0 million in fiscal 1997, an increase of
approximately $6.8 million from approximately $1.2 million in fiscal 1996. The
increase in store operating expenses was primarily attributable to the opening
of an additional 57 stores during fiscal 1997. For fiscal 1996, store operating
expenses as a percentage of revenues was approximately 120.0%. For fiscal year
1997, this ratio decreased to approximately 92%, which is a result of maturation
at certain stores and the implementation of initiatives designed to reduce store
level expenses.
Gross Operating Profit (Loss). Gross operating profit was approximately
$670,000 in fiscal 1997, an increase of approximately $849,000 from a loss of
approximately $179,000 in fiscal 1996. This increase was primarily attributable
to the increase in revenues during the period and initiatives to reduce store
level expenses.
Preopening Costs. Preopening costs were approximately $457,000 in fiscal
1997, a decrease of approximately $16,000 from approximately $473,000 in fiscal
1996. The Company expenses preopening costs as incurred. The decrease in
preopening costs was the result of management efforts to control these expenses.
During fiscal 1996 the Company opened 14 stores and had two stores under
development at fiscal year end 1996. During fiscal 1997 the Company opened 30
developed stores and had 24 stores under construction at fiscal year end 1997.
Depreciation and Amortization. Depreciation and amortization expense was
approximately $2.3 million in fiscal 1997, compared to approximately $568,000 in
fiscal 1996. This increase of approximately $1.7 million was principally due to
increased levels of property and equipment related to the Company's expansion.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $10.7 million in fiscal 1997, an
increase of approximately $8.1 million from approximately $2.6 million in fiscal
1996. This increase is primarily attributable to the Company building its
corporate infrastructure in order to allow the Company to manage its anticipated
nationwide expansion. Specifically, the Company hired additional professionals
to provide for nationwide operations and real estate development and to
establish a dedicated acquisitions department. During fiscal 1997, the Company's
general and administrative personnel, excluding store level personnel, increased
from 30 to 98 resulting in an increase in compensation costs of approximately
$2.7 million. The increase is also attributable in part to an increase in
advertising expenses of approximately $1.2 million, reflecting the Company's
efforts to create a leading national brand and an increased number of stores
during fiscal 1997. The selling, general and administrative expense also
reflects an increase in professional fees and travel costs of approximately
$888,000 and $1.2 million, respectively, over fiscal 1996 due to increased
acquisition and development activities.
Interest Income and Interest Expense, net. Interest income increased to
approximately $433,000 in fiscal 1997, an increase of $404,000 from
approximately $29,000 in fiscal 1996. The increase in interest income was
primarily attributable to the investment of proceeds from equity offerings
pending ultimate use in operations or for capital investment. Interest expense,
net of capitalized interest was approximately $892,000 in fiscal 1997, an
increase of approximately $843,000 from approximately $49,000 in fiscal 1996.
The increase in interest expense, net was primarily attributable to additional
borrowings under the Senior Credit Facility, the outstanding balance of which
increased from approximately $4.6 million at fiscal year end 1996 to
approximately $35.9 million at fiscal year end 1997.
Net Loss. The net loss recorded in fiscal 1997 was $13.8 million, an
increased loss of approximately $9.9 million from the $3.9 million loss recorded
in fiscal 1996. The increased loss was primarily attributable to depreciation
and amortization associated with the number of new stores both acquired and
developed during the year and the increase in selling, general and
administrative expenses attributable to the building of the Company's corporate
infrastructure.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The Company was formed in October 1995, and had no stores opened or under
construction as of fiscal year end 1995 and therefore no store level revenues or
store operating expenses were realized in fiscal 1995. During fiscal year 1996,
the Company generated approximately $1.0 million in store revenues and
approximately $1.2 million in store operating expenses. For fiscal 1996, store
operating losses totaled approximately $179,000 and depreciation and
amortization was approximately $568,000. These revenues, operating expenses,
operating losses, and depreciation and amortization were attributable entirely
to the 14 stores opened between April 1996 and fiscal year end 1996. Selling,
general and administrative expenses were approximately $2.6 million in fiscal
1996, compared to approximately $5,000 in fiscal 1995. The increase in selling,
general and administrative expenses was primarily attributable to development of
the Company's corporate infrastructure. Interest expense was approximately
$49,000 in fiscal 1996 compared to no interest expense in fiscal 1995. Interest
expense represented interest on the Company's outstanding balance under its
Senior Credit Facility, which totaled $4.6 million as of fiscal year end 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 6, 1998, the Company had total assets of approximately $129.7
million, including current assets of approximately $35.8 million. Cash and cash
equivalents were approximately $27.0 million.
Cash used in operations during the year-to-date period ended September 6,
1998 was approximately $10.2 million compared to cash used in operations during
the corresponding period in 1997 of approximately $11.1 million. The use of cash
in each period was primarily attributable to the use of working capital for the
Company's store rollout, as well as the payment of corporate expenses, while the
1998 year-to-date period also included the effects of prepaid rent payments of
$2.8 million in connection with sale-leaseback transactions and various store
lease agreements.
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Cash used in investing activities during the year-to-date period ended
September 6, 1998 was approximately $30.4 million compared to $11.8 million used
in investing activities for the corresponding period in 1997. The additional use
of cash was primarily due to capital expenditures and business acquisitions,
partially offset by $1.9 million in net proceeds from sale-leaseback
transactions.
The Company made capital expenditures of approximately $34.2 million in the
year-to-date period ended September 6, 1998 compared to capital expenditures of
approximately $16.4 million in the 1997 corresponding period. The increase was
primarily attributable to an increased rate of expansion and laundry equipment
purchased.
Cash provided by financing activities was approximately $59.5 million
during the year-to-date period ended September 6, 1998 compared to approximately
$30.9 million provided by financing activities during the corresponding period
in 1997 arising principally from the issuance of Series B Stock in 1997 and
proceeds from the sale of the Notes in 1998, partially offset by the payment of
$46.9 million on the Senior Credit and LaSalle Facilities.
EBITDA in the third quarter of 1998 was a loss of $1.8 million, an
improvement of approximately $1.1 million from the loss of approximately $2.9
million for the corresponding period in 1997. EBITDA year-to-date 1998 was a
loss of approximately $4.2 million, an improvement of approximately $2.1 million
from the loss of approximately $6.3 million for the corresponding period in
1997. This increase was primarily attributable to increased revenue from the
maturation of stores, partially offset by the increase in selling, general and
administrative expenses.
On April 3, 1998, the Company commenced the Private Placement, an offering
of unsecured senior discount notes and an indeterminate number of warrants to
purchase Common Stock, to "qualified institutional buyers" only as defined in
Rule 144A under the Securities Act of 1933, as amended. The offering was
completed on April 29, 1998, with the Company selling $144,990,000 aggregate
principal amount at maturity 12 3/4% unsecured senior discount notes and
warrants to purchase 26,661 shares of the Company's Common Stock with an
exercise price of $0.01 per share for gross proceeds to the Company of
$100,001,053. The net proceeds of the Private Placement of approximately $96.8
million were used to pay the expenses of the Private Placement, repay
approximately $46.9 million in existing indebtedness on its Senior Credit and
LaSalle Facilities, and to provide funds for investment in new stores and for
general corporate purposes. Coincident with the closing of the Private
Placement, the put rights, granted to all holders of all classes of the
Company's preferred stock were terminated.
Prior to the Private Placement, the Company had in place its $45.0 million
Senior Credit Facility from Raytheon, one of the largest commercial laundry
equipment vendors, which provided for approximately $30.0 million of equipment
financing and $15.0 million of acquisition financing. This facility had provided
100% financing for commercial laundry equipment purchases (based upon list
prices) and store acquisitions. The Company also had procured its secured
LaSalle Facility in March 1998, which provided up to $15.0 million of credit
available for acquisitions and general corporate purposes. The Company repaid
all indebtedness outstanding under these two facilities with the net proceeds
from the Private Placement and terminated the related loan agreements. In
connection with the termination of these loan agreements, the Company recognized
an extraordinary loss on early extinguishment of debt of approximately $334,000
for the write-off of the unamortized balance of debt issue costs related to
these agreements.
On April 29, 1998, the Company also closed a secured credit facility in the
maximum principal amount of $40.0 million with Heller Financial, Inc. (the
"Heller Facility"). The Heller Facility consists of a revolving credit facility
in an aggregate principal amount of $40.0 million that will mature on April 28,
2002. The Heller Facility is collateralized by a first priority security
interest upon (i) all of the Company's now owned and hereafter acquired real and
personal property and all proceeds thereof and (ii) all general intangibles and
other intangible assets (including, without limitation, trademarks and trade
names) of the Company, if any, and proceeds thereof. The Company will be
entitled to draw amounts under this facility, subject to availability pursuant
to a borrowing base formula based upon income from store operations and net book
value of laundry equipment, in order to fund ongoing working capital, capital
expenditures and general corporate purposes. As of September 6, 1998, management
estimated that this borrowing base was approximately $14.3 million. Until
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March 22, 1999, the maximum amount available under the Heller Facility is $32.5
million, which limitation shall be lifted on or after that date if certain
conditions are met. The Heller Facility requires the Company to maintain
compliance with certain covenants. The Company was in compliance with all but
one of these covenants at September 6, 1998. The Company has, however, obtained
the waiver of the lenders with respect to this breach and thus it will not
restrict the Company's ability to borrow under the Heller Facility.
As a condition of the Heller Facility, the Company was required (within 90
days after the closing of such agreement) to cause the lenders ("Collecting
Banks") holding the Company's deposit accounts ("Blocked Accounts") to enter
blocked account agreements with all banks at which it maintains deposit
accounts. Upon the occurrence of certain events of default, and the lapse of any
applicable cure periods under the Heller Facility, Heller can require the
Collecting Banks to promptly transfer all payments or deposits from the Blocked
Accounts to Heller. As of July 28, 1998, the Company obtained a 60 day extension
of this requirement from Heller in order to complete the required paperwork for
the Blocked Account agreements. As of August 31, 1998, the Company had obtained
all required Blocked Account agreements.
Obligations under the Heller Facility shall bear interest with reference to
either the "Base Rate" or the "LIBOR Rate," as determined by the Company at the
time each such obligation is incurred. "Base Rate Loans" shall bear interest at
the rate of 0.50% plus the greater of (a) the "Bank Prime Loan" rate published
by the Board of Governors of the Federal Reserve System or (b) 0.50% plus the
Federal Funds Effective Rate. "LIBOR Rate Loans" shall bear interest at the rate
of 2.75% plus the rate determined by dividing (a) the rate at which U.S. dollar
deposits for the relevant interest period are being offered based upon
information presented on the Reuters Screen LIBOR Page as of 11:00 A.M. (London
time) on the day which is two business days prior to the first day of such
interest period by (b) 1.0 minus the aggregate (without duplication) of the
rates (expressed as a decimal) of reserve requirements on the day which is two
business days prior to the beginning of such interest period for Eurocurrency
funding required to be maintained by a member bank of the Federal Reserve
System, rounded to the nearest 1/16 of 1%.
In July 1998 the Company and Heller Financial executed an amendment to the
Heller Facility pursuant to which the Company agreed to changes in the borrowing
base formula and the minimum Mature Store average EBITDA financial covenant
thresholds. These thresholds were adjusted to reflect the treatment of certain
personnel and advertising expenses as selling, general and administrative
expenses rather than as cost of revenues -- store operating expenses, excluding
depreciation and amortization. Changes were also made to certain of the
Company's reporting requirements pursuant to the Heller Facility and a
limitation on advertising expenses, to a maximum of 4% of annual revenues was
added.
On December 30, 1997, the Company entered into a sale/leaseback transaction
with SpinDevCo, L.L.C. ("SpinDevCo"), which is not an affiliate of the Company
and is wholly-owned by McMahon-Oliphant, Inc., pursuant to which it sold its fee
simple interest in 11 properties to SpinDevCo for approximately $6.5 million.
Concurrently, the Company entered into leases of those sites with SpinDevCo at
lease rates management believes to be favorable. The Company contributed
approximately $2.5 million for prepaid rent on these properties, which will be
amortized over the term of the respective lease agreements. The note receivable
to the Company from SpinDevCo in the amount of approximately $4.9 million,
including principal and accrued but unpaid interest, was due on April 30, 1998.
The note was secured by mortgages on the 11 properties sold to SpinDevCo. As of
April 30, 1998, the Original Note was renegotiated (the "Extended Note") to
extend the maturity date through September 30, 1998 to allow SpinDevCo
additional time to either find a substitute source of financing or sell the
properties. In connection with the extension, the Company received $125,000 in
payment of accrued and unpaid interest due under the Original Note through May
30, 1998. Monthly payments of interest based upon the principal amount
outstanding at the end of each month are payable during the extension period.
On October 15, 1998, the Company received approximately $4.9 million in
cash from SpinDevCo in repayment of outstanding principal and interest on the
Extended Note. Simultaneously, the Company purchased three sites from SpinDevCo
for approximately $1.75 million in cash, the same amount for which it had
previously sold them to SpinDevCo. The Company is currently operating stores at
these three sites. The Company has an agreement with a third party to sell these
three properties for $1.75 million in cash. After the
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sale, the properties will be subject to more favorable leases, including lower
rental rates, than the leases the Company had with SpinDevCo.
To date, the Company has funded its operations through sales of securities
and borrowings under its credit facilities. The Company currently anticipates
generating positive cash flow provided by operating activities as determined in
accordance with generally accepted accounting principles as of the close of the
first fiscal quarter of 1999. As of the close of the thirteenth period of 1998,
the Company anticipates generating positive EBITDA on a per period basis. As of
November 1, 2001, the Company will be required to satisfy substantially higher
periodic cash debt service obligations because as of that date cash interest on
the Notes will be payable semi-annually at the rate of 12 3/4% per annum
(approximately $18.5 million per year). The Company had intended to access the
public equity markets in late 1998 or early 1999 to provide additional growth
capital for the Company's planned expansion. Given the current condition of the
U.S. capital markets, the Company has elected to proceed cautiously with its
planned expansion, slowing such expansion to judiciously utilize available cash
or borrowing capacity under the Heller Facility or other facilities.
Management believes that the proceeds from the Private Placement will be
sufficient to complete the 1998 expansion plan to finish 1998 with 176 stores.
As of October 4, 1998, the Company is committed to develop only ten additional
stores in 1999. The Company believes it will have sufficient positive cash flow
provided by operating activities and the Heller Facility to meet its capital
requirements to (i) develop the ten committed stores in 1999 and (ii) fund
general corporate purposes, including some additional expansion. The Company
intends to continue to pursue its growth through the addition of new Acquired
Stores and Developed Stores, but will not commit to such growth without the
immediate availability of funds required for such development or acquisitions
under existing credit facilities or gross operating profit.
POTENTIAL LOSS OF NOLS
As of September 6, 1998, the Company had NOLs of approximately $31.0
million for U.S. federal income tax purposes. These NOLs, if not utilized to
offset taxable income in future periods, will begin to expire in 2011. Section
382 of the Code, and regulations promulgated thereunder, impose limitations on
the ability of corporations to use NOLs, if the corporation experiences a more
than 50% change in ownership during any three-year period. It is likely that the
Company has experienced one or more ownership changes in 1996 and 1997 as a
result of the Company raising various rounds of private equity or that such an
ownership change may have occurred or be deemed to have occurred due to events
beyond the control of the Company (such as transfers of Common Stock by certain
stockholders or the exercise or treatment of warrants, conversion rights or
stock options issued by the Company). There can also be no assurance that the
Company will not take additional actions, such as the issuance of additional
stock, that would cause an ownership change to occur. In addition, the NOLs are
subject to examination by the IRS, and are thus subject to adjustment or
disallowance resulting from any such IRS examination. Accordingly, prospective
purchasers of the Notes should not assume the unrestricted availability of the
Company's currently existing or future NOLs, if any, in making their investment
decisions. See "Risk Factors -- Potential Loss of NOLs."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS; YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of many MIS using two digits (rather
than four) to define the applicable year. Thus, time-sensitive MIS may recognize
a date ending in "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions in a company's
operations. As a result, in less than two years, MIS used by many organizations
may need to be upgraded to comply with Year 2000 requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with the failure to become Year 2000 compliant.
SpinCycle depends upon MIS to monitor daily revenue and machine utilization
in each of its stores, exercise centralized cash controls and compile and
analyze critical marketing and operations data. Any disruption in the operation
of the Company's MIS, the loss of employees knowledgeable about such systems or
the Company's failure to continue to effectively modify such systems as its
business expands would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competitive
Strengths."
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The Company's Readiness for Year 2000. Based on the Company's initial
tests and certifications received from its MIS providers, the Company believes
that its critical software systems are currently Year 2000 compliant and that
its store hardware systems will be compliant by the end of the first quarter of
1999. Management's assessment of the Company's exposure to Year 2000 problems
began in March 1998 with a test of all of the Company's MIS for Year 2000
readiness. Since that time, management has obtained certifications from the
providers of the Company's accounting, revenue control and other critical
software systems that such MIS are Year 2000 compliant. Final test procedures
for Year 2000 compliance are being developed by management. Currently, the
Company believes that it is approximately 85% ready for the Year 2000. By the
end of the first quarter of 1999, management believes the Company will be 100%
Year 2000 compliant. However, if the Company's modifications and testing are not
made on a timely basis or do not resolve its Year 2000 issues, such issues could
have a material adverse effect on the operations of the Company. See also Note
14 to the Unaudited Consolidated Financial Statements for a discussion of the
Company's new accounting software.
Readiness of Third Parties. The Company has taken reasonable precautions
to verify the Year 2000 readiness of any third party that could cause a material
impact on the Company. Alliance, the Company's major supplier of laundry
machines, has represented to the Company that the electronic controls embedded
in Alliance's machines will not experience problems as a result of Year 2000.
Alliance further represented that the electronic controls embedded in its
machines have been tested by simulating the Year 2000 date change and no
problems have arisen. In addition, SpinCycle's providers of essential software
systems have certified to the Company that such systems are Year 2000 compliant.
Historical and Estimated Costs. The Company has not established a separate
Year 2000 compliance budget and does not expect to do so in the immediate
future. To date, the Company has not incurred any Year 2000 compliance costs.
The Company's only immediately foreseeable cost for Year 2000 compliance is the
expenditure of approximately $50,000 to replace certain personal computers in
the Company's stores by the end of the first quarter of 1999. Although no
assurances can be given, management does not expect future costs related to Year
2000 compliance to have a material adverse effect on the Company's results of
operations or financial condition. Costs are based on current estimates and
actual results may vary significantly from such estimates.
Most Reasonably Likely Worst Case Scenario. The most reasonably likely
worst case Year 2000 scenario facing the Company is that the Company's expected
ability to implement variable pricing for its laundry machines in an effort to
boost off-peak customer traffic, revenues and profitability may temporarily
malfunction on January 1, 2000. Since the machines recognize each day of the
week based upon the calendar date contained in their embedded computer chips,
the price programmed for a certain day of the week may in fact appear on a
different day. Although the Company does not currently have a definitive
contingency plan in place to deal with this issue, it is expected that each
store's personnel will be able to adjust the programming in each laundry machine
so that the date contained in its embedded chip once again correlates with the
correct day of the week. In the unlikely event that the dates in the embedded
chips are not able to be reset, store personnel will be able to manually set the
laundry machines to charge a fixed price until such time as the Company resolves
defects in its variable pricing system. See "Risk Factors -- Dependence on
Management Information Systems; Year 2000 Compliance."
SEASONALITY
Coin-operated laundromat industry data indicates that a slight reduction in
revenue for the Company may occur during the later spring and summer seasons.
Management believes this seasonality is a result of the reduced volume of
heavier clothing worn during the spring and summer months, which results in
lower laundry machine usage. The Company observed the effect of such seasonality
in the 70 stores opened for the period from December 28, 1997 to October 4,
1998. During the first ten periods, ending October 4, 1998, these 70 stores'
revenue fluctuated approximately 11.5%, from a peak during the third period to a
low in the ninth period. These 70 stores experienced an aggregate 6.2% increase
in revenue in period ten over period nine. These results are, however, based
upon only relatively limited actual operating data of the Company and may not be
indicative of future results. The Company believes, however, that any
seasonality will not have a material adverse effect on its annual results of
operations. See "Risk Factors -- Seasonality."
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THE EXCHANGE OFFER
TERMS OF EXCHANGE OFFER
In connection with the sale of the Old Notes pursuant to a purchase
agreement dated as of April 24, 1998, between the Company and the Initial
Purchaser (the "Purchase Agreement"), the Company and the Initial Purchaser
entered into the Registration Rights Agreement for the benefit of the Initial
Purchaser and its assignees.
Under the Registration Rights Agreement, the Company is obligated to (i)
file the Registration Statement of which this Prospectus is a part for a
registered exchange offer with respect to an issue of New Notes with terms
substantially identical in all material respects to the Old Notes (except that
such New Notes will not contain terms with respect to transfer restrictions),
within 60 days after April 29, 1998, the date the Old Notes were originally
issued (the "Issue Date") and (ii) use its best efforts to cause the
Registration Statement to be declared effective within 150 days after the Issue
Date. For each Old Note surrendered pursuant to the Exchange Offer, the Holder
of such Old Note will receive a New Note having a principal amount at maturity
equal to that of the surrendered Old Note. The Exchange Offer being made hereby
if commenced and consummated within such applicable time periods will satisfy
those requirements under the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letters of Transmittal (which together constitute the Exchange
Offer), the Company will accept for exchange all Old Notes validly tendered and
not withdrawn prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date.
The Company will issue New Notes in exchange for an equal principal amount at
maturity of outstanding Old Notes accepted in the Exchange Offer. As of the date
of this Prospectus, Old Notes with an aggregate principal amount at maturity of
$144,990,000 were outstanding.
This Prospectus, together with the Letters of Transmittal, is being sent to
all registered Holders as of , 1998. The Company's obligation to
accept Old Notes for exchange pursuant to the Exchange Offer is subject to
certain conditions as set forth herein under "-- Conditions."
The Company shall accept all Old Notes validly tendered and not withdrawn
pursuant to the Exchange Offer. The Exchange Agent will act as agent for the
tendering Holders of Old Notes for the purposes of receiving the New Notes from
the Company and delivering New Notes to such Holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Notes. In such
event, Holders of Old Notes seeking liquidity in their investment would have to
rely on exemptions to registration requirements under the U.S. and state
securities laws. See "Risk Factors -- Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 1998 (30 days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended, but in
no event later than , 1999 (210 days following the commencement of
the Exchange Offer). The Company will notify the Exchange Agent of any extension
of the Expiration Date by oral or written notice and will mail to the record
Holders of Old Notes an announcement thereof, each prior to 9:00 a.m., Eastern
Standard Time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
Notwithstanding any extension of the Exchange Offer, if for any reason the
Exchange Offer is not consummated before October 27, 1998 (180 days following
the Issue Date), the Company will, at its own expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Old
Notes (a "Shelf Registration Statement"), (b) use its best efforts to cause a
Shelf Registration Statement to be declared effective under the Securities Act
and (c) keep the Shelf Registration Statement effective until the earlier of (i)
24 months from the date of its effectiveness, (ii) such time as all of the Old
Notes have been sold
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thereunder or (iii) such time as the Old Notes are no longer restricted
securities (as defined in Rule 144 under the Securities Act). The Company will,
in the event a Shelf Registration Statement is filed, among other things,
provide to each Holder for whom such Shelf Registration Statement was filed
copies of the prospectus which is a part of such Shelf Registration Statement,
notify each such Holder when such Shelf Registration Statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the Old Notes. A Holder selling such Old Notes pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
Holder (including certain indemnification obligations).
The Company reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"-- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the Holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the Holders of the Old Notes of such amendment
and the Company will extend the Exchange Offer for a sufficient period of time,
depending upon the significance of the amendment and the manner of disclosure to
Holders of the Old Notes, that will allow the Holders of the Old Notes to
reassess the Exchange Offer.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the Delaware General Corporation Law,
the governing law of the state of incorporation of the Company.
EXCHANGE OFFER PROCEDURES
To tender in the Exchange Offer, a Holder must complete, sign and date a
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver a Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent, prior to 5:00 p.m. Eastern Standard
Time, on the Expiration Date. In addition, either (i) certificates for such
tendered Old Notes must be received by the Exchange Agent along with a Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at the Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the Holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. To be tendered effectively, the Old Notes, a Letter of
Transmittal and all other required
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documents must be received by the Exchange Agent prior to 5:00 p.m., Eastern
Standard Time, on the Expiration Date. Delivery of all documents must be made to
the Exchange Agent at the addresses set forth below. Holders may also request
their respective brokers, dealers, commercial banks, trust companies or nominees
to effect such tender for such Holders.
The tender by a Holder of Old Notes will constitute an agreement between
such Holder and the Company in accordance with the terms and subject to the
conditions set forth therein and in the Letter of Transmittal.
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "Holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender shall contact such registered Holder promptly and instruct such
registered Holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing a Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from the registered Holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant thereto
are tendered (i) by a registered Holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered Holder, in each case as the
name of the registered Holder or Holders appears on the Old Notes.
If the Letter of Transmittal, or any Old Notes, bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted by the Company, would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letters of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Company shall determine. None of the Company, the Exchange Agent or
any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any Old Notes received by an Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost to such Holder by the Exchange Agent to the
tendering Holders of such Old Notes, unless otherwise provided in the Letter of
Transmittal.
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In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture and the Amended Articles, to (i) purchase or
make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date or, as set forth under "-- Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights Agreement
and (ii) to the extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchase or offers could differ from the terms of the Exchange Offer.
By tendering, each Holder will represent to the Company that (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act),
(ii) any New Notes to be received by it were acquired in the ordinary course of
its business and (iii) at the time of commencement of the Exchange Offer, it was
not engaged in, and did not intend to engage in, a distribution of such New
Notes and had no arrangement or understanding with any person to participate in
a distribution (within the meaning of the Securities Act) of the New Notes. If a
Holder of Old Notes is an affiliate of the Company, and is engaged in or intends
to engage in a distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such Holder could not rely on the applicable
interpretations of the staff of the SEC and must comply with the registration
and prospectus delivery requirement of the Securities Act in connection with any
secondary resale transaction. Each broker-dealer that acquired Old Notes for its
own account as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of New Notes exchanged for such
Old Notes. Each broker-dealer that acquired Old Notes directly from the Company,
and not as a result of market-making or trading activities, must, in the absence
of an exemption, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the secondary resale of
the New Notes and cannot rely on the position of the staff of the SEC enunciated
in no-action letters issued to third parties. See "Plan of Distribution."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Conditions" below. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes for exchange
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent.
For each Old Note tendered for exchange, the Holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note.
If (i) by June 29, 1998 (60 days after the Issue Date), neither the
Exchange Offer Registration Statement nor the Shelf Registration Statement has
been filed with the SEC, (ii) by October 27, 1998 (180 days after the Issue
Date), the Exchange Offer is not consummated and, if applicable, the Shelf
Registration Statement is not declared effective or (iii) after either the
Exchange Offer Registration Statement or the Shelf Registration Statement is
declared effective, such Registration Statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with resales
of Old Notes or New Notes in accordance with and during the periods specified in
the Registration Rights Agreement (each such event referred to in clauses (i)
through (iii) a "Registration Default"), additional interest or dividends, as
the case may be, will accrue or accumulate on the applicable Old Notes and New
Notes at the rate of 0.50% per annum from and including the date on which any
such Registration Default shall occur to, but excluding, the earlier of (i) the
date on which all Registration Defaults have been cured or (ii) the date on
which the Notes become freely transferable by Holders other than affiliates of
the Company without further registration under the Securities Act. Such interest
or dividends, as the case may be, will be payable in cash and will be in
addition to any other interest or dividends payable from time to time with
respect to the Old Notes and the New Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
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Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount, than the
Holder desires to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering Holder thereof (or, in the case of Old
Notes tendered by book-entry transfer procedures described below, such
nonexchanged Old Notes will be credited to an account maintained for the benefit
of the Holder with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "-- Exchange Agent" on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes,
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
Holder of such Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form to transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) the certificate for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.
Eastern Standard Time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under "--
Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing Holder. If
certificates for the Old Notes have been delivered or otherwise identified to an
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been
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tendered pursuant to the procedures of book-entry transfer described above, any
notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the Holder thereof without cost to such Holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under the "-- Procedures for Tendering" above at any time
on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if because of any changes in law, or
applicable interpretations thereof by the SEC, the Company determines that it is
not permitted to effect the Exchange Offer. In addition, the Company has no
obligation to, and will not knowingly, accept tenders of Old Notes from
affiliates of the Company (within the meaning of Rule 405 under the Securities
Act) or from any other Holder or Holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations thereof by the SEC,
or if the New Notes to be received by such Holder or Holders of Old Notes in the
Exchange Offer, upon receipt, will not be tradeable by such Holder without
restriction under the Securities Act and the Exchange Act and without material
restriction under the "blue sky" or securities law of substantially all of the
states.
EXCHANGE AGENT
Norwest Bank Minnesota, N.A. has been appointed as Exchange Agent in
connection with the Exchange Offer. Questions and requests for assistance in
connection with the Exchange Offer and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified Mail: By Overnight Courier:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
P.O. Box 1517 Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55480-1517 Minneapolis, Minnesota 55479-0113
Attention: Corporate Trust Operations Attention: Corporate Trust Operations
By Hand: By Facsimile (for Eligible Institutions
Only):
Norwest Bank Minnesota, N.A.
Northstar East Building Norwest Bank Minnesota, N.A.
608 2nd Ave. S. (612) 667-4927
12th Floor Attention: Corporate Trust Services
Minneapolis, Minnesota 55479-0113 Confirm by Telephone: (612) 667-9764
Attention: Corporate Trust Services
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tender pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
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The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent, the
Trustee, the Transfer Agent (as defined) and accounting, legal printing and
related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered Holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at the
same carrying values as the Old Notes as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized upon the consummation of the Exchange Offer. The
expense of the Exchange Offer will be amortized by the Company over the term of
the New Notes in accordance with generally accepted accounting principles.
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BUSINESS
THE COMPANY
The Company was founded in October 1995 to develop and implement
SpinCycle's unique concept of a national chain of branded coin-operated
laundromats and to serve as a platform for a nationwide consolidation in the
coin-operated laundromat industry. The Company's goal is to become the leading
operator of high quality coin-operated laundromats in the United States by
establishing SpinCycle as a national brand, providing a superior level of
customer service and by exercising disciplined management control in its
expansion and business plan. In sharp contrast to many existing laundromats, a
SpinCycle laundromat is an inviting, spacious and well-equipped facility that is
conveniently located, clean and well-lighted. As of September 6, 1998, the
Company had opened a total of 134 stores in 25 markets, 81 of which it developed
and 53 of which it acquired. SpinCycle stores are located in densely populated
urban markets, including Chicago, Cleveland, Albuquerque, Houston, Los Angeles,
Philadelphia, Detroit, Miami, Atlanta, Dallas and Washington, D.C. Of those 134
stores, the Company leases 132 and owns two of these sites.
The Company plans to selectively expand primarily within its existing
markets during the balance of 1998 and in 1999 by developing new SpinCycle
stores and acquiring existing laundromats. The Company's acquired stores
typically conform to a SpinCycle developed store in terms of location (physical
location and area demographics), store size and machine mix and can be converted
to a SpinCycle store with new signage, fresh paint and installation of the
Company's computer and point of sale systems. By year end 1998, management
believes that there will be approximately 176 SpinCycle stores.
Management believes its equipment configuration and store design is unique
and maximizes customer convenience and in-store experience. As evidence of its
superior concept, management believes, based upon Company compiled survey data
that over 90% of the customers who first visit its stores will return as
customers. SpinCycle stores are between 3,500 and 5,500 square feet,
significantly larger than the 1,500 to 2,500 square feet of a typical
laundromat, and generally contain 50 washers of varied capacities and 54 large
capacity dryers. The Company installs a computer board in each washer and dryer
which allows daily monitoring of machine utilization and superior cash control.
Each store is staffed during operating hours by at least one customer service
representative who assists customers, maintains the facility and performs "wash
and fold" services, if offered. Customers can sort and fold laundry while
watching color television with cable programming at 12 to 14 folding stations
and purchase food, beverages and laundry supplies from vending machines. In its
Developed Stores which have been Mature Stores for all of its first nine 1998
fiscal periods, the Company has achieved, on average, per period revenues of
$28,107. In its Acquired Stores which have been Mature Stores for all of its
first nine 1998 fiscal periods, the Company has achieved, on average, per period
revenues of $19,837. Management believes this Mature Store performance is a
result of its superior store design and management controls. There can be no
assurance that these results are indicative of future results.
MARKET OPPORTUNITY
The retail coin-operated laundromat industry began more than 50 years ago
and has been characterized by steady, non-cyclical demand. Management believes
the coin-operated laundromat industry, unlike other retail concepts, is
virtually unaffected by consumer fads and technological change, as laundry
represents a basic consumer necessity. Based on the 1997 Coin Laundry Industry
Survey, management estimates that retail coin-operated laundromats comprise a
$2.0-3.0 billion industry with approximately 25,000 laundromats nationwide, 89%
of which are operated by owners of only one or two stores and only 4% of which
are operated by owners of more than five stores. Today, management believes, the
industry is characterized by (i) fragmented store ownership, (ii) small,
unattractive stores and (iii) limited customer service. The Company's research
indicates that typical laundromats generally contain poorly maintained, aging
equipment and are often dirty and considered unsafe by their customers.
Management therefore believes that the typical laundromat user is significantly
underserved. Further, because management believes its targeted consumer group is
growing in size and market power, management believes that the coin-operated
laundromat industry presents favorable growth opportunities.
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Management believes that by combining superior store design and site
selection, disciplined professional management and financial resources,
SpinCycle will be able to successfully consolidate a highly fragmented industry
while delivering a superior product to consumers. SpinCycle designs its stores
to provide an inviting atmosphere focused on customer convenience and
satisfaction. Unlike many of its competitors, SpinCycle also staffs its
locations during operating hours and installs security devices to promote
safety. Management believes that its innovative format can transform the retail
laundromat industry and become the standard by which laundromats are judged.
BUSINESS STRATEGY
Continue Growth in Existing and New Markets. The Company's strategy is to
maintain and build upon its position in the national retail coin-operated
laundromat industry. By consolidating its position in existing markets and
developing a strong presence in new markets the Company has the highest average
per store revenues of any national or regional chain. Management selects markets
which it believes have populations sufficiently large and dense to support a
large number of SpinCycle stores which can generate model Mature Store revenues.
SpinCycle utilizes two primary methods to roll out its concept: (i) developing
retail locations and (ii) acquiring and converting existing laundromats. During
1998, management expects to add a total of approximately 106 stores, through a
balance of Developed Stores and Acquired Stores, for a year end total of
approximately 176 stores, primarily in its 25 existing markets. In the first
nine periods of 1998, the Company opened 63 stores. As of October 27, 1998, the
Company had 150 stores operating and had ten leased stores under construction,
nine leases executed and signed letters of intent to acquire seven stores, all
of which management expects to open or acquire by year end 1998. The
pre-construction permitting process varies from market to market but takes, on
average, from 30 to 60 days to complete. Once construction begins, it takes the
Company approximately 12 weeks to open the store. In addition, the Company
maintains a dynamic database of approximately 200 potential acquisition targets.
Continue Superior Site Selection. Based upon management's knowledge and
experience in site selection for other multi-unit retail concepts, as well as
their experience in opening the first 150 SpinCycle stores, management believes
that operating from superior real estate is an essential element in SpinCycle's
ability to generate revenue in excess of industry averages and gain and maintain
market share. The Company identifies both development sites and acquisition
targets using a systematic market analysis and a "Main and Main" strategy,
whereby it seeks to locate stores near intersections of major thoroughfares in
high profile neighborhood shopping centers or freestanding buildings in order to
maximize customer traffic and brand exposure. The Company's real estate and
acquisitions departments will continue to employ disciplined criteria in order
to ensure that SpinCycle secures the best available locations in each of its
markets.
Maintain Focus on Target Markets. SpinCycle's market strategy is to
develop a "critical mass" of stores in its targeted markets by opening stores in
Company-defined trade areas that contain at least 15,000 households of over two
occupants with median household incomes between $25,000 and $35,000 and in which
at least 50% of such households rent their homes or apartments. SpinCycle's
primary customer is a working mother or female head of household living in an
apartment complex or other multi-unit housing that lacks adequate on-site
laundry facilities. Management believes this demographic is substantially
underserved and possesses growing market power, and thus affords an attractive
long-term opportunity for the Company's core services as well as an opportunity
to strategically expand into additional service and product offerings. From time
to time, the Company may pursue strategic alliances to leverage its knowledge
base and brand strength in its target markets.
COMPETITIVE STRENGTHS
Management believes SpinCycle is the leading owner-operator of nationally
branded coin-operated laundromats. The Company's management believes it has the
following competitive strengths:
Superior Facility and Customer Service. SpinCycle stores have high
visibility to traffic, bright, colorful exteriors and signage and are finished
with large windows to optimize visibility into the store while providing a
bright and secure interior. SpinCycle stores are designed with a unique
equipment mix to optimize customer convenience and satisfaction and to maximize
profitability. The Company's stores are always staffed with at least one
customer service representative trained to follow the SpinCycle-prescribed
operations program,
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which emphasizes cleanliness, customer responsiveness and equipment maintenance.
SpinCycle stores are air conditioned and have multiple color televisions with
cable programming and numerous folding stations, as well as children's play
areas, bathrooms, pay telephones and snack, beverage and laundry supply vending
machines. Based upon Company compiled survey data management believes that over
90% of the customers who first visit its stores will return as customers.
Management believes that this statistic is the direct result of its superior
facilities and customer service. This data also indicates that more than 20% of
SpinCycle customers have laundry equipment in their homes, which management
believes indicates that the SpinCycle concept has increased the number of
potential customers rather than merely capturing market share from existing
laundromats. In addition, management anticipates providing value-added services,
such as drop off "wash and fold" laundry service which as of September 6, 1998
was available in 71 stores, at selected stores to further enhance customer
satisfaction and generate incremental store revenue.
Industry Leader. Management believes SpinCycle is the first owner-operator
to launch a disciplined national consolidation in the retail coin-operated
laundromat industry and has gained valuable experience in opening its first 150
stores. By being the first nationally branded operator of superior laundromat
facilities, and by effectively promoting and clustering stores in prime
locations in its targeted markets, the Company expects to rapidly achieve market
leading positions in each of its markets. Management expects the creation and
ongoing support of this leading national brand to drive significant additional
revenue and store profit as SpinCycle increasingly becomes the laundromat of
choice for consumers. In addition, the Company has already begun to experience a
dramatic shift in landlord receptivity to the SpinCycle concept. Initially,
landlords (and other retail tenants), wary of the image of a typical laundromat,
were reluctant to have SpinCycle as a tenant in desirable neighborhood shopping
centers. More recently, however, landlords (and other retail tenants) have begun
to actively encourage SpinCycle to become a tenant because of direct and
observed experiences that SpinCycle stores can increase customer traffic as its
customers typically spend two hours in and around the store while doing their
laundry. As the Company has established multiple outlets and become more widely
known, it has begun to receive unsolicited offers from laundromat owners who
wish to sell their stores and to realize purchasing economies on equipment and
supplies.
Advanced Systems and Controls. SpinCycle brings superior MIS and cash
controls to a highly fragmented, unprofessionally managed industry. SpinCycle's
advanced systems allow the Company to monitor daily revenue and machine
utilization in each of its stores, exercise centralized cash and management
control and compile and analyze critical marketing and operations data. For
example, the Company has refined the mix of machines in its stores based on data
gathered from existing stores and is poised to implement remote variable pricing
to boost off-peak customer traffic, revenues and profitability once the
manufacturer makes the necessary laundry machine modifications. The Company's
MIS also allow management to reconcile each machine activation to cash
collected, identify non-performing machines and coordinate efficient machine
maintenance. Additionally, Brinks Incorporated and other service companies work
in concert with the Company to further mitigate the risk inherent in a cash
business. As a result of its superior controls, the Company has experienced
annual shrinkage of less than 0.50%.
Experienced Management. The Company has achieved its leadership position
and established a national presence by hiring a management team with experience
in finance, development, operations and multi-unit rollouts on a national scale.
SpinCycle is professionally managed as three integrated business segments: (i)
real estate/acquisitions, (ii) operations and (iii) MIS. Members of management
have significant expertise in all of these disciplines. The Company's real
estate/acquisitions department includes professionals with significant site
selection experience at several other multi-unit concepts, some of which were
rapidly rolled out. The operations department includes senior management from
Rent-A-Center, a rent-to-own multi-unit operation whose target customer closely
mirrors SpinCycle's target customer. The Company's MIS department includes
several professionals with extensive experience in building a "hub and spoke"
wide area network and in developing computer systems for operations. Management
believes this experience affords the Company a competitive advantage in rolling
out and managing a nationwide chain.
SPINCYCLE CUSTOMERS
SpinCycle believes that identification and satisfaction of its customers is
paramount to its success. SpinCycle has devoted significant resources to the
identification of its core customer and has tailored its
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operations, store construction and marketing to the needs of such customers.
SpinCycle believes that it is the first owner-operator of coin-operated
laundromats which has devoted such attention to the identification and
satisfaction of its core customer base. Specifically, SpinCycle has gathered
data on its core customer base through in-store customer surveys and focus group
surveys of potential, existing and previous SpinCycle customers. SpinCycle has
utilized in-store promotions to encourage participation in its surveys and has
used nationally recognized third-party consulting firms to assist in its focus
group surveys. Such studies have been undertaken in several of SpinCycle's
existing markets with the focus on identification of current and potential
customers and the ranking of their needs and preferences pertaining to
coin-operated laundromat usage.
A November 1997 analysis of approximately 21,000 SpinCycle customers
revealed the following characteristics about SpinCycle customers:
- Approximately 70% are female, many of which are the head of their
household
- Approximately 73% are between 18 and 39 years old
- Over 70% live in households that have more than two children
- Approximately 78% rent their dwellings
- Approximately 62% live in apartment units
- Approximately 20% own a washer and dryer
- On average, 61% reside within one mile and approximately 75% reside
within three miles of the SpinCycle store visited
- Average annual household incomes range between $25,000 and $35,000
- Visit a SpinCycle store for approximately two hours and approximately
every ten days
- Spend an average of approximately $10 per visit
SpinCycle's research regarding its existing customers, potential customers
and past customers is undertaken in order to allow the Company to continue to
deliver a superior facility and superior customer service. SpinCycle has also
used this information to tailor its store design and the services provided to
accommodate market specific needs of its customers. It is this attention to
customer needs that the Company believes results in the Company's ability to
retain customers.
INDUSTRY OVERVIEW
The retail coin-operated laundromat industry is over 50 years old and has
been characterized by steady, non-cyclical demand and a relatively minimal
degree of technological innovation. Today, management believes, the industry is
characterized by (i) fragmented store ownership, (ii) small, unattractive stores
and (iii) limited customer service. According to the 1997 Coin Laundry Industry
Survey there are approximately 25,000 laundromats nationwide, 89% of which are
owned by owners of one or two stores, and only 4% of which are owned by owners
of more than five stores. Nationwide, over 84% of the coin-operated laundromats
are less than 4,000 square feet, with the average laundromat size being
approximately 2,480 square feet.
According to the 1997 Coin Laundry Industry Survey, the average annual
revenue generated by a laundromat in the United States is approximately
$151,000, the median laundromat generates approximately $93,700 in annual
revenue, and only 6% of laundromats generate greater than $300,000 in annual
revenues. The average store has 33 washers and 19 dryers and the typical washer
equipment mix includes over 58% top load machines. Management believes that top
load machines have a significantly shorter life and are less profitable to
operate than front load machines.
Management believes the lack of any substantial owner-operators of
coin-operated laundromats has created an industry characterized by stores
lacking in consistency, security, cleanliness and service capability.
Additionally, typical operators rarely reinvest in their stores after making
their initial investment, resulting in a deteriorating stock of retail
coin-operated laundromats.
CURRENT OPERATIONS AND PLANNED EXPANSION
The Company's current operations and its planned expansion focus on
achieving a "critical mass" of SpinCycle stores in its targeted markets.
Management expertise focuses on employing rigorous, standard criteria to
development, acquisitions and operations in order to achieve steady, repeatable
store performance.
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As of October 27, 1998, the Company had opened 150 stores in 25 markets across
the United States. Of these 150 stores, the Company developed 86 stores and
purchased 64 stores. During the balance of 1998, management expects to open
approximately 26 additional stores. As of October 27, 1998, the Company had ten
leased stores under construction, nine leases executed and signed letters of
intent to acquire seven stores, all of which management expects to open or
acquire by year end 1998. The following map summarizes the current states and
markets in which the Company operates as well as the states and markets which
the Company intends to enter through 1999:
[SPIN CYCLE MAP]
SPINCYCLE'S EXPANSION STRATEGY
Through 1998 and beyond, the Company intends to expand upon its leading
position in the national retail coin-operated laundromat industry through a
systematic two-pronged approach of opportunistic development and consolidation.
SpinCycle intends to continue to expand in 1998 primarily within its 25 existing
markets. Substantial development and acquisition activity in 1999 and beyond is
dependent upon the Company obtaining additional capital and/or borrowing
capacity.
SpinCycle approaches expansion methodically, utilizing its knowledge of the
SpinCycle customer as the basis for its growth. Whether acquiring or developing
locations within existing or new markets, the Company bases its expansion
decisions on a careful examination of the market. Based upon demographic studies
analyzing the concentration of the typical SpinCycle customer, the Company
determines its target markets and defined trade areas within these markets and
opportunistically develops or acquires stores that meet, or can be converted in
order to meet, SpinCycle's target store economics. Management believes such an
approach to expansion allows the Company to rapidly achieve a leading position
within markets that support the SpinCycle concept.
Market Plan. SpinCycle considers its market plan the first step in its
expansion process. Based on management's understanding of its core customer,
SpinCycle identifies markets that contain a base of its target customers
sufficient to support a critical mass of SpinCycle stores. Once a market of such
size is identified, SpinCycle gathers detailed demographic information to define
individual trade areas that the Company believes encompass the majority of
potential SpinCycle customers in the overall market. Finally, SpinCycle
identifies all eligible development sites and acquisition candidates within
these defined trade areas that are best suited to service the trade area.
Markets are identified using detailed third party demographic
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information including population density, median household income, average
household size and age, renter/owner ratios and annual laundromat spending
densities.
SpinCycle considers a trade area sufficient if it has a population density
of at least 15,000 households with a median household income ranging from
$25,000 to $35,000 per year, average household size of greater than two
occupants, a renter-occupied housing percentage of at least 50% and annual
laundromat spending densities in excess of $1.0 million. The Company defines
trade areas by, among other criteria, six to seven minute average drive times to
the potential site, geographic barriers, traffic patterns and major
thoroughfares. Once the trade areas are defined, the Company's real estate
professionals, aided by local real estate brokers, gather information on
competition, traffic counts and patterns, locations of high traffic retailers
(such as discount stores and grocery stores) and the locations of retailers
which cater to a customer base similar to SpinCycle's (such as dollar stores,
rent-to-own stores and check-cashing stores). Such information is used to create
the real estate strategy for a particular trade area. After mapping this
information, the real estate professionals identify (i) key intersections for
potential SpinCycle locations and (ii) potential acquisition candidates within
the trade area.
Development. Once the market plan is complete and all trade areas are
defined, the Company's regional real estate professional develops a list of all
potential SpinCycle sites within the given trade areas. Key factors in
identifying potential SpinCycle sites are store visibility and profile, access,
size, signage, parking, location, economics, expected transaction timing and
estimated store volume. Several tours of the trade area are performed to ensure
that the Company evaluates all available sites. Concurrently, the real estate
team begins negotiations to lease desired space and to secure tenant improvement
contributions by the landlord and/or evaluate potential acquisitions. The
typical SpinCycle lease is for a ten year term with between two and four five
year renewal options with 10-12% rent escalation every five years.
Once potential development sites are identified, the Company's regional
real estate professional and regional construction manager prepare a development
budget for each store at its particular site. If the store can be developed
within budgeted criteria, the site is submitted for final field approval by the
Chief Development Officer. Upon completion of field approval, a comprehensive
site evaluation package is submitted for approval by SpinCycle's senior
management.
Once a site is approved, the Company's nationwide network of general
contractors, design firms and architectural firms allows SpinCycle to quickly
and accurately customize it to the SpinCycle format while minimizing development
overrun costs. The Company typically requires a minimum of three bids for any
construction project. The Company's regional construction managers are usually
familiar with the work of the contractors they engage thus further helping to
ensure a timely, consistent and high quality build-out. By coordinating
construction efforts through Company construction professionals, management
believes it has been able to realize significant development cost savings
through on-going improvements in site design and engineering.
Acquisitions. SpinCycle targets the acquisition of existing laundromats
which (i) enhance SpinCycle's rapid achievement of critical mass in targeted
markets and allow strategic consolidation of local competitors, (ii) eliminate
duplicative development efforts, (iii) provide immediate mature cash flow and
(iv) can be easily converted to SpinCycle's store concept. SpinCycle identifies
and acquires acquisitions through its regional real estate professionals,
advertising in industry trade journals, contacts provided by equipment
manufacturers and distributors and referrals from other sellers. Additionally,
because the typical laundromat owner has historically lacked an exit strategy,
SpinCycle often receives unsolicited inquiries from potential sellers. During
1997, SpinCycle acquired 27 laundromats in seven markets.
SpinCycle utilizes a proprietary financial model based on utility
consumption rates and machine mix to verify the historical revenue information
provided by a potential acquisition candidate. Additionally, a thorough analysis
of a potential acquisition candidate's competitive position within its trade
area helps to ensure the Company's ability to sustain such historical cash
flows. The Company has typically purchased stores at a 4.0x-5.0x Store EBITDA,
pro forma for the Company's anticipated expense levels (or 3.0x-4.0x historical
Store EBITDA), although from time to time the Company has acquired, and expects
that in the future it will acquire, existing laundromats based upon other
strategic considerations.
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OPERATIONS
Once a store is opened, SpinCycle believes that its manner of operations
distinguishes it from its competition. Key components of SpinCycle's operating
strategy include (i) heavy emphasis on customer satisfaction and superior
facility maintenance, (ii) facility security and (iii) loss prevention through
management controls. SpinCycle considers customer satisfaction paramount in its
efforts to build a successful chain of branded coin-operated laundromats. To
ensure customer satisfaction, SpinCycle expends significant resources training
store employees to provide consistent and reliable store appearance,
extraordinary customer service and facility maintenance.
Customer Satisfaction and Facility Maintenance. SpinCycle has established
high quality standards in an industry characterized by its lack of attention to
customer service and satisfaction. Management believes its equipment
configuration and store design is unique and ensures customer satisfaction by
providing a pleasant in-store experience and minimizing the time necessary to
complete full laundry cycles. Stores generally are open from 7:00 a.m. to 10:00
p.m. daily, with some stores open for extended hours. Several Acquired Stores
are open 24 hours.
Facility cleanliness and customer service are hallmarks of the Company's
operations. Store employees regularly clean all elements of the facility.
Employees are trained according to the Company's prescribed program to execute
precisely a scheduled and highly structured daily cleaning program of the
machines and the entire physical plant and to provide superior levels of
customer service by assisting customers with all matters of machine usage and
laundry care, thus further enhancing the customer's satisfaction.
SpinCycle also strives to keep all of its equipment in good working order.
The Company's success in machine maintenance results from its insistence upon
purchasing high quality commercial washers and dryers and training in-store
staff to execute routine maintenance programs. Approximately 80% of the washers
in a SpinCycle store are front load washers, which management believes are more
durable and more efficient to operate than top loaders. Store employees are also
trained to troubleshoot machine problems before referring matters to service
technicians. The Company's next generation proprietary store control system was
site-tested in the second quarter of 1998. Future enhancements include the
ability to remotely monitor and diagnose maintenance issues and to provide
maintenance personnel access to the maintenance history of each machine and an
advance indication of the nature of a problem in order to ensure that service
technicians have the parts necessary to complete a service call. These
enhancements cannot, however, be implemented until the laundry equipment
manufacturers make some hardware adjustments.
Facility Security. SpinCycle places significant emphasis on providing a
store that is safe and secure both for customers and employees. A substantial
component of SpinCycle's target customers -- women in urban neighborhoods --
have indicated that safety is a paramount concern. To provide a secure facility
and thereby promote employee and customer safety, the Company typically uses the
following precautionary measures: video surveillance and monitoring systems,
armored car services, panic buttons in every store, safety training and well
lighted interiors and exteriors. In addition, SpinCycle's store attendants
monitor the safety and security of the store.
Management Controls. SpinCycle installs a network interface card ("NIC")
in each of its washers and dryers. These cards are connected to a personal
computer in the store which polls the individual NIC's, creating a local area
network ("LAN"). The LAN in each store is linked via modem to the Company's
headquarters enabling management to track daily performance of each machine at
each store and thereby constantly evaluate actual store performance versus
budgeted levels. Such tracking also enables the real estate and operations
departments to evaluate overall market strategy and make necessary adjustments
in the site criteria used to make future real estate decisions.
The store control system records each machine activation and downloads this
information to corporate headquarters nightly. Cash management involves a
process of daily coin collection by employees, who then deposit the cash into a
store safe. The cash is then collected by Brinks Incorporated or another armored
car service. The collected amount is reconciled against the Company's data
collected from the store control system. SpinCycle's cash handling procedures
are designed to minimize the risk to employees as well as the potential for
theft, as theft is detectable from the daily reconciliation reports. The
implementation of these cash handling procedures has allowed the Company to
maintain annual shrinkage of less than 0.50%. In
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addition to providing an effective auditing mechanism, the system also assists
management in making staffing, operating and security decisions, as well as
determining optimal machine mix and configuration.
MARKETING
The Company believes that a significant amount of its per store customer
base is generated through brand identification and word of mouth, but SpinCycle
also actively markets to increase a store's market penetration. SpinCycle's
store marketing strategy typically includes a grand opening program, in-store
signage and ongoing promotions. A store's grand opening program generally
commences four weeks prior to opening a store and includes banners, facility
tours with community leaders and promotional partnerships with local businesses
and civic organizations, including the United Negro College Fund, the Boys and
Girls Club and community churches. A direct mail promotional incentive is
generally sent to potential customers to raise awareness and interest in the
SpinCycle concept. After a store has been operating for several months, the
Company may run additional promotions such as a "Half Off Wash" or "Free Dry" to
generate additional customer visits. The Company has found that such promotions
drive significant additional customer traffic and result in a permanent increase
in its customer base, thus increasing revenue following such promotions. The
Company uses in-store signage to teach its customers about the advantages of
SpinCycle's unique machine mix (e.g., using a double load front load washer
versus a single load top loader) and facility. Other marketing initiatives have
included focus groups, billboard advertising and community outreach programs.
SpinCycle actively promotes off-peak usage by offering mid-week specials
such as reduced wash or dry prices. SpinCycle's next generation store control
system is expected to allow for remote price changing, which is expected to
enable corporate management to run mid-week price reductions and other
promotions from SpinCycle headquarters. Management believes that this capability
should help the Company to substantially increase non-peak hour demand for its
equipment and generate significant incremental revenue.
COMPETITION
Although there is no single chain of laundromats with which the Company
competes on a national basis, the Company experiences significant competition in
all of its markets from local "mom and pop" operators and, in some markets, from
regional chains. For example, in Texas, the Company competes against KwikWash,
which is a chain of over 150 stores owned by Coinmach Corporation, a publicly
traded company. While Coinmach Corporation has substantially greater resources
than the Company, KwikWash stores are on average smaller and, management
believes, deliver significantly inferior service than the Company's prototype
store delivers. The Company also competes against other laundry services
available to potential customers, including laundry facilities available in
their homes or apartment buildings (including those serviced by route service
operators) and independently owned neighborhood coin-operated laundromats.
Laundry facilities at apartment buildings are often maintained by route
operators whose resources are also often substantially greater than the
Company's.
Management believes that the principal competitive factors in the retail
coin laundry industry are convenient location, adequate parking, a varied
equipment mix, functioning machines, attended facilities and customer
satisfaction. Management believes it is superior to its competitors in each
regard. See "Risk Factors -- Competition."
EMPLOYEES
As of September 6, 1998, the Company had 759 total employees of whom 459
are full time and 300 are part-time. Each of the Company's full-time employees
is eligible for medical benefits, which management believes helps the Company
hire and retain the best available employees. The Company's part-time employees
work primarily in the Company's stores and are engaged primarily in customer
service functions.
FACILITIES
The Company leases its approximately 15,500 square foot corporate office in
Scottsdale, Arizona pursuant to a five year lease, expiring July 2002.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the age and position of the executive
officers and directors of the Company:
NAME AGE POSITION
- ---- --- --------
Peter L. Ax.................... 39 Chief Executive Officer and Chairman of the Board
Christopher A. Lombardi........ 37 Chief Development Officer
James R. Puckett............... 36 Chief Financial Officer
Matthew B. Campbell............ 42 Vice President, Operations
Chief Information Officer, Vice President,
Patrick H. Boyer............... 36 Finance
John S. Banas, III............. 36 General Counsel
Alfredo Brener................. 46 Director
Dean Buntrock.................. 67 Director
James E. Hutton................ 60 Director
John H. Muehlstein............. 43 Director
Peer Pedersen.................. 73 Director
John Wallace................... 38 Director
Peter L. Ax has been the Chief Executive Officer since January 1998 and the
Chairman of the Board since March 1998. From December 1996 to January 1998 Mr.
Ax was Chief Financial Officer and was Vice Chairman of the Board from December
1996 until March 1998. From March 1995 to December 1996, Mr. Ax served as Head
of the Private Equity Division and Senior Vice President of Lehman Brothers.
From March 1994 to March 1995, Mr. Ax was responsible for the private placement
of fixed income securities on the fixed income syndicate desk at Lehman
Brothers. From September 1991 to March 1994, Mr. Ax served in the Investment
Banking Division of PaineWebber, Inc. Mr. Ax has an M.B.A. from The Wharton
School at the University of Pennsylvania, a J.D. from the University of Arizona
and a B.S. from the University of Arizona and is a C.P.A.
Christopher A. Lombardi has been the Chief Development Officer since March
1996. From May 1994 to March 1996, Mr. Lombardi served as Vice President of
Development of Northstar Restaurants, Inc., a franchise area developer for
Boston Chicken, Inc., where he coordinated and directed the real estate
selection and construction in developing 54 stores in 22 months. From May 1990
to May 1994, Mr. Lombardi served as Franchise Operations Manager for Blockbuster
Video, Inc. During his four years at Blockbuster, Mr. Lombardi's territory grew
from 29 to 79 stores in the midwestern United States and western Canada. Mr.
Lombardi has a B.A. from the University of Chicago.
James R. Puckett has been the Chief Financial Officer since May 1998.
Previously he was Vice President of Corporate Development from May 1997 to May
1998. From June 1995 to May 1997, Mr. Puckett was a senior member of the Real
Estate Finance Group in the Fixed Income Division of Donaldson, Lufkin &
Jenrette, Inc. where he was responsible for underwriting debt securities. From
July 1990 to May 1995, Mr. Puckett served in the Investment Banking Division of
PaineWebber, Inc. Previously, Mr. Puckett served in the Corporate Finance
Department of Drexel Burnham Lambert Incorporated where he was responsible for
underwriting equity and debt securities and merger and advisory assignments. Mr.
Puckett has a B.A. from the University of New Mexico.
Matthew B. Campbell has been Vice President, Operations since July 1998.
Previously, he was the Chief Learning Officer from November 1997 to July 1998.
From September 1990 through November 1997 Mr. Campbell was employed by Thorn
Americas where he served as the Senior Director of Training, Management and
Development. Prior to joining Thorn Americas, Mr. Campbell served as a professor
of Political Science at Troy State University. Mr. Campbell has a B.A. from
Southwest Texas State University, an M.A. from the University of Toledo and a
Ph.D. (ABD) from the University of Virginia.
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Patrick H. Boyer has been the Chief Information Officer and Vice President,
Finance since May 1998, He was Chief Financial Officer from March 1998 to May
1998. Previously, Mr. Boyer was the Chief Information Officer from March 1996
until March 1998 and was the Vice President of Finance from March 1996 to August
1997. From July 1994 to March 1996, Mr. Boyer was President of Portable Systems
Solutions, Inc., a management information systems consulting firm. From August
1992 to June 1994, Mr. Boyer was National Sales Manager for Lisa Frank, Inc., a
stationery and school supply manufacturer. Previously, Mr. Boyer had been
Controller at Hogue Printing, Inc. and worked at Arthur Andersen and Co. and
Andersen Consulting. Mr. Boyer has an M.B.A. from the University of Missouri and
a B.A. from Trinity University.
John S. Banas, III has been General Counsel since July 1998. Previously,
Mr. Banas served as Senior Corporate Counsel for Lam Research Corp. from
December 1995 to January 1998. From October 1992 to December 1995, Mr. Banas was
an associate at the law firm of Wilson, Sonsini, Goodrich & Rosati. Mr. Banas
has a J.D. from Northwestern University School of Law and a B.A. from Tufts
University.
Alfredo Brener has been a Director since June 1996. Since 1987 Mr. Brener
has been President and Chief Executive Officer of Breco Holdings, Inc., a
Houston-based diversified holding company. Mr. Brener is the former Chairman of
the Board of Boys Market, Inc., a Los Angeles-based supermarket chain; Grupo
Mexicano de Video, S.A. de C.V., the Blockbuster Mexico franchisee; Discovery
Zone de Mexico, S.A. de C.V., the Discovery Zone Mexico franchisee; and a
director of Fiesta Mart Supermarket, a Houston-based supermarket chain. Mr.
Brener is also a director of E-Stamp Corp. and Super Stand Entertainment Co.
Dean Buntrock has been a Director since January 1998. Mr. Buntrock was the
founder and Chairman of the Board of Waste Management, Inc. from 1968 to July
1997 and was its Chief Executive Officer from 1968 until June 1996 and from
February 1997 until August 1997. Mr. Buntrock was Chairman of the Board of
Wheelabrator Technologies, Inc. from March 1997 until December 1997. Mr.
Buntrock was also a director of Boston Chicken, Inc., WM International, First
National Bank of Chicago and Stone Container Corp.
James E. Hutton has been a Director since April 1996. Since June 1993, Mr.
Hutton has been Vice President of Operations for Burrel Professional Labs, Inc.
Mr. Hutton serves on the boards of Indiana Federal Savings Bank; North Coast
Distributing Company, a Miller Beer distributor; and T. P. Orthodontics, a
manufacturer of orthodontic prosthesis devices. From 1973 to 1993, Mr. Hutton
was a tax partner with Geo. S. Olive & Co., a public accounting firm.
Previously, Mr. Hutton was with the accounting firm of Dogan, Roby & Company.
Mr. Hutton is a C.P.A.
John H. Muehlstein has been a Director since April 1997. Since 1986, Mr.
Muehlstein has been a partner of Pedersen & Houpt, P.C., Chicago, Illinois,
counsel to the Company. Mr. Muehlstein's practice focuses on private capital
transactions and corporate finance. Mr. Muehlstein is a director of Blue Rhino
Corporation and Einstein/Noah Bagel Corp. Mr. Muehlstein is a nephew of Mr.
Pedersen, another director of the Company.
Peer Pedersen has been a Director since November 1997. Mr. Pedersen has
been a partner of the law firm Pedersen & Houpt, P.C. for the past 40 years and
is its Chairman and Managing Partner. Mr. Pedersen is also a director of Boston
Chicken, Inc., Latin American Growth Fund, Tennis Corporation of America,
Extended Stay America, Inc. and Spraying Systems Co. Mr. Pedersen is an uncle of
Mr. Muehlstein, another director of the Company.
John Wallace has been a Director since June 1996. From June 1996 to
September 1997, Mr. Wallace was a Regional Vice President -- Real Estate for the
Company. From March 1994 to March 1996, Mr. Wallace served as a Director in the
Corporate Finance/Merchant Banking Department at First Southwest Company. In
1986, Mr. Wallace founded and, from 1986 to 1989, he served as the President of
Houston Video Enterprises, which had the rights to Blockbuster Video franchises
for the Houston area. During this period Mr. Wallace assisted with the opening
of 12 company-owned video superstores and 40 additional franchise stores. In
1990, Mr. Wallace and several equity partners formed Grupo Mexicano de Video,
S.A. de C.V. which held the franchise rights to Blockbuster Video in Mexico. Mr.
Wallace served as the General Director from 1990 through 1993, during which time
Grupo Mexicano de Video opened in excess of 80 stores throughout Mexico.
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DIRECTOR COMPENSATION
Currently, the Company's directors receive no cash compensation for serving
on the Board of Directors. They do, however, receive reimbursement for expenses
reasonably incurred in connection with their service to the Company as
directors. There is also a Non-Employee Director Stock Option Plan pursuant to
which as of July 1 of each year each non-employee director is entitled to a
grant of an option to purchase 20 shares of Common Stock which vest over three
years on each anniversary of the grant date. The initial grants under the plan
vested immediately. Options to purchase 100 shares per the initial grants to
directors and 120 shares per the 1998 grant are outstanding.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee (the "Audit Committee"), a
Compensation and Organization Committee (the "Compensation Committee") and a
Finance Committee (the "Finance Committee"). The Audit Committee is composed of
Messrs. Hutton and Brener. The Audit Committee is responsible for reviewing the
scope of the independent auditors' examinations of the Company's financial
statements and receiving and reviewing their reports. The Audit Committee also
meets with the independent auditors, receives recommendations or suggestions for
changes in accounting procedures and initiates or supervises any special
investigations it may choose to undertake. The Compensation Committee is
composed of Messrs. Buntrock, Muehlstein and Pedersen. Messrs. Muehlstein and
Pedersen are members of the law firm of Pedersen & Houpt, P.C. which serves as
counsel to the Company. See "Certain Transactions." The Compensation Committee
determines the Company's policies with respect to the nature and amount of all
compensation of the Company's executive officers and administers the Company's
employee option plans. The Finance Committee is composed of Messrs. Buntrock,
Pedersen and Wallace. The Finance Committee is responsible for overseeing the
Company's borrowing and capital raising activities.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
compensation paid by the Company during the year ended December 28, 1997 to the
Company's Chief Executive Officer and its four other executive officers with
annual compensation of $100,000 or more (collectively, the "Named Executive
Officers"). The Company did not grant stock appreciation rights or stock options
to any Named Executive Officer during the year ended December 28, 1997.
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------
------------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL STOCK ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) (#) ($)
- --------------------------- ------ ------ ------ ------------ ---------- ------------
Patrick A. Clifton.............. 1997 200,000 44,167 36,900 -- --
Chief Executive Officer
and Chairman(3)
Peter L. Ax..................... 1997 150,000 450,000(4) --(5) 8,038(6)(7) --
Chief Financial Officer
and Vice Chairman(8)
Bruce D. Mosby.................. 1997 200,000 -- 33,300 4,038(7) --
Chief Operating Officer(9)
Christopher A. Lombardi......... 1997 110,640 25,000 32,300 2,038(7) --
Chief Development Officer
Patrick H. Boyer................ 1997 86,650 25,000 40,700 2,038(7) --
Chief Information Officer
- ---------------
(1) As of year end 1997, the Company accrued $338,754 for bonuses for all
employees for fiscal 1997. In May 1998, the Compensation Committee agreed to
pay cash bonuses to the senior executive officers as follows: Mr. Ax,
$50,000; Mr. Lombardi, $25,000; and Mr. Boyer, $25,000 (of which $22,800 was
guaranteed). Mr. Clifton's bonus was not part of the accrual.
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(2) The amounts presented for each of the Named Executive Officers are comprised
primarily of relocation compensation related to the Company's move to
Arizona and automobile allowances.
(3) Mr. Clifton was Chief Executive Officer of the Company until his resignation
on January 21, 1998; he was Chairman of the Board of Directors until his
resignation on February 27, 1998. Mr. Clifton resigned to pursue other
interests. Pursuant to a severance agreement dated February 27, 1998, the
Company has agreed to pay Mr. Clifton $200,000 in annual compensation, plus
continue disability benefits for him and medical benefits for him and his
immediate family through February 2001. Concurrently with the execution of
the severance agreement, the Company agreed to forgive a loan to Mr. Clifton
in the amount of $50,000, plus accrued interest thereon, Mr. Clifton
relinquished certain stock option and first refusal rights he had held and
the Company redeemed approximately 75% of Mr. Clifton's holdings of Common
Stock (18,019 shares) in exchange for an extra year of compensation beyond
the term to which he was entitled pursuant to his employment agreement.
(4) In April 1997, the Company paid Mr. Ax $400,000 for services rendered prior
to joining the Company in connection with the private offer and sale of the
Company's Series B Stock. Mr. Ax was engaged by the Company in lieu of
engaging an investment bank as placement agent.
(5) Mr. Ax received perquisites and other personal benefits in addition to
salary, cash bonuses and other annual compensation. The amounts of such
perquisites and other personal benefits are not shown because the aggregate
amount of such compensation, if any, for Mr. Ax during the 1997 fiscal year
did not exceed the lesser of $50,000 or 10% of total salary and bonus
reported for such executive officer.
(6) As a founder of the Company, Mr. Ax was granted an option to purchase 8,000
shares of Common Stock at $125.00 per share. These options vest over time
upon attaining certain performance goals, provided, however, that if such
goals are not attained by December 15, 2001 such options shall be fully
vested. Mr. Clifton waived his rights to similar options in his severance
agreement dated February 27, 1998.
(7) Each of Messrs. Ax, Mosby, Lombardi and Boyer were granted fully vested
options to purchase 38 shares of Common Stock in connection with their
respective agreements to relocate to Arizona.
(8) Effective January 21, 1998, Mr. Ax became Chief Executive Officer of the
Company. Effective March 4, 1998, Mr. Ax became Chairman of the Company.
(9) Effective July 7, 1998, Mr. Mosby was terminated by the Company. Mr. Mosby
and the Company are in discussions regarding severance payments.
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OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
value of the stock options held by the Named Executive Officers at December 28,
1997. No Named Executive Officer exercised any stock options or stock
appreciation rights during the year ended December 28, 1997 or had any stock
appreciation rights outstanding at December 28, 1997.
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 28, AT DECEMBER 28,
1997(#)(1) 1997($)(2)
-------------------- --------------------
VESTED UNVESTED VESTED UNVESTED
------ -------- ------ --------
Patrick A. Clifton.......................... -- -- -- --
Peter L. Ax................................. 38 8,000(3) -- 600,000
Bruce D. Mosby.............................. 838 3,200(4) 60,000 --
Christopher A. Lombardi..................... 438 1,600 30,000 120,000
Patrick H. Boyer............................ 438 1,600 30,000 120,000
- ---------------
(1) All of the options granted to the Named Executive Officers were granted
under the 1995 Option Plan (as defined). The options granted were for shares
of the Company's Common Stock. Unless otherwise noted, the options granted
to the Named Executive Officers vest 20% on each anniversary of the grant.
(2) With the exception of the vested options for 38 shares of Common Stock
granted to Messrs. Ax, Mosby, Lombardi and Boyer with an exercise price of
$200.00 per share, each of the options granted to the Named Executive
Officers is exercisable at a price of $125.00 per share of Common Stock.
(3) Mr. Ax's options vest upon attainment of certain performance goals,
provided, however that if such goals are not attained by December 15, 2001,
such options shall be fully vested.
(4) As of October 5, 1998, Mr. Mosby's rights to his vested options had expired.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs. Ax
and Lombardi. Mr. Ax's agreement, effective as of December 1, 1996 has a term of
four years with automatic one year extensions thereafter, subject to the
provision of at least six months written notice by either party. The agreement
includes a one year post-termination non-competition clause. If Mr. Ax is
terminated by the Company for any other reason except for "cause" as defined in
the agreement, Mr. Ax is entitled to salary and benefits for the remainder of
the term of the agreement, including any bonuses accrued but unpaid as of the
date of termination. In the event of a merger, consolidation or sale of all or
substantially all of the Company's assets, or a reorganization or
recapitalization pursuant to which at least a majority of the equity investment
and voting control is the same as the Company's, the Company may assign its
obligations under the agreement to the surviving or purchasing entity. The terms
of the employment agreement between the Company and Mr. Lombardi is
substantially the same as with Mr. Ax except that upon termination other than
for "cause" Mr. Lombardi is entitled to salary and benefits for only one year.
1995 AMENDED AND RESTATED STOCK OPTION PLAN
The Company adopted a stock option plan in 1995, which was amended and
restated in 1997 (the "1995 Option Plan") to attract, retain and motivate
selected employees and officers of the Company. The 1995 Option Plan was
approved by the stockholders of the Company in June 1997. Pursuant to the 1995
Option Plan, options to purchase up to 69,270 shares of the Company's Common
Stock may be granted to employees or consultants to the Company. The 1995 Option
Plan is administered by the Compensation Committee which determines the persons
who are to receive options and the number of shares subject to each option. As
of
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September 6, 1998, options covering an aggregate of 38,025 shares of Common
Stock were outstanding, of which 7,903 were vested and none had been exercised.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In 1997, the Company adopted a non-employee director stock option plan (the
"Director Option Plan") to attract and compensate non-employee directors of the
Company. The Director Option Plan was approved by the stockholders of the
Company in June 1997. The Company has reserved 2,000 shares of Common Stock for
issuance under the Director Option Plan effective upon the consummation of the
Private Placement. Pursuant to the plan, all non-employee directors as of the
effective date of the Director Option Plan (July 1, 1997) and as of the first
board meeting after the annual stockholders meeting of each year beginning in
1998 are entitled to a grant of options to purchase 20 shares of Common Stock at
a price per share equal to the fair market value per share of the Common Stock
as of the grant date. The initial grants under the plan vested immediately;
subsequent grants vest over three years on each anniversary of the grant dates.
As of September 6, 1998, options to purchase 220 shares have been granted under
the Director Option Plan, of which 100 are vested and the other 120 vest over
three years, one third on each anniversary of the grant date of July 1, 1998.
See "-- Director Compensation."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the capital stock of the Company as of October 27, 1998 by (i) each
person known by the Company to own beneficially more than 5% of the Company's
capital stock; (ii) each director of the Company; (iii) each Named Executive
Officer; and (iv) all executive officers and directors as a group.
NUMBER OF SHARES
OF CAPITAL STOCK
BENEFICIALLY PERCENT OF
NAME OWNED(1) VOTING RIGHTS
- ---- ---------------- -------------
DIRECTORS AND EXECUTIVE OFFICERS:
Dean Buntrock(2)....................................... 25,675 8.26%
Peer Pedersen(3)....................................... 24,551 7.90
Peter L. Ax(4)(13)..................................... 8,655 2.79
Patrick A. Clifton(5).................................. 7,426 2.39
John Wallace(6)........................................ 2,900 *
Patrick H. Boyer(7)(13)................................ 2,038 *
Christopher A. Lombardi(8)(13)......................... 2,038 *
Bruce D. Mosby(9)...................................... 800 *
James E. Hutton(10).................................... 1,073 *
John H. Muehlstein(11)................................. 804 *
Alfredo Brener(12)..................................... 20 *
------- -----
Total for Directors and Executive
Officers(14)............................... 77,700 25.02%
======= =====
OTHER BENEFICIAL OWNERS:
Howard C. Warren(15)................................... 23,681 7.62
William Farley(16)..................................... 21,420 6.89
------- -----
Total for All Beneficial Owners (16
persons)................................... 122,801 39.54%
======= =====
- ---------------
* Less than 1%.
(1) Includes shares of Common Stock, Series A Stock, Series B Stock, Series C
Stock, vested options to purchase Common Stock and options to purchase
Common Stock which will vest within 60 days.
(2) Includes 4,319 shares of Series C Stock and 432 shares of Common Stock held
by Mr. Buntrock, 386 shares of Series A Stock and 2,421 shares of Series B
Stock held by Mr. Buntrock's wife, and 772 shares of Series A Stock, 4,842
shares of Series B Stock, 11,366 shares of Series C Stock and 1,137 shares
of Common Stock held by The Butterfield Group L.L.C., of which Mr.
Buntrock's wife is the manager. The business address of Mr. Buntrock is
Oakbrook Terrace Tower, One Tower Lane, Suite 2242, Oakbrook Terrace,
Illinois 60181.
(3) Includes 4,352 shares of Series A Stock, 9,684 shares of Series B Stock,
9,559 shares of Series C Stock and 956 shares of Common Stock. The business
address of Mr. Pedersen is 161 North Clark Street, Suite 3100, Chicago,
Illinois 60601.
(4) Includes 450 shares of Series C Stock, 8,167 shares of Common Stock and
vested options to purchase 38 shares of Common Stock held by Mr. Ax.
(5) Includes 6,026 shares of Common Stock owned by Mr. Clifton and 1,400 shares
of Series A Stock owned jointly by Mr. Clifton and his wife. Mr. Clifton's
business address is c/o Ms. Karen McConnell, Fennemore Craig, P.C., 3003
North Central Avenue, Suite 2600, Phoenix, Arizona 85012.
(6) Includes 2,880 shares of Series A Stock and vested options to purchase 20
shares of Common Stock held by Mr. Wallace. The business address of Mr.
Wallace is 3624 Ella Lee Lane, Houston, Texas 77027.
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(7) Includes 1,200 shares of Common Stock and vested options to purchase 838
shares of Common Stock held by Mr. Boyer.
(8) Includes 1,200 shares of Common Stock and vested options to purchase 838
shares of Common Stock held by Mr. Lombardi.
(9) Includes 800 shares of Common Stock held by Mr. Mosby. Mr. Mosby is no
longer employed by the Company. His business address is 1011 East Port Au
Prince Lane, Phoenix, Arizona 85022.
(10) Includes 800 shares of Series A Stock, 230 shares of Series C Stock, 23
shares of Common Stock and vested options to purchase 20 shares of Common
Stock held by Mr. Hutton. The business address of Mr. Hutton is 1311
Merrilville Road, Crown Point, Indiana 46307.
(11) Includes 484 shares of Series B Stock, 273 shares of Series C Stock and 27
shares of Common Stock held jointly by Mr. Muehlstein and his wife. Mr.
Muehlstein also has vested options to purchase 20 shares of Common Stock.
Mr. Muehlstein's business address is 161 North Clark Street, Suite 3100,
Chicago, Illinois 60601.
(12) Includes vested options to purchase 20 shares of Common Stock held by Mr.
Brener. The business address of Mr. Brener is 5298 Memorial Drive, Houston,
Texas 77007.
(13) The address of each such person is 15990 N. Greenway/Hayden Loop, Suite
400, Scottsdale, Arizona 85260.
(14) Includes vested options to purchase 1,720 shares owned by other executive
officers of the Company not listed above.
(15) Includes 4,351 shares of Series A Stock, 9,684 shares of Series B Stock,
8,769 shares of Series C Stock and 877 shares of Common Stock. Mr. Warren's
business address is c/o Absolute Ventures, 420 Green Bay Road, Suite 103,
Kenilworth, Illinois 60043.
(16) Includes 579 shares of Series A Stock, 3,632 shares of Series B Stock,
1,136 shares of Series C Stock and 114 shares of Common Stock held by the
Fruit of the Loom, Inc. Senior Executive Officer Deferred Compensation
Trust of which Mr. Farley is the sole member of the Pension Investment
Committee of the Board of Directors of Fruit of the Loom, Inc., which
maintains sole voting power and investment power over these shares; 386
shares of Series A Stock and 2,421 shares of Series B Stock held by
Retirement Program of Farley Inc. of which Mr. Farley is the sole member of
the Pension Investment Committee; 579 shares of Series A Stock and 3,632
shares of Series B Stock held by Farley Inc. of which Mr. Farley is the
sole owner; 3,410 shares of Series C Stock and 341 shares of Common Stock
held by FTL Investments Inc. of which Mr. Farley is the Chairman and Chief
Executive Officer; 2,273 shares of Series C Stock and 227 shares of Common
Stock held by the Fruit of the Loom Pension Trust of which Mr. Farley is
the sole member of each Pension Investment Committee that has sole voting
power and investment power over these shares; and 370 shares of Series A
Stock and 2,320 shares of Series B Stock held by the Acme Boot Company,
Inc. Pension Plan of which Mr. Farley is the sole member of the Investment
Committee. Mr. Farley's business address is 233 South Wacker Drive,
Chicago, Illinois 60606.
CERTAIN TRANSACTIONS
In March 1997, Mr. Pedersen, a director of the Company, executed a personal
guarantee on behalf of the Company in favor of Associated Bank in connection
with an $8.0 million loan by Associated Bank to the Company. The loan was repaid
in April 1997 and Mr. Pedersen's guarantee was released. Mr. Pedersen did not
receive any consideration for executing the guarantee.
In April 1997, the Company paid Mr. Ax, Chairman and Chief Executive
Officer of the Company, a fee in the amount of $400,000 for services rendered
prior to joining the Company in connection with the private offer and sale of
the Company's Series B Stock. Mr. Ax was engaged by the Company in lieu of
engaging an investment bank as placement agent.
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In April 1997, Messrs. Buntrock and Pedersen, directors of the Company,
either directly or through their affiliates, purchased $1,880,853 and
$1,929,080, respectively, of Series B Stock from the Company. Messrs. Buntrock
and Pedersen purchased these shares on the same terms and conditions as all
other purchasers of Series B Stock.
In April 1998, Messrs. Buntrock and Pedersen, either directly or through
their affiliates, purchased $1,950,300 and $2,000,020, respectively, of Series C
Units, comprised of Series C Stock and shares of Common Stock.
Messrs. Muehlstein and Pedersen are partners and members of the management
committee of the law firm of Pedersen & Houpt, P.C., which has served as counsel
to the Company since March 1997. In that connection, the firm has been paid fees
for services rendered.
DESCRIPTION OF THE HELLER FACILITY
GENERAL
Concurrently with the closing of the Private Placement, the Company entered
into the Heller Facility with Heller Financial, Inc. ("Heller") as agent. The
Heller Facility consists of a revolving credit facility in an aggregate
principal amount of $40.0 million that will mature on April 28, 2002.
Indebtedness under the Heller Facility is secured by a first priority
security interest upon (i) all of the Company's now owned and hereafter acquired
inventory, equipment, accounts receivable, real and personal property and all
proceeds thereof and (ii) all general intangibles and other intangible assets
(including, without limitation, trademarks and trade names) of the Company, if
any, and proceeds thereof.
REVOLVING CREDIT FACILITY
The Heller Facility consists of a revolving credit facility in an aggregate
principal amount of $40.0 million. As of August 1998, the Heller Facility was
syndicated such that Heller is obligated to provide up to $25.0 million and
FINOVA Capital Corporation ("FINOVA") is obligated to provide up to $15.0
million of the $40.0 million Heller Facility. The Company will be entitled to
draw amounts under the Heller Facility, subject to availability pursuant to a
borrowing base formula based upon income from store operations and net book
value of laundry equipment, in order to fund ongoing working capital, capital
expenditures and general corporate purposes. As of September 6, 1998,
approximately $14.3 million of the Heller Facility was available for the Company
to draw. Until March 22, 1999, the maximum amount available under the Heller
Facility is $32.5 million, which limitation shall be lifted on or after that
date if certain conditions are met.
INTEREST RATES
Obligations under the Heller Facility shall bear interest with reference to
either the "Base Rate" or the "LIBOR Rate," as determined by the Company at the
time each such obligation is incurred. "Base Rate Loans" shall bear interest at
the rate of 0.50% plus the greater of (a) the "Bank Prime Loan" rate published
by the Board of Governors of the Federal Reserve System or (b) 0.50% plus the
Federal Funds Effective Rate. "LIBOR Rate Loans" shall bear interest at the rate
of 2.75% plus the rate determined by dividing (a) the rate at which U.S. dollar
deposits for the relevant interest period are being offered based upon
information presented on the Reuters Screen LIBOR Page as of 11:00 A.M. (London
time) on the day which is two business days prior to the first day of such
interest period by (b) 1.0 minus the aggregate (without duplication) of the
rates (expressed as a decimal) of reserve requirements on the day which is two
business days prior to the beginning of such interest period for Eurocurrency
funding required to be maintained by a member bank of the Federal Reserve
System, rounded to the nearest 1/16 of 1%.
COVENANTS
The Heller Facility contains certain covenants and other requirements of
the Company. In general, the affirmative covenants provide for mandatory
reporting by the Company of financial and other information to the agent and
notice by the Company to the agent upon the occurrence of certain events.
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The Heller Facility also contains certain negative covenants and
restrictions on actions by the Company including, without limitation,
restrictions on indebtedness, liens, guarantee obligations, mergers, asset
dispositions, certain payments, transactions with affiliates, entering other
lines of business and amendments of the terms of other indebtedness. The Heller
Facility requires the Company to meet certain financial covenants including a
fixed charge coverage ratio subject to availability dropping below a certain
threshold and covenants requiring maintenance of a minimum Mature Store average
EBITDA and minimum unused availability. The Company was in compliance with all
but one of these covenants at September 6, 1998. The Company has, however,
obtained the waiver of the lenders with respect to this breach and thus it will
not restrict the Company's ability to borrow under the Heller Facility.
EVENTS OF DEFAULT
The Heller Facility specifies certain customary events of default
including, without limitation, non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default to certain other indebtedness and agreements,
bankruptcy and insolvency events, material judgments and liabilities and
unenforceability of certain documents under the Heller Facility. In addition, a
"change of control" of the Company, which is defined in the Heller Facility by
referring to the definition of that term in the Indenture, constitutes an event
of default under the Heller Facility. The events of default under the Heller
Facility are substantially similar to the events of default under the Indenture
with certain exceptions.
In July 1998 the Company and Heller Financial executed an amendment to the
Heller Facility pursuant to which the Company agreed to changes in the borrowing
base formula and the minimum Mature Store average EBITDA financial covenant
thresholds. These thresholds were adjusted to reflect the treatment of certain
personnel and advertising expenses as selling, general and administrative
exemptions rather than as cost of revenues -- store operating expenses,
excluding depreciation and amortization. Changes were also made to certain of
the Company's reporting requirements pursuant to the Heller Facility and a
limitation on advertising expenses, to a maximum of 4% of annual revenues, was
added. The description of the Heller Facility set forth above is qualified in
its entirety by the complete text of the documents entered into in connection
therewith.
DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes have been, and the New Notes will be issued under an
Indenture, dated as of April 29, 1998 (the "Indenture"), between the Company and
Norwest Bank Minnesota, N.A., as Trustee (the "Trustee"). The form and terms of
the Old Notes are substantially identical to the form and terms of the New Notes
described herein, except that the offer of the New Notes will have been
registered under the Securities Act and, therefore, the New Notes will not bear
legends restricting the transfer thereof.
The following is a summary of the material provisions of the Indenture and
the Notes, including the New Notes, a copy of which Indenture and the form of
New Notes has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary of the material provisions of
the Indenture and the New Notes does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
Indenture, and those terms made a part thereof by reference to the Trust
Indenture Act, and the New Notes, including the definitions of certain terms
therein.
The New Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 principal amount at maturity and any
integral multiple of $1,000. See "Book Entry, Delivery and Form." No service
charge shall be made for any registration of transfer or exchange of New Notes,
but the Company may require payment of a sum sufficient to cover any transfer
tax or other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior obligations of the Company, limited to
$144,990,000 aggregate principal amount at maturity, and will mature on May 1,
2005. Except as described below, no cash interest will accrue
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on the Notes prior to May 1, 2001, although for U.S. federal income tax purposes
a significant amount of original issue discount, taxable as ordinary income,
will be recognized by a Holder as such discount accrues from the Issue Date
through May 1, 2005. Cash interest will accrue on the Notes at 12 3/4% per annum
from May 1, 2001 or from the most recent date to which interest has been paid or
provided for, payable semi-annually to Holders of record at the close of
business on the April 15 or October 15 immediately preceding the interest
payment date on May 1 and November 1 of each year, commencing November 1, 2001.
Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months. The Company will pay interest on overdue principal at 1% per
annum in excess of such rate, and it will pay interest on overdue installments
of cash interest at such higher rate to the extent lawful. If, after this
Registration Statement is declared effective, such Registration Statement ceases
to be effective or usable in certain circumstances, cash interest may accrue on
the Notes.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to May 1, 2002. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount at
maturity), plus accrued interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on May 1 of the years set forth below:
REDEMPTION
PERIOD PRICE
- ------ ----------
2002.............................................. 106.375%
2003.............................................. 103.188
2004 and thereafter............................... 100.000
In addition, at any time and from time to time prior to May 1, 2001, the
Company may redeem in the aggregate up to 35% of the Accreted Value of the Notes
with the proceeds of one or more Public Equity Offerings following which there
is a Public Market, at a redemption price of 112.750% of the Accreted Value to
the date of redemption; provided, however, that at least $94.2 million of the
aggregate principal amount at maturity of the Notes must remain outstanding
after each such redemption.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in principal amount at maturity or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will be senior unsecured
obligations of the Company ranking pari passu in right of payment with all other
senior unsecured Indebtedness of the Company (including the Old Notes, if any)
and senior to all Subordinated Obligations. The Notes will be subordinated to
all Secured Indebtedness of the Company, if any, to the extent of the value of
the assets securing such Indebtedness and to all Indebtedness and other
obligations (including trade payables) of the Company's future Subsidiaries, if
any. The Company does not presently intend to operate through Subsidiaries and
the ability of such Subsidiaries to incur any indebtedness is restricted by the
Indenture.
As of September 6, 1998, the Company's unsecured Indebtedness was
approximately $99.0 million. Although the Indenture contains limitations on the
amount of additional Indebtedness that the Company may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Secured Indebtedness or Indebtedness of the
Company's future Subsidiaries, if
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any. See "-- Certain Covenants -- Limitation on Indebtedness" and "-- Limitation
on Indebtedness and Preferred Stock of Restricted Subsidiaries."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant record date
to receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the then outstanding Voting Stock of the Company;
provided, however, that for purposes of this clause (i), the Permitted
Holders shall be deemed to beneficially own any Voting Stock of a
corporation (the "specified corporation") held by any other corporation
(the "parent corporation") so long as one or more of the Permitted Holders
beneficially own (as so defined), directly or indirectly, in the aggregate
a majority of the voting power of the Voting Stock of the parent
corporation;
(ii) during any period of two consecutive years after the Company's
initial Public Equity Offering, individuals who at the beginning of such
period constituted the Board of Directors (together with any new directors
whose election by such Board of Directors or whose nomination for election
by the stockholders of the Company was approved by a vote of 66 2/3% of the
directors of the Company then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (in each case other than a Person that is controlled by the
Permitted Holders), and, in the case of any such merger or consolidation,
the securities of the Company that are outstanding immediately prior to
such transaction and which represent 100% of the aggregate voting power of
the Voting Stock of the Company are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities
are changed into or exchanged for, in addition to any other consideration,
securities of the surviving corporation or a parent corporation that owns
all of the capital stock of such corporation that represent immediately
after such transaction, at least a majority of the aggregate voting power
of the Voting Stock of the surviving corporation or such parent
corporation, as the case may be.
Within 30 days following any Change of Control, unless notice of redemption
of the Notes has been given pursuant to the provisions of the Indenture
described under "-- Optional Redemption" above, the Company shall mail a notice
to the Trustee and to each Holder stating: (1) that a Change of Control has
occurred and that such Holder has the right to require the Company to purchase
such Holder's Notes at a purchase price in cash equal to 101% of the Accreted
Value thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest on the relevant interest payment date); (2) the circumstances
and relevant facts regarding such Change of Control; (3) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (4) the instructions determined by the Company,
consistent with the covenant described hereunder, that a Holder must follow in
order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
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regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of Indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation on Indebtedness"
and "-- Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries." Such restrictions can only be waived with the consent of the
Holders of a majority in principal amount at maturity of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
Holders protection in the event of a highly leveraged transaction.
If a Change of Control offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be delivered by Holders seeking to accept the Change of
Control offer. The failure of the Company to make or consummate the Change of
Control offer or pay the purchase price when due will give the Trustee and the
Holders the rights described under "-- Defaults."
The existence of a Holder's right to require the Company to offer to
repurchase such Holder's Notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Heller Credit Agreement imposes, and future indebtedness of the Company
may impose, prohibitions on the occurrence of certain events that would
constitute a Change of Control or require such indebtedness to be repaid or
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Notes could cause a default
under such indebtedness, even if the Change of Control itself does not, due to
the financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the Holders following the occurrence of a Change of
Control may be limited by the Company's then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases. The provisions under the Indenture relating to
the Company's obligation to make an offer to repurchase the Notes as a result of
a Change of Control may be waived or modified with the written consent of the
Holders of a majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not incur, directly
or indirectly, any Indebtedness unless, on the date of such incurrence and
after giving effect thereto, the Consolidated Coverage Ratio exceeds 2.0 to
1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company may Incur
any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to the Heller Credit Agreement
or any other credit or loan agreement in an aggregate principal amount
which, when taken together with all letters of credit and the principal
amount of all other Indebtedness Incurred pursuant to this clause (1)
and then outstanding, does not exceed $40.0 million;
(2) Indebtedness owed to and held by a Wholly Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebted-
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ness (other than to another Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the
Company;
(3) the Notes;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3) or (4) or this
clause (5) or pursuant to the covenant described under "-- Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries" below;
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the Company
pursuant to the Indenture;
(7) Indebtedness of the Company consisting of obligations in
respect of purchase price adjustments in connection with the acquisition
or disposition of assets by the Company or any Restricted Subsidiary
permitted under the Indenture;
(8) Capital Lease Obligations and Attributable Debt of the Company
with respect to Sale/ Leaseback Transactions in an aggregate principal
amount not exceeding $10.0 million at any one time outstanding; and
(9) Indebtedness in an aggregate principal amount which, together
with all other Indebtedness of the Company outstanding on the date of
such Incurrence (other than Indebtedness permitted by clauses (1)
through (8) above or paragraph (a)), does not exceed $20.0 million at
any one time outstanding.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds
thereof are used, directly or indirectly, to Refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to the Notes to
at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the covenant entitled
"-- Limitation on Indebtedness," (i) in the event that an item of
Indebtedness meets the criteria of more than one of the types of
Indebtedness described above, the Company, in its sole discretion, will
classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii)
an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries. The Company shall not permit any Restricted Subsidiary to
Incur, directly or indirectly, any Indebtedness or Preferred Stock except:
(a) Indebtedness or Preferred Stock issued to and held by the
Company or a Wholly Owned Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock which results in
any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary
or any subsequent transfer of such Indebtedness or Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the issuance of such Indebtedness or
Preferred Stock by the issuer thereof;
(b) Indebtedness or Preferred Stock of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than
Indebtedness or Preferred Stock Incurred in connection with, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company); provided, however, that on the date of
such acquisition and after giving effect thereto, the Company would have
been able to Incur at least $1.00 of additional Indebtedness pursuant to
clause (a) of the covenant described under "-- Limitation on
Indebtedness";
(c) Indebtedness or Preferred Stock outstanding on the Issue Date
(other than Indebtedness or Preferred Stock described in clauses (a) or
(b) of this paragraph);
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(d) Indebtedness of any Restricted Subsidiary consisting of
obligations in respect of purchase price adjustments in connection with
the acquisition or disposition of assets by the Company or any
Restricted Subsidiary permitted under the Indenture;
(e) Preferred Stock which is not Disqualified Stock; provided,
however, that such Restricted Subsidiary shall not pay cash dividends on
such Preferred Stock; and
(f) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in clauses (b) or (c) of this paragraph or
this clause (f); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Restricted Subsidiary described in clause (b), such
Refinancing Indebtedness shall be Incurred only by such Restricted
Subsidiary.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist
any Lien upon any of its property or assets, now owned or hereafter
acquired, securing any obligation unless concurrently with the creation of
such Lien effective provision is made to secure the Notes equally and
ratably with such obligation for so long as such obligation is so secured;
provided, that, if such obligation is a Subordinated Obligation, the Lien
securing such obligation shall be subordinated and junior to the Lien
securing the Notes with the same or lesser relative priority as such
Subordinated Obligation shall have been with respect to the Notes. The
preceding restriction shall not require the Company or any Restricted
Subsidiary to secure the New Notes if the Lien consists of the following:
(a) Liens created by the Indenture, Liens under the Heller Credit
Agreement and Liens existing as of the Issue Date;
(b) Permitted Liens;
(c) Liens to secure Indebtedness issued by the Company for the
purpose of financing all or a part of the purchase price of assets or
property acquired or constructed in the ordinary course of business
after the Issue Date; provided, however, that (a) the aggregate
principal amount (or accreted value in the case of Indebtedness issued
at a discount) of Indebtedness so issued shall not exceed the lesser of
the cost or fair market value, as determined in good faith by the Board
of Directors, of the assets or property so acquired or constructed, (b)
the Indebtedness secured by such Liens shall have been permitted to be
Incurred under the "-- Limitation on Indebtedness" covenant and (c) such
Liens shall not encumber any other assets or property of the Company or
any of its Restricted Subsidiaries other than such assets or property or
any improvement on such assets or property and shall attach to such
assets or property within 90 days of the construction or acquisition of
such assets or property;
(d) Liens on the assets or property of a Restricted Subsidiary
existing at the time such Restricted Subsidiary becomes a Restricted
Subsidiary and not issued as a result of (or in connection with or in
anticipation of) such Restricted Subsidiary becoming a Restricted
Subsidiary; provided, however, that such Liens do not extend to or cover
any other property or assets of the Company or any of its other
Restricted Subsidiaries;
(e) Liens securing Capital Lease Obligations Incurred in accordance
with the "-- Limitation on Indebtedness" covenant;
(f) Liens with respect to Sale/Leaseback Transactions permitted by
clause (b)(8) of the "-- Limitation on Indebtedness" covenant;
(g) Liens securing Indebtedness issued to Refinance Indebtedness
which has been secured by a Lien permitted under the Indenture and is
permitted to be Refinanced under the Indenture; provided, however, that
such Liens do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the
Indebtedness so Refinanced; or
(h) Liens on assets of the Company or any of its Restricted
Subsidiaries securing Indebtedness in an aggregate principal amount not
to exceed $10.0 million.
Limitation on Sale/Leaseback Transactions. The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any
Sale/Leaseback Transaction with respect to any property unless
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(i) the Company or such Restricted Subsidiary would be (A) in compliance
with the covenants described under "-- Limitation on Indebtedness" or
"Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries"
immediately after giving effect to such Sale/Leaseback Transaction and (B)
entitled to create a Lien on such property securing the Attributable Debt
with respect to such Sale/ Leaseback Transaction without securing the New
Notes pursuant to the covenant described under "-- Limitation on Liens,"
(ii) the net proceeds received by the Company or any Restricted Subsidiary
in connection with such Sale/Leaseback Transaction are at least equal to
the fair market value (as determined by the Board of Directors) of such
property and (iii) the Company or such Restricted Subsidiary applies the
proceeds of such transaction in compliance with the covenant described
under "-- Limitation on Sales of Assets and Subsidiary Stock."
Limitation on Restricted Payments. (a) The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, make
a Restricted Payment if at the time the Company or such Restricted
Subsidiary makes, and after giving effect to, the proposed Restricted
Payment: (i) a Default shall have occurred and be continuing (or would
result therefrom); (ii) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described
under "-- Limitation on Indebtedness"; or (iii) the aggregate amount of
such Restricted Payment and all other Restricted Payments since the Issue
Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the Notes
were originally issued to the end of the most recently ended fiscal
quarter for which financial statements are available at the time of such
Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from
capital contributions or the issuance or sale of its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other than
an issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of
its employees);
(C) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than
by a Subsidiary of the Company) subsequent to the Issue Date, of any
Indebtedness of the Company for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash, or the fair value of
any other property, distributed by the Company upon such conversion or
exchange), whether pursuant to the terms of such Indebtedness or
pursuant to an agreement with a creditor to engage in an equity for debt
exchange; and
(D) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets, in each
case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however,
that the foregoing sum shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made (and treated as a
Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary subsequent to the Issue Date.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Capital Stock of the Company
(other than (A) Disqualified Stock or (B) Capital Stock issued or sold
to a Subsidiary of the Company or other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of its employees) or out of
the proceeds of a substantially concurrent capital contribution to the
Company; provided, however, that (x) such purchase, capital contribution
or redemption shall be excluded in the
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calculation of the amount of Restricted Payments and (y) the Net Cash
Proceeds from such sale of Capital Stock or capital contribution shall
be excluded from clause (iii)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations in whole
or in part (including premium, if any, and accrued and unpaid interest)
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of the Company which is permitted to be
Incurred pursuant to the covenant described under "-- Limitation on
Indebtedness"; provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted
Payments; and
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions
on its Capital Stock to the Company or a Restricted Subsidiary, (b) pay any
Indebtedness owed to the Company, (c) make any loans or advances to the
Company or (d) transfer any of its property or assets to the Company,
except:
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on which
such Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by
the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this covenant or this
clause (iii) or contained in any amendment to an agreement referred to
in clause (i) or (ii) of this covenant or this clause (iii); provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
such agreements;
(iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases to the extent such provisions
restrict the transfer of the lease or sublease or the property leased or
subleased thereunder or in purchase money financings;
(v) in the case of clause (d) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;
(vi) encumbrances or restrictions imposed by operation of
applicable law; and
(vii) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Disposition unless (i) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset
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Disposition at least equal to the fair market value (including the value of
all non-cash consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset Disposition, and
at least 75% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (ii)
an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be) (A) first, to the extent the Company elects in its sole
discretion (or is required by the terms of any Indebtedness), to prepay,
repay, redeem or purchase (and permanently reduce the commitments under)
Indebtedness under the Heller Credit Agreement or that is otherwise secured
by its assets subject to such Asset Disposition within one year from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash (the "Receipt Date"); (B) second, to the extent of the
balance of such Net Available Cash after application in accordance with
clause (A), to the extent the Company elects in its sole discretion, to
acquire Additional Assets; provided, however, that the Company shall be
required to commit such Net Available Cash to the acquisition of Additional
Assets within one year from the later of the date of such Asset Disposition
or the Receipt Date and shall be required to consummate the acquisition of
such Additional Assets within 18 months from the Receipt Date; (C) third,
to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A) and (B), to make an offer pursuant to
paragraph (b) below to the Holders to purchase Notes pursuant to and
subject to the conditions contained in the Indenture; and (D) fourth, to
the extent of the balance of such Net Available Cash after application in
accordance with clauses (A), (B) and (C) to any other application or use
not prohibited by the Indenture. Notwithstanding the foregoing provisions
of this paragraph, the Company and the Restricted Subsidiaries shall not be
required to apply the Net Available Cash in accordance with this paragraph
except to the extent that the aggregate Net Available Cash from all Asset
Dispositions which is not applied in accordance with this paragraph exceeds
$5.0 million (at which time, the entire unutilized Net Available Cash, and
not just the amount in excess of $5.0 million, shall be applied pursuant to
this paragraph). Pending application of Net Available Cash pursuant to this
covenant, such Net Available Cash shall be invested in Permitted
Investments.
For the purposes of this covenant, the following are deemed to be cash
or cash equivalents: (x) the express assumption of Indebtedness of the
Company or any Restricted Subsidiary and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company
or such Restricted Subsidiary into cash within 90 days of closing the
transaction and (z) Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of
the Notes pursuant to clause (a)(ii)(C) above, the Company will be required
to purchase Notes tendered pursuant to an offer by the Company for the
Notes at a purchase price of 100% of their Accreted Value plus accrued but
unpaid interest in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of Notes tendered pursuant to such offer is less than the
Net Available Cash allotted to the purchase thereof, the Company will be
required to apply the remaining Net Available Cash in accordance with
clause (a)(ii)(D) above. The Company shall not be required to make such an
offer to purchase Notes pursuant to this covenant if the Net Available Cash
available therefor is less than $5.0 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is
required with respect to any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this clause by virtue
thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any transaction
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company (an "Affiliate
Transaction") unless the terms thereof (1) are no less favorable to the
Company or such Restricted
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Subsidiary than those that could be obtained at the time of such
transaction in a comparable transaction in arm's length dealings with a
Person who is not such an Affiliate, (2) if such Affiliate Transaction
involves an amount in excess of $1.0 million, (i) are set forth in writing
and (ii) have been approved by a majority of the members of the Board of
Directors having no material personal financial stake in such Affiliate
Transaction and (3) if such Affiliate Transaction involves an amount in
excess of $5.0 million, have been determined by a nationally recognized
investment banking firm or other qualified appraiser under the relevant
circumstances to be fair, from a financial standpoint, to the Company or
its Restricted Subsidiary, as the case may be.
(b) The provisions of the foregoing paragraph (a) shall not prohibit
(i) any Permitted Investment or Restricted Payment permitted to be made
pursuant to the covenant described under "-- Limitation on Restricted
Payments," or any payment or transaction specifically excepted from the
definition of Restricted Payment, (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or
the funding of, employment arrangements, stock options and stock ownership
plans or any other similar arrangement heretofore or hereafter entered into
in the ordinary course of business or consistent with past practice, (iii)
the grant of stock options or similar rights to employees and directors
pursuant to plans approved by the Board of Directors or the board of
directors of the relevant Restricted Subsidiary, (iv) loans or advances to
officers, directors or employees in the ordinary course of business, (v)
the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries, (vi) any Affiliate Transaction between the Company
and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries, (vii)
the purchase of or the payment of Indebtedness of or monies owed by the
Company or any of its Restricted Subsidiaries for goods or materials
purchased, or services received, in the ordinary course of business or
(viii) any transaction pursuant to an agreement or arrangement in effect on
the Issue Date.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary, and shall not permit
any Restricted Subsidiary, directly or indirectly, to issue or sell or
otherwise dispose of any shares of its Capital Stock except (i) to the
Company or a Wholly Owned Subsidiary or (ii) if, immediately after giving
effect to such issuance, sale or other disposition, such Restricted
Subsidiary remains a Restricted Subsidiary; provided, however, that in
connection with any such sale or disposition of Capital Stock the Company
or any such Restricted Subsidiary complies with the covenant described
under "-- Limitation on Sales of Assets and Subsidiary Stock."
Merger and Consolidation. The Company shall not consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a
series of transactions, its assets substantially as an entirety to, any
Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) shall expressly
assume, by an indenture supplemental thereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the
Company under the Notes and the Indenture; (ii) immediately after giving
effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have occurred
and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described
under "-- Limitation on Indebtedness"; (iv) immediately after giving effect
to such transaction, the Successor Company shall have Consolidated Net
Worth in an amount that is not less than the Consolidated Net Worth of the
Company prior to such transaction minus any costs incurred in connection
with such transaction; and (v) the Company shall have delivered to the
Trustee an officer's certificate and an opinion of counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power
of, the Company under the Indenture, but the
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predecessor company, only in the case of a conveyance, transfer or lease,
shall not be released from the obligation to pay the principal of and
interest on the New Notes.
SEC Reports. Notwithstanding that the Company may not be or required
to remain subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, the Company shall file with the SEC and provide within 15
days of filing therewith to the Trustee and Noteholders such annual reports
and such information, documents and other reports as are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a U.S.
corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing
of such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as
(i) a default in the payment of interest on the Notes when due,
continued for 30 days;
(ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
acceleration or otherwise;
(iii) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above;
(iv) the failure by the Company to comply for 30 days after notice
with any of its obligations in the covenants described above under "Change
of Control" (other than a failure to purchase Notes) or under "-- Certain
Covenants -- Limitation on Indebtedness," "-- Limitation on Indebtedness
and Preferred Stock of Restricted Subsidiaries," "-- Limitation on
Restricted Payments," "-- Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "-- Limitation on Sales of Assets and Subsidiary
Stock," "-- Limitation on Affiliate Transactions," "-- Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries," or "-- SEC
Reports;"
(v) the failure by the Company to comply for 60 days after notice with
its other agreements contained in the Indenture;
(vi) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the Holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10.0 million and
such non-payment continues or such acceleration is not rescinded within ten
days after notice thereof (the "cross acceleration provision");
(vii) certain events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary (the "bankruptcy provisions"); or
(viii) any judgment or decree (not covered by insurance or an
indemnity by a person other than the Company or a Restricted Subsidiary,
which indemnitor is solvent) for the payment of money in excess of $10.0
million is entered against the Company or any Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is
not discharged, waived or stayed within 30 days after notice (the "judgment
default provision").
However, a default under clause (iv), (v), (vi) or (viii) will not
constitute an Event of Default until the Trustee or the Holders of 25% in
principal amount at maturity of the outstanding Notes notify the Company of the
default and the Company does not cure such default within the time specified
after receipt of such notice.
If an Event of Default (other than the bankruptcy provisions relating to
the Company) occurs and is continuing, the Trustee or the Holders of at least
25% in principal amount at maturity of the outstanding Notes may declare the
Accreted Value of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to the bankruptcy
provisions relating to the Company occurs and is continuing, the principal of
and interest on all the Notes will ipso facto become and be immediately due and
payable without
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any declaration or other act on the part of the Trustee or any Holders. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder of a New Note may
pursue any remedy with respect to the Indenture or the New Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount at maturity of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
Holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the Holders of a majority in principal amount at maturity of the
outstanding Notes have not given the Trustee a direction inconsistent with such
request within such 60-day period. Subject to certain restrictions, the Holders
of a majority in principal amount at maturity of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any Note, the Trustee may withhold notice if and
so long as the board of directors, the executive committee or a committee of its
trust officers determines that withholding notice is not opposed to the interest
of the Holders. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action the Company is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount at maturity of the
Notes then outstanding (including consents obtained in connection with a tender
offer or exchange for the Old Notes) and any past default or compliance with any
provisions may also be waived with the consent of the Holders of a majority in
principal amount at maturity of the Notes then outstanding.
Without the consent of each Holder of an outstanding Note affected thereby,
no amendment may (i) reduce the amount of Notes whose Holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal or Accreted Value of or extend the Stated
Maturity of any Note, (iv) reduce the premium payable upon the redemption of any
Note or change the time at which any Note may be redeemed as described under "--
Optional Redemption" above, (v) make any Note payable in money other than that
stated in the Note, (vi) impair the right of any Holder to receive payment of
principal of and interest on such Holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such Holder's Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions or
(viii) affect the ranking of the Notes in any material respect.
Without the consent of any Holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place
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of certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner such
that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add guarantees with respect to the Notes, to secure the Notes, to add
to the covenants of the Company for the benefit of the Holders or to surrender
any right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any Holder or to comply with any requirement of
the SEC in connection with the qualification of the Indenture under the Trust
Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment. However,
the failure to give such notice to all Holders, or any defect therein, will not
impair or affect the validity of the amendment.
TRANSFER
A Holder may transfer or exchange the New Notes in accordance with the
Exchange Offer and the Indenture. The Company, the Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture.
DEFEASANCE
The Company at its option at any time may terminate all of its obligations
under the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. In addition, the Company at its option at any time may terminate its
obligations under "Change of Control" and under the covenants described under
"-- Certain Covenants" (other than the covenant described under "-- Merger and
Consolidation") (and any omission to comply with such obligations shall not
constitute a Default or Event of Default with respect to the Notes), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision described
under "-- Defaults" above and the limitations contained in clauses (iii) and
(iv) of the first paragraph under "-- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the New Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated because
of an Event of Default specified in clause (iv), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under "-- Defaults" above or because of
the failure of the Company to comply with clause (iii) or (iv) of the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an opinion of counsel to
the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such opinion of counsel
must be based on a ruling of the IRS or other change in applicable federal
income tax law).
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SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when: (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee an amount in
United States dollars sufficient to pay and discharge the entire indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, for the
principal of, premium, if any, and interest to the date of deposit; (ii) the
Company has paid or caused to be paid all other sums payable under the Indenture
by the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the SEC that such waiver is against public policy.
CONCERNING THE TRUSTEE
Norwest Bank Minnesota, N.A. is the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes. Such bank may also act as a depository of funds for, or make loans to and
perform other services for, the Company or its affiliates in the ordinary course
of business in the future. The corporate trust office of the Trustee is located
at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0067.
The Holders of a majority in principal amount at maturity of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that if an Event of
Default occurs (and is not cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent person in the conduct of
his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the Indenture. The
Trustee may resign at any time or may be removed by the Company. If the Trustee
resigns, is removed or becomes incapable of acting as Trustee or if a vacancy
occurs in the office of the Trustee for any cause, a successor Trustee shall be
appointed in accordance with the provisions of the Indenture.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and the Indenture. The Indenture also
contains certain limitations on the right of the Trustee, as a creditor of the
Company, to obtain payment of claims in certain cases, or to realize on certain
property received by it in respect of any such claims, as security or otherwise.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each,
a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
- ------------------------ --------------
November 1, 1998..................................... $ 734.18
May 1, 1999.......................................... 780.98
November 1, 1999..................................... 830.77
May 1, 2000.......................................... 883.73
November 1, 2000..................................... 940.07
May 1, 2001.......................................... 1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
of a Unit and (b) an amount equal to the product of (1) the Accreted Value
for the first Semi-Annual Accrual Date less such original issue price
multiplied by (2) a fraction, the numerator of which is the number of days
from the Issue Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the Issue Date to the first Semi-Annual Accrual Date, using a 360-day
year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clause (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger or
consolidation (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary), (ii) all
or substantially all the assets of any division or line of business of the
Company or any Restricted Subsidiary, or (iii) any other assets of the Company
or any Restricted Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary (other than, in the case of (i), (ii) and
(iii) above, (x) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a
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Wholly Owned Subsidiary and (y) for purposes of the covenant described under "--
Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments" or a
disposition specifically excepted from the definition of Restricted Payment);
provided, however, that Asset Disposition shall not include (a) a transaction or
series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration less than or equal to $1.0 million
or (b) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "Certain
Covenants -- Merger, Consolidation and Sale of Assets."
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/ Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) 200% of the aggregate amount of EBITDA for the period of the most
recent two consecutive fiscal quarters ending at least 45 days prior to the date
of such determination to (ii) Consolidated Interest Expense for the four most
recent fiscal quarters ending at least 45 days prior to the date of such
determination; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the EBITDA
(if negative) directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such
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period directly attributable to the Indebtedness of such Restricted Subsidiary
to the extent the Company and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale), (3) if since the beginning
of such period the Company or any Restricted Subsidiary (by merger or otherwise)
shall have made an Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period, (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition, Investment or acquisition
of assets that would have required an adjustment pursuant to clause (2) or (3)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period. For purposes of this
definition, if pro forma effect is to be given to an acquisition of assets, the
amount of income or earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred in connection
therewith, then the pro forma calculations shall be determined in good faith by
a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, then the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries without duplication, (i)
interest expense attributable to Capital Lease Obligations and one-third of the
rental expense attributable to operating leases, (ii) amortization of debt
discount and debt issuance costs, (iii) capitalized interest, (iv) non-cash
interest expense, (v) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (vi) net
costs associated with Hedging Obligations (including amortization of fees),
(vii) Preferred Stock dividends in respect of all Preferred Stock held by
Persons other than the Company or a Wholly Owned Subsidiary, (viii) interest
incurred in connection with Investments in discontinued operations, and (ix)
interest accruing on any Indebtedness of any other Person to the extent such
Indebtedness is Guaranteed by the Company or any Restricted Subsidiary;
provided, however, that there shall not be included in Consolidated Interest
Expense (y) a proportional amount of any of the foregoing items or other
interest expense incurred by a Restricted Subsidiary in such period to the
extent the net income of such Restricted Subsidiary is excluded in the
calculation of Consolidated Net Income pursuant to clause (iii) of the
definition thereof and (z) any fees or debt issuance costs (and any amortization
thereof) payable in connection with the sale of the Notes and the Warrants on
the Issue Date.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated Net
Income; (ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary of the Company in a pooling of interests transaction for any period
prior to the date of such acquisition; (iii) any net income of any Restricted
Subsidiary to the extent that such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any
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such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution paid to another Restricted Subsidiary, to
the limitation contained in this clause) and (B) the Company's equity in a net
loss of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income; (iv) any gain (but not loss) realized
upon the sale or other disposition of any assets of the Company or its
consolidated Subsidiaries (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary course
of business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person; (v) extraordinary gains or
losses; and (vi) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which financial statements are available, as
(i) the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees and their
respective successors.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock, or
(iii) is redeemable at the option of the Holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving Holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital Stock
are not more favorable to the holders of such Capital Stock than the provisions
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" and "-- Certain Covenants -- Change of Control."
"EBITDA" for any period means the sum of Consolidated Net Income plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company, (b) depreciation expense, (c) amortization expense, and (d) all other
non-cash items reducing such Consolidated Net Income (excluding any non-cash
item to the extent it represents an accrual of, or reserve for, cash
disbursement for any subsequent period) less all non-cash items increasing such
Consolidated Net Income (such amount calculated pursuant to this clause (d) not
to be less than zero), in each case for such period. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization of, a Subsidiary of the Company shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be paid as a dividend to the Company by such
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) in statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) in the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person (whether arising by virtue of agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb (and the participle formed
therefrom) shall have a correlative meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Heller Credit Agreement" means the Credit Agreement, dated as of April 29,
1998, between the Company, Heller Financial, Inc., as agent, and the lenders
party thereto, as such agreement, in whole or in part, may be amended, renewed,
extended, increased (but only so long as such increase is permitted under the
terms of the Indenture), substituted, refinanced, restructured, replaced
(including, without limitation, any successive renewals, extensions, increases,
substitutions, refinancings, restructurings, replacements, supplements or other
modifications of the foregoing).
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for Indebtedness; provided, however, that any Indebtedness of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" shall have a correlative
meaning. The accretion of principal of a non-interest bearing or other discount
security shall be deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business); (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn upon, or, if
and to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit); (v) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends); (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the
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payment of which, in either case, such Person is responsible or liable, directly
or indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; (vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured; and (viii) to the extent not
otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed solely
to protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the definition of "Unrestricted Subsidiary," the definition of "Restricted
Payment" and the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments," (i) "Investment" shall include the portion (proportionate
to the Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that if such
designation is made in connection with the acquisition of such Subsidiary or the
assets owned by such Subsidiary, the "Investment" in such Subsidiary shall be
deemed to be the consideration paid in connection with such acquisition;
provided further, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation, and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date of original issuance of the Notes.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or required by law to
close. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, brokerage commissions,
underwriting discounts or commissions or sales commissions and other reasonable
fees and expenses (including, without limitation, fees and expenses of counsel,
accountants and investment bankers) related to such Asset Disposition or
converting to cash any other proceeds received, and any relocation and severance
expenses as a result thereof, and all Federal, state, provincial, foreign and
local taxes
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required to be accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition or made in order to obtain a necessary
consent to such Asset Disposition or to comply with applicable law, (iii) all
distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) appropriate amounts provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the property or other assets
disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Disposition. Further, with respect to an
Asset Disposition by a Subsidiary which is not a Wholly Owned Subsidiary, Net
Available Cash shall be reduced pro rata for the portion of the equity of such
Subsidiary which is not owned by the Company.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Business" means the acquisition, construction, development and
operation of laundromat facilities.
"Permitted Holders" means all executive officers of the Company as of the
Issue Date and each of their Affiliates as well as Dean L. Buntrock, William
Farley, Peer Pedersen and Howard C. Warren and each of their Affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business; (ii)
another Person, if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; provided, however, that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary,
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
commissions, payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business; (vi)
loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary;
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; and (viii) any Person, to the extent
such Investment represents the non-cash portion of the consideration received
for an Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under workers' compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings; (c)
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review or time for appeal has not yet expired; (d) Liens for taxes,
assessments or other governmental charges not yet subject to penalties for
non-payment or which are being
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contested in good faith by appropriate proceedings; (e) Liens in favor of
issuers of surety bonds or letters of credit and banker's acceptances issued
pursuant to the request of and for the account of such Person in the ordinary
course of its business; provided, however, that such letters of credit and
banker's acceptances do not constitute Indebtedness; (f) survey exceptions,
encumbrances, easements or reservations of or rights of others for licenses,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
properties or Liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (g) Liens securing an Interest Rate Agreement so long
as the related Indebtedness is, and is permitted to be under the Indenture,
secured by a Lien on the same property securing the Interest Rate Agreement; and
(h) leases and subleases of real property which do not interfere with the
ordinary conduct of the business of such Person, and which are made on customary
and usual terms applicable to similar properties.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Company has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided, further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Restricted Subsidiary that Refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company on the Issue Date.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with
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any merger or consolidation involving such Person), other than dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock) and dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and other than pro rata dividends or other distributions
made by a Subsidiary that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation), (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of the Company
held by any Person or of any Capital Stock of a Restricted Subsidiary held by
any Affiliate of the Company (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying of a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition), or (iv)
the making of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02(w) under
Regulation S-X promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Service.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
limited liability company, limited or general partnership or other business
entity of which more than 50% of the total voting power of shares of Capital
Stock or other interests (including partnership interests) entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person, or (iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting
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the qualifications described in clause (ii) above, (iv) investments in
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's or "A-1" (or higher) according to S&P, (v) investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's and (vi) investments in money market funds
that make investments in instruments of the type described in clauses (i)
through (v) above in accordance with the regulations of the SEC under the
Investment Company Act of 1940, as amended.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) if such Unrestricted Subsidiary at
such time has Indebtedness, the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
DESCRIPTION OF CAPITAL STOCK
As of September 6, 1998, there were 27,763 shares of Common Stock, 76,974
shares of Series A Convertible Preferred Stock, $.01 par value ("Series A
Stock"), 125,498 shares of Series B Convertible
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Preferred Stock, $.01 par value ("Series B Stock") and 72,930 shares of Series C
Convertible Preferred Stock, $.01 par value ("Series C Stock") outstanding, held
of record by 178 holders. As of such date, no shares of capital stock were held
in the treasury of the Company. In addition, as of September 6, 1998, the
Company had outstanding option grants exercisable for 38,025 shares of Common
Stock. The following summary of certain provisions of the Company's capital
stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, the Company's certificate
of incorporation, as amended to date, by-laws and by the provisions of
applicable law.
COMMON STOCK
The Company is authorized to issue up to 630,000 shares of Common Stock,
$.01 par value. Holders of Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably the
net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
subject to Warrants sold by the Company in the Private Placement will be, when
issued and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of Series A Stock, Series B
Stock, and Series C Stock and any series of Preferred Stock which the Company
may designate and issue in the future.
The shares of Common Stock held by current and former members of management
are subject to a stock transfer restriction agreement pursuant to which the
Company has a right of first refusal to purchase any such shares which a holder
desires to transfer before such shares may be transferred to any other person.
WARRANTS
The Company has outstanding 26,661 Warrants to purchase Common Stock. Each
Warrant, when exercised, entitles the holder thereof to purchase .1839 shares of
Common Stock from the Company at a price (the "Exercise Price") of $.01 per
share. The Warrants may be exercised at any time on or after the earlier of (x)
April 29, 1999 or (y) 60 days after the consummation of an initial public
offering of the Company's Common Stock. Unless earlier exercised, the Warrants
will expire on May 1, 2005. Upon the occurrence of certain events, the number of
shares of Common Stock issuable upon the exercise of the Warrants and the
Exercise Price are subject to adjustment.
The holders of unexercised Warrants are not entitled to receive dividends,
to vote, to consent, to exercise any preemptive rights, to receive notice as
stockholders of the Company in respect of any stockholders meeting, or to
exercise any other rights whatsoever as stockholders of the Company. In the
event of a dissolution, liquidation or winding-up of the Company, the holders of
the Warrants will be entitled to receive distributions on an equal basis with
the holders of Common Stock, or other securities issuable upon the exercise of
the Warrants, as if the Warrants had been exercised immediately prior to such
event, less the Exercise Price.
PREFERRED STOCK
The Company is authorized to issue up to 100,000 shares of Series A Stock,
150,000 shares of Series B Stock and 120,000 shares of Series C Stock. Holders
of Preferred Stock are entitled to one vote for each share held on all matters
and do not have cumulative voting rights. Accordingly, holders of a majority of
the shares of Preferred Stock entitled to vote in any election of directors may
elect a majority of the directors standing for election. Concurrently with the
closing of the Private Placement, the rights of the holders of Series A Stock,
Series B Stock and Series C Stock to require the Company to purchase their
shares to the Company at any time on or after June 1, 2001 (if the Company has
not yet completed a qualified initial public offering) following notice to the
Company by the holders of 51% or more of the Company's preferred stock were
terminated. The shares of Series A Stock, Series B Stock and Series C Stock are
pari passu with respect to liquidation preference.
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Series A Convertible Preferred Stock. The Company has 76,974 shares of
Series A Stock outstanding. Holders of Series A Stock are entitled, along with
the holders of the Series B Stock, to vote as a class to elect one person to the
Board of Directors. The Series A Stock is convertible into shares of Common
Stock on a one-for-one basis and will be converted into Common Stock
concurrently with a qualified public offering of the Company's Common Stock.
Holders of Series A Stock have preemptive rights with respect to the issuance of
any equity securities of the Company. The shares of Series A Stock are fully
paid and nonassessable.
Series B Convertible Preferred Stock. The Company has 125,498 shares of
Series B Stock outstanding. Holders of Series B Stock are entitled, along with
the holders of the Series A Stock, to vote as a class to elect one person to the
Board of Directors. The Series B Stock is convertible into shares of Common
Stock on a one-for-one basis and will be converted into Common Stock
concurrently with a qualified public offering of the Company's Common Stock.
Holders of Series B Stock have preemptive rights with respect to the issuance of
any equity securities of the Company. The shares of Series B Stock are fully
paid and nonassessable.
Series C Convertible Preferred Stock. The Company has 72,930 shares of
Series C Stock outstanding. Holders of Series C Stock are entitled to vote as a
class to elect one person to the Board of Directors. The Series C Stock is
convertible into shares of Common Stock on a one-for-one basis and will be
converted into Common Stock concurrently with a qualified public offering of the
Company's Common Stock. Holders of Series C Stock have preemptive rights with
respect to the issuance of any equity securities of the Company. The shares of
Series C Stock are fully paid and nonassessable.
REGISTRATION RIGHTS
The holders of Series A Stock, Series B Stock and Series C Stock have both
demand and "piggyback" registration rights. At any time after the earlier to
occur of (i) May 1, 1998 or (ii) the expiration of any lock up period in
connection with an initial public offering by the Company, the holders of 51% of
the shares of Preferred Stock outstanding may demand that the Company use its
best efforts to register their shares at the Company's expense. The preferred
stockholders may make up to three such demands upon the Company. The preferred
stockholders also have "piggyback" registration rights pursuant to which they
have the right to participate in any registration other than a registration on
Form S-8 (or similar form), subject to typical underwriter reductions in shares
permitted to be sold.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of the State of Delaware. In general, this statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transactions in which the person becomes an interested stockholder, unless
the business combination is approved in a prescribed manner. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within the prior three years did own) 15% or more of the corporation's voting
stock.
The Company has included in its certificate of incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the Delaware
General Corporation Law and to indemnify its directors and officers to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's capital stock is Norwest
Bank Minnesota, N.A., Minneapolis, Minnesota.
BOOK-ENTRY; DELIVERY AND FORM
GENERAL
The New Notes will be issued in the form of one or more fully registered
New Notes in global form ("Global Notes"). The Regulation S Notes will be issued
in fully registered, certificated form (the "Restricted Certificated Notes").
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Upon issuance of the Global Notes, the Depositary or its nominee will
credit, on its book-entry registration and transfer system, the number of New
Notes represented by such Global Notes to the accounts of institutions that have
accounts with the Depositary or its nominee ("participants"). The accounts to be
credited shall be designated by the Initial Purchaser. Ownership of beneficial
interests in the Global Notes will be limited to participants or persons that
may hold interests through participants. Ownership of beneficial interest in
such Global Notes will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary or its nominee (with
respect to participants' interests) for such Global Notes, or by participants or
persons that hold interests through participants (with respect to beneficial
interests of persons other than participants). The laws of some jurisdictions
may require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
transfer or pledge beneficial interests in the Global Notes.
The Restricted Certificated Securities, upon transfer to a QIB in reliance
on Rule 144A, will, unless the Global Securities have previously been exchanged
for Certificated Securities (as defined), be exchanged for an interest in the
Global Securities representing the number of Units, principal amount of Notes or
number of Warrants being transferred. For a description of the restrictions on
transfer of Restricted Certificated Securities, see "Transfer Restrictions." Any
such transfers will generally require the delivery by the transferee of a
transfer certificate in the form set forth in the Indenture or Warrant
Agreement, as applicable.
So long as the Depositary, or its nominee, is the registered Holder of any
Global Notes, the Depositary or such nominee, as the case may be, will be
considered the sole legal owner and Holder of such New Notes represented by such
Global Notes for all purposes under the Indenture and the New Notes. Except as
set forth below, owners of beneficial interests in Global Notes will not be
entitled to have such Global Notes or any New Notes represented thereby
registered in their names, will not receive or be entitled to receive physical
delivery or certificated securities in exchange therefor and will not be
considered to be the owners or Holders of such Global Notes or any New Notes
represented thereby for any purpose under the New Notes or the Indenture. The
Company understands that under existing industry practice, in the event an owner
of a beneficial interest in a Global Note desires to take any action that the
Depositary, as the Holder of such Global Note, is entitled to take, the
Depositary would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
Any payment of principal or interest due on the New Notes on any interest
payment date or at maturity will be made available by the Company to the Trustee
by such date. As soon as possible thereafter, the Trustee will make such
payments to the Depositary or its nominee, as the case may be, as the registered
owner of the Global Notes representing such New Notes in accordance with
existing arrangements between the Trustee and the Depositary.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of the Global Notes, will credit
immediately the accounts of the related participants with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note as shown on the records of the Depositary. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Notes held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participants.
None of the Company, the Trustee or any payment agent for the Global Notes
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in any of the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for other aspects of the relationship
between the Depositary and its participants or the relationship between such
participants and the owners or beneficial interests in the Global Notes owning
through such participants.
As long as the New Notes are represented by a Global Note, the Depositary's
nominee will be the Holder of the New Notes and therefore will be the only
entity that can exercise a right to repayment or of repurchase
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of the New Notes. See "Description of the New Notes -- Change of Control" and
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock."
Notice by participants or by owners of beneficial interests in a Global Note
held through such participants of the exercise of the option to elect repayment
of beneficial interests in New Notes represented by a Global Note must be
transmitted to the Depositary in accordance with its procedures on a form
required by the Depositary and provided to participants. In order to ensure that
the Depositary's nominee will timely exercise a right to repayment with respect
to a particular New Note, the beneficial owner of such New Note must instruct
the broker or other participant to exercise a right to repayment. Different
firms have different cut-off times for accepting instructions from their
customers and, accordingly, each beneficial owner should consult the broker or
other participant through which it holds an interest in a New Note in order to
ascertain the cut-off time by which such an instruction must be given in order
for timely notice to be delivered to the Depositary. The Company will not be
liable for any delay in delivery of notices of the exercise of the option to
elect repayment.
Unless and until exchanged in whole or in part for New Notes in definitive
form in accordance with the terms of the New Notes, the Global Notes may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary of any such nominee to a successor of the
Depositary or a nominee of each successor.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of the
Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depositary or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations. The
Company and the Trustee may conclusively rely on, and shall be protected in
relying on, instructions from the Depositary for all purposes.
CERTIFICATED SECURITIES
Global Notes shall be exchangeable for corresponding certificated
securities registered in the name of persons other than the Depositary or its
nominee ("Certificated Securities") only if (i) the Depositary (A) notifies the
Company that it is unwilling or unable to continue as Depositary for any of the
Global Notes or (B) at any time ceases to be a clearing agency registered under
the Exchange Act, (ii) there shall have occurred and be continuing an Event of
Default (as defined in the Indenture) with respect to the New Notes or (iii) the
Company executes and delivers to the Trustee or the Warrant Agent, as
appropriate, an order that the Global Notes shall be so exchangeable. Any
certificated securities will be issued only in fully registered form, and in the
case of certificated New Notes, shall be issued without coupons in denominations
of $1,000 and integral multiples thereof. Any certificated securities so issued
will be registered in such names and in such denominations as the Depositary
shall request.
THE CLEARING SYSTEM
The Depositary has advised the Company as follows: the Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (which may
include the Initial Purchaser), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depositary's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material United States federal income
tax consequences of an exchange of Old Notes for New Notes and the ownership of
Notes, as well as certain potential federal income tax consequences to the
Company with respect to the Notes. This discussion is based on current
provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
applicable final, temporary and proposed Treasury Regulations ("Treasury
Regulations"), judicial authority, and current administrative rulings and
pronouncements of the Internal Revenue Service (the "IRS") and upon the facts
concerning the Company as of the date hereof. This discussion includes a section
summarizing the opinion of the Company's tax counsel. These opinions are
referenced later in the discussion in the subsection titled "Opinion of the
Company's Tax Counsel."
There can be no assurance that the IRS will not take a contrary view to
that outlined in this discussion, and no ruling from the IRS has been or will be
sought by the Company. Legislative, judicial, or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to Holders.
This discussion does not purport to deal with all aspects of taxation that
may be relevant to particular Holders of the Notes in light of their personal
investment or tax circumstances, or to certain types of investors (including
individual retirement accounts and other tax deferred accounts, insurance
companies, financial institutions, broker-dealers or tax-exempt organizations)
subject to special treatment under the U.S. federal income tax laws. This
discussion does not deal with special tax situations, such as the holding of the
Notes as part of a straddle with other investments, or situations in which the
functional currency of a Holder is not the U.S. dollar. In addition, this
discussion deals only with Notes held by initial purchasers that hold such Notes
as capital assets within the meaning of Section 1221 of the Code. A prospective
Holder is strongly urged to consult his, her or its tax advisor regarding the
particular tax consequences to such prospective purchaser of purchasing, holding
and disposing of the New Notes.
As used herein, a "U.S. Holder" means a beneficial owner of the New Notes
who or that is (i) a citizen or resident of the United States, (ii) a
corporation or other entity created or organized in or under the laws of the
United States or a political subdivision thereof, (iii) an estate the income of
which is subject to U.S. federal income taxation regardless of its source, (iv)
a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust or (v) otherwise subject to U.S.
federal income taxation on a net income basis in respect of the New Notes. As
used herein, a "Non-U.S. Holder" means a Holder that is not a U.S. Holder.
OPINION OF THE COMPANY'S TAX COUNSEL
The Company has received the written opinion of its tax counsel, Pedersen &
Houpt, P.C., to the effect set forth as items A through G in this subsection.
The written opinion is based upon such assumptions and is subject to such
conditions and caveats as are typical of legal opinion letters.
A. The exchange of Old Notes for New Notes will not be treated as an
exchange for federal income tax purposes.
B. The New Notes will be treated as indebtedness and not as equity for
federal income tax purposes.
C. The New Notes will be considered as having been issued with more than a
de minimis amount of original issue discount for federal income tax
purposes.
D. No part of the stated interest on the New Notes will be qualified
stated interest, and therefore, the stated redemption price at maturity
of the New Notes will equal their principal amount at maturity plus all
stated interest.
E. The New Notes will constitute applicable high yield discount
obligations.
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F. A U.S. holder will recognize taxable gain or loss on the sale or
redemption of the New Notes equal to the difference between the amount
realized from such sale or redemption and his or her adjusted tax basis
in such New Notes.
G. A U.S. holder will not recognize any taxable gain or loss on the
exchange of Old Notes for the New Notes.
TAX TREATMENT OF NEW NOTES
The Exchange. Based upon the opinion of the Company's tax counsel
discussed above, the exchange of Old Notes for New Notes should not be treated
as an exchange for federal income tax purposes because the New Notes will not
differ materially in kind or extent from the Old Notes and because the exchange
will occur by operation of the original terms of the Old Notes. As a result,
U.S. Holders who exchange their Old Notes for New Notes should not recognize any
income, gain or loss for federal income tax purposes. A U.S. Holder will have
the same adjusted issue price, adjusted basis and holding period in the New
Notes immediately after the exchange as it had in the Old Notes immediately
before the exchange.
Status as Debt. Based upon the opinion of the Company's tax counsel
discussed above, the New Notes should be treated as indebtedness and not as
equity for federal income tax purposes, and the federal income tax consequences
described below are based on that characterization. Such treatment, however, is
not binding on the IRS (or the courts), and there can be no assurance that the
IRS would not argue (or that a court would not hold) that all or some portion of
the New Notes should be treated as equity for federal income tax purposes. Among
other consequences, treatment as equity would result in all or some portion of
the interest payments and/or original issue discount on the New Notes being
treated as distributions with respect to stock which would not be deductible by
the Company.
Interest and Original Issue Discount. Based upon the opinion of the
Company's tax counsel discussed above, the New Notes should be considered as
having been issued with more than a de minimis amount of original issue discount
for federal income tax purposes. In general, original issue discount on the New
Notes, defined as the excess of the New Notes' "stated redemption price at
maturity" over their "issue price," must be included in a U.S. Holder's gross
taxable income in advance of the receipt of cash representing that income, and
such amounts will increase periodically over the life of the New Notes.
The issue price of the New Notes will be the amount allocated to the New
Notes as described above. Under the Treasury Regulations, a debt instrument's
stated redemption price at maturity is the sum of all payments provided by the
instrument other than payments of "qualified stated interest," which is defined
as stated interest that is unconditionally payable at least annually at a single
fixed rate. Based upon the opinion of the Company's tax counsel described above,
no part of the stated interest on the New Notes should be qualified stated
interest, and, therefore, the stated redemption price at maturity of the New
Notes should equal their principal amount at maturity plus all stated interest.
Thus, each New Note should bear original issue discount in an amount equal to
the excess of (i) the sum of its principal amount at maturity plus all stated
interest payments over (ii) its issue price.
A U.S. Holder generally will be required to include in gross income the
original issue discount attributable to the New Notes over their term and before
receipt of the cash attributable to such income under a method embodying an
economic accrual of such discount and calculated on the basis of a constant
yield to maturity. The amount of original issue discount to be included in
income will be an amount equal to the sum of the daily portions of original
issue discount for each day during the taxable year in which the New Note is
held. The daily portions of original issue discount are determined by allocating
to each day in an accrual period (which may be of any length and may vary over
the term of the New Notes, at the option of the Holder, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest on the New Notes occurs on the first or last day of an
accrual period) the pro rata portion of the original issue discount allocable to
the accrual period. The amount of original issue discount that is allocable to
an accrual period generally will be the excess of the product of the adjusted
issue price of the New Note at the beginning of the accrual period (the issue
price of the New Notes generally increased by all prior accruals of original
issue discount and decreased by the amount of any payments made on the New
Notes, other than
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payments of qualified stated interest) and the yield to maturity of the New Note
over the stated interest paid during the accrual period or on the first day of
the succeeding accrual period. Any amount of original issue discount included in
income will increase a U.S. Holder's basis in the New Notes.
The Company is required to furnish certain information to the IRS, and will
furnish annually to the record Holders of New Notes information with respect to
original issue discount accruing during the calendar year. That information will
be based upon the adjusted issue price of the New Note as if the Holder were the
original holder of the New Note.
Optional Redemption. In determining the yield and maturity of a debt
instrument which contains a call option, such as the New Notes, the Company will
be presumed to exercise the call option if, by utilizing the date of exercise of
the call option as the maturity date and the redemption price as the stated
redemption price at maturity, the exercise of such option minimizes the yield on
the debt instrument. See "Description of the New Notes -- Optional Redemption."
If the New Note is not in fact called on the presumed exercise date, then, for
purposes of the accrual of original issue discount, the yield and maturity of
the New Note are redetermined by treating the New Note as reissued on that date
for an amount equal to its adjusted issue price (generally the original issue
price increased by the aggregate amount of previously accrued original issue
discount less payments other than qualified stated interest) on that date.
Applicable High Yield Discount Obligation. The original issue discount on
any obligation that constitutes an "applicable high yield discount obligation"
is not deductible by the issuer thereof until paid. An "applicable high yield
discount obligation" is any debt instrument that (i) has a maturity date which
is more than five years from the date of issue, (ii) has a yield to maturity
which equals or exceeds the applicable federal rate (as set forth in Section
1274(d) of the Code) for the calendar month in which the obligation is issued
plus five percentage points and (iii) has "significant original issue discount."
A debt instrument generally has "significant original issue discount" if the
aggregate amount of interest (including original issue discount) that would be
includible in gross income with respect to the debt instrument for periods
before the close of any accrual period that ends more than five years after the
date of issue exceeds the sum of (i) the aggregate amount of interest to be paid
on the instrument before the close of such accrual period and (ii) the product
of the issue price of the instrument and its yield to maturity. Moreover, if the
debt instrument's yield to maturity exceeds the applicable federal rate plus six
percentage points, a ratable portion of the issuing corporation's deduction for
original issue discount (the "Disqualified OID") will be permanently denied. In
the case of a corporate Holder of such debt instrument, the Disqualified OID
will be treated, when accrued, as a dividend to the extent of the issuing
corporation's current or accumulated earnings and profits for purposes of the
dividends received deduction provisions in the Code.
Based upon the opinion of the Company's tax counsel described above, the
New Notes should constitute applicable high yield discount obligations and a
portion of the original issue discount on the New Notes should be treated as
Disqualified OID. As a result, the Company will not be allowed a deduction for
the accrual of original issue discount on the New Notes until such interest is
actually paid, and the Company will not be allowed a deduction for the accrual
or payment of the portion of the original issue discount that constitutes
Disqualified OID. Subject to otherwise applicable limitations, corporate Holders
of the New Notes generally should be allowed a dividends received deduction with
respect to the accrual of the Disqualified OID so long as the Company has
sufficient current or accumulated earnings and profits.
Sale or Redemption. Based upon the opinion of the Company's tax counsel
described above, a U.S. Holder should recognize taxable gain or loss on the sale
or redemption of the New Notes equal to the difference between the amount
realized from such sale or redemption and his or her adjusted tax basis for such
New Notes. Such gain or loss generally will be capital gain or loss and will be
classified as long-term capital gain or loss if the holding period for such New
Notes is more than 12 months. A U.S. Holder's adjusted tax basis in a New Note
is generally equal to the amount paid therefor, increased by original issue
discount previously included in such Holder's gross income with respect to the
New Note, and decreased by payments on the New Note other than payments of
qualified stated interest.
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Based upon the opinion of the Company's tax counsel described above, a U.S.
Holder should not recognize any taxable gain or loss on the exchange of Old
Notes for the New Notes with no material modifications pursuant to the
Registered Exchange Offer.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will make annual reports to the IRS and U.S. Holders of the New
Notes regarding the amount of original issue discount and actual and
constructive dividends with respect to such securities paid or accrued during
the year, to the extent required by law.
Under federal income tax law, a U.S. Holder of New Notes may, under certain
circumstances, be subject to "backup withholding" unless such U.S. Holder (i) is
a corporation, or is otherwise exempt and, when required, demonstrates this fact
or (ii) provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The withholding rate is 31% of
"reportable payments," which include interest (including original issue
discount), proceeds from sale or redemption and, under certain circumstances,
principal payments.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN HOLDERS
The following discussion summarizes certain United States federal income
tax consequences generally applicable to the ownership and disposition of the
New Notes by a Non-U.S. Holder. This discussion does not purport to deal with
all aspects of United States federal income taxation that may be relevant to a
Non-U.S. Holder and does not describe any tax consequences arising out of the
laws of any state, locality or foreign jurisdiction or out of United States
federal estate and gift tax laws. NON-U.S. HOLDERS ARE ADVISED TO CONSULT THEIR
TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THEIR PARTICIPATION IN THIS OFFERING.
Interest and Original Issue Discount. Interest paid by the Company to a
Non-U.S. Holder that is not effectively connected with the conduct of a trade or
business within the United States by such Holder generally will not be subject
to United States withholding tax if (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company, (ii) the Non-U.S. Holder is not a controlled foreign corporation
with respect to which the Company is a "related person" within the meaning of
the Code and (iii) the beneficial owner, under penalty of perjury, certifies
that the beneficial owner is not a United States person and provides the
beneficial owner's name and address on U.S. Treasury Form W-8 (or a suitable
substitute form). A Non-U.S. Holder that does not qualify for exemption from
withholding under the preceding sentence generally will be subject to United
States withholding tax at the rate of 30% (or a lower applicable treaty rate) on
interest payments.
Interest paid by the Company to a Non-U.S. Holder that is effectively
connected with the conduct of a trade or business within the United States by
such Holder generally will be subject to the United States federal income tax on
net income that applies to United States persons generally (and, with respect to
corporate Holders under certain circumstances, the branch profits tax).
Original issue discount that accrues while a New Note is held by a Non-U.S.
Holder is generally treated in the same manner as interest described above.
Withholding attributable to original issue discount, where required, is made at
the time a payment of interest or principal on the New Note is made or, to the
extent such original issue discount was not previously taxed, at the time the
New Note is sold, exchanged or redeemed.
Gain on Disposition. A Non-U.S. Holder generally will not be subject to
United States federal income tax (subject to the discussion under "Information
Reporting and Backup Withholding" below) on gain realized on a sale or other
disposition (including a redemption) of New Notes unless (i) the gain is
effectively connected with the conduct of a trade or business within the United
States by the Non-U.S. Holder or (ii) in the case of a Non-U.S. Holder who is a
nonresident alien individual and holds the New Notes as a capital asset, such
Holder is present in the U.S. for 183 or more days in the taxable year of the
sale or disposition.
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Information Reporting and Backup Withholding. In the case of payments of
interest to Non-U.S. Holders, Treasury Regulations provide that the 31% backup
withholding and other reporting will not apply to such payments with respect to
which either the requisite certification, as described above, has been received
or an exemption has otherwise been established (provided that neither the
Company nor its paying agent has actual knowledge that the Holder is a United
States person or the conditions of any other exemption are not in fact
satisfied). Under Treasury Regulations, these information reporting and backup
withholding requirements will apply, however, to the gross proceeds paid to a
foreign person upon the disposition of the New Notes by or through a United
States office of a United States or foreign broker, unless the Holder certifies
to the broker under penalties of perjury as to its name, address and status as a
foreign person or the Holder otherwise establishes an exemption. Information
reporting requirements (but not backup withholding) will also apply to a payment
of the proceeds of a disposition of the New Notes by or through a foreign office
of (i) a United States broker, (ii) a foreign broker 50% or more of whose gross
income for certain periods is effectively connected with the conduct of a trade
or business in the United States or (iii) a foreign broker that is a "controlled
foreign corporation", unless the broker has documentary evidence in its records
that the Holder is a Non-U.S. Holder and certain other conditions are met, or
the Holder otherwise establishes an exemption. Neither information reporting nor
backup withholding will generally apply to a payment of the proceeds of a
disposition of the New Notes by or through a foreign office of a foreign broker
not subject to the preceding sentence.
REFUNDS
Any amounts withheld under the backup withholding rules from a payment to a
Holder will be allowed as a refund or a credit against such Holder's United
States federal income tax liability, provided that the required information is
furnished to the IRS.
OTHER TAX CONSIDERATIONS
There may be other federal, state, local or foreign tax considerations
applicable to the circumstances of a particular Holder of New Notes.
ACCORDINGLY, EACH PROSPECTIVE HOLDER OF NEW NOTES SHOULD CONSULT HIS, HER OR ITS
TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH PROSPECTIVE HOLDER OF
EXCHANGING OLD NOTES FOR NEW NOTES AND OF HOLDING AND DISPOSING OF NEW NOTES.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1999, all dealers effecting transactions in the
New Notes may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a Prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
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For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incurred in connection with its obligations to conduct the Exchange Offer
(including the reasonable expenses of one counsel for the Holders of the Notes)
and will indemnify the Holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Notes are effected. Accordingly, any resale of the Notes in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Holders are advised to seek legal advice prior to any resale of the Notes.
REPRESENTATIONS OF PURCHASERS
Each Holder of Notes in Canada who receives a purchase confirmation will be
deemed to represent to the Company and the dealer from whom such purchase
confirmation is received that (i) such Holder is entitled under applicable
provincial securities laws to purchase such Notes without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
that such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws. Following a
decision of the U.S. Supreme Court, it is possible that Ontario purchasers will
not be able to rely upon the remedies set out in Section 12(2) of the United
States Securities Act of 1933 where securities are being offered under a U.S.
prospectus such as this document.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Notes to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Notes acquired
by such purchaser pursuant to this offering. Such report must be in the form
attached to British Columbia Securities Commission Blanket Order BOR #95/17, a
copy of which may be obtained from the Company. Only one such report must be
filed in respect of Notes acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Notes should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Notes in
their particular circumstances and with respect to the eligibility of the Notes
for investment by the purchaser under relevant Canadian legislation.
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LEGAL MATTERS
The validity of the Notes offered hereby and certain of the tax matters
discussed in "Federal Income Tax Consequences" will be passed upon for the
Company by Pedersen & Houpt, P.C., Chicago, Illinois. Peer Pedersen and John H.
Muehlstein, directors of the Company, are also partners of Pedersen & Houpt,
P.C.
EXPERTS
The consolidated financial statements of the Company and its subsidiary as
of December 28, 1997 and December 31, 1996, and for the years then ended, and as
of December 31, 1995 and for the period from October 10, 1995 (inception) to
December 31, 1995, included in this Prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-4 (including all
amendments thereto, the "Registration Statement") under the Securities Act of
1933, with respect to the New Notes offered in connection with the Exchange
Offer. As permitted by the rules and regulations of the SEC, this Prospectus
omits certain information contained in the Registration Statement. For further
information with respect to the Company and the New Notes offered in connection
with the Exchange Offer, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this Prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such exhibits.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the SEC's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from such office after payment
of fees prescribed by the SEC. The SEC also maintains a Web site that contains
reports, proxy statements and other information regarding registrants, including
the Company, that file such information electronically with the SEC. The address
of the SEC's Web site is http://www.sec.gov.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SPINCYCLE, INC.
PAGE
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of December 28, 1997, December
31, 1996 and December 31, 1995............................ F-3
Consolidated Statement of Operations for the Years Ended
December 28, 1997 and December 31, 1996 and for the period
from October 10, 1995 (inception) to December 31, 1995.... F-4
Consolidated Statement of Mandatorily Redeemable Preferred
Stock and Shareholders' Equity (Deficit) for the Years
Ended December 28, 1997 and December 31, 1996 and for the
period from October 10, 1995 (inception) to December 31,
1995...................................................... F-5
Consolidated Statement of Cash Flows for the Years Ended
December 28, 1997 and December 31, 1996 and for the period
from October 10, 1995 (inception) to December 31, 1995.... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 6, 1998 and
December 28, 1997......................................... F-17
Consolidated Statement of Operations for the Year-to-date
Period and for the Quarter Ended September 6, 1998 and
September 30, 1997........................................ F-18
Consolidated Statement of Cash Flows for the Year-to-date
Period Ended September 6, 1998 and September 30, 1997..... F-19
Notes to Unaudited Consolidated Financial Statements........ F-20
F-1
97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
SpinCycle, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, mandatorily redeemable preferred stock
and shareholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of SpinCycle, Inc. and its subsidiary
at December 28, 1997, December 31, 1996 and December 31, 1995, and the results
of their operations and their cash flows for the years ended December 28, 1997
and December 31, 1996 and for the period from October 10, 1995 (inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Phoenix, Arizona
March 13, 1998
F-2
98
SPINCYCLE, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 8,249,161 $ 360,006 $ 5,001
Landlord allowances.............................. 1,081,396 170,000 --
Prepaid expenses................................. 483,828 201,435 20,000
Inventory........................................ 71,517 49,209 --
Land held for sale-leaseback..................... 4,120,039 -- --
Other current assets............................. 952,881 40,062 4,223
------------ ----------- -------
Total current assets.......................... 14,958,822 820,712 29,224
Property and equipment, net........................ 53,969,382 12,840,712 18,130
Goodwill, net...................................... 6,150,839 -- --
Other assets....................................... 417,123 147,923 7,433
------------ ----------- -------
Total assets............................. $ 75,496,166 $13,809,347 $54,787
============ =========== =======
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 5,950,086 $ 4,820,207 $ 3,837
Construction payables............................ 951,242 762,847 --
Accrued utilities................................ 616,779 8,841 --
Accrued expenses................................. 1,453,455 422,446 --
Advances from shareholder........................ -- 150,000 56,400
Current portion of long-term debt................ 578,360 -- --
------------ ----------- -------
Total current liabilities..................... 9,549,922 6,164,341 60,237
Long-term debt..................................... 35,347,428 4,591,844 --
Deferred rent...................................... 1,225,728 134,266 --
Other liabilities.................................. 207,386 -- --
------------ ----------- -------
Total liabilities........................ 46,330,464 10,890,451 60,237
------------ ----------- -------
Commitments and Contingencies
Series A, Series B and Series C mandatorily
redeemable preferred stock, $.01 par value,
370,000 shares authorized, 262,213, 54,478 and 0
shares issued and outstanding, respectively...... 48,792,805 6,809,700 --
------------ ----------- -------
Shareholders' equity (deficit):
Common stock, $.01 par value, 630,000 shares
authorized, 38,487, 34,280 and 4 shares issued
and outstanding, respectively................. 385 343 1
Additional paid-in capital....................... 9,273 8,227 --
Accumulated deficit.............................. (19,636,761) (3,899,374) (5,451)
------------ ----------- -------
Total shareholders' equity (deficit)............. (19,627,103) (3,890,804) (5,450)
------------ ----------- -------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' equity
(deficit)..................................... $ 75,496,166 $13,809,347 $54,787
============ =========== =======
The accompanying notes are an integral part of these financial statements.
F-3
99
SPINCYCLE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM
YEARS ENDED OCTOBER 10, 1995
-------------------------------------- (INCEPTION) TO
DECEMBER 28, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
Revenues.................................. $ 8,652,888 $ 1,014,516 $ --
Cost of revenues -- store operating
expenses, excluding depreciation and
amortization............................ 7,982,566 1,193,020 --
------------ ----------- ----------
Gross operating profit (loss)........... 670,322 (178,504) --
Preopening costs.......................... 456,920 472,811 --
Depreciation and amortization............. 2,340,647 568,280 --
Selling, general and administrative
expenses................................ 10,729,663 2,653,698 5,451
Loss on disposal of property and
equipment............................... 479,500 -- --
------------ ----------- ----------
Operating loss.......................... (13,336,408) (3,873,293) (5,451)
Interest income........................... 432,812 28,741 --
Interest expense, net of amount
capitalized of $327,727 in 1997......... (891,913) (49,371) --
------------ ----------- ----------
Net loss................................ (13,795,509) (3,893,923) (5,451)
Accretion of redeemable preferred stock... (1,941,878) -- --
------------ ----------- ----------
Net loss applicable to holders of common
stock................................ $(15,737,387) $(3,893,923) $ (5,451)
============ =========== ==========
Net loss per common share............... $(412.76) $(117.42) $(1,362.75)
============ =========== ==========
Weighted average number of common shares
outstanding............................. 38,127 33,162 4
============ =========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
100
SPINCYCLE, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
MANDATORILY
REDEEMABLE
PREFERRED STOCK STOCK COMMON STOCK ADDITIONAL
--------------------- SUBSCRIPTIONS --------------- PAID-IN ACCUMULATED
SHARES AMOUNT RECEIVABLE SHARES AMOUNT CAPITAL DEFICIT
------- ----------- ------------- ------ ------ ---------- ------------
October 10, 1995 (inception).... -- $ -- $ -- 4 $ 1 $ -- $ --
Net loss........................ (5,451)
------- ----------- ------------ ------ ---- ------ ------------
Balance at December 31, 1995.... -- -- -- 4 1 -- (5,451)
Issuance of Series A
Redeemable Preferred
Stock....................... 53,960 6,745,000 (6,745,000)
Issuance of Series A
Redeemable Preferred Stock
for services................ 518 64,700
Issuance of Common Stock for
services.................... 34,276 342 8,227
Payment of stock
subscriptions............... 6,745,000
Net loss...................... (3,893,923)
------- ----------- ------------ ------ ---- ------ ------------
Balance at December 31, 1996.... 54,478 6,809,700 -- 34,280 343 8,227 (3,899,374)
Issuance of Series A
Redeemable Preferred Stock,
net......................... 21,350 2,598,750 (2,668,750)
Issuance of Series A
Redeemable Preferred Stock
for services................ 1,146 143,300
Issuance of Series B
Redeemable Preferred Stock,
net......................... 125,498 24,382,912 (24,999,912)
Issuance of Common Stock for
services.................... 4,207 42 1,046
Accretion of Series A and
Series B Redeemable
Preferred Stock............. 1,941,878 (1,941,878)
Issuance of Series C
Redeemable Preferred Stock,
net......................... 59,741 12,916,265 (13,272,265)
Payments of stock
subscriptions............... 40,940,927
Net loss...................... (13,795,509)
------- ----------- ------------ ------ ---- ------ ------------
Balance at December 28, 1997.... 262,213 $48,792,805 $ -- 38,487 $385 $9,273 $(19,636,761)
======= =========== ============ ====== ==== ====== ============
The accompanying notes are an integral part of these financial statements.
F-5
101
SPINCYCLE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM
YEARS ENDED OCTOBER 10, 1995
------------------------------------- (INCEPTION) TO
DECEMBER 28, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
Cash flows provided by (used in) operating
activities:
Net loss..................................... $(13,795,509) $(3,893,923) $(5,451)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities:
Depreciation and amortization................ 2,340,647 568,280 --
Loss on disposal of property and equipment... 479,500 -- --
Issuance of stock for services............... 144,388 73,269 1
Changes in assets and liabilities:
Landlord allowances....................... (911,396) (170,000) --
Prepaid expenses.......................... (282,393) (181,435) (20,000)
Inventory................................. (22,308) (49,209) --
Other current assets...................... (912,819) (35,839) (4,223)
Other assets.............................. (269,200) (75,490) (7,433)
Accounts payable.......................... 1,129,879 4,816,370 3,837
Construction payables..................... 188,395 762,847 --
Accrued utilities......................... 607,938 8,841 --
Accrued expenses.......................... 1,031,009 422,446 --
Deferred rent............................. 1,091,462 134,266 --
Other liabilities......................... 207,386 -- --
------------ ----------- -------
Net cash provided by (used in) operating
activities.............................. (8,973,021) 2,380,423 (33,269)
------------ ----------- -------
Cash flows used in investing activities:
Purchase of fixed assets..................... (6,350,490) (8,504,045) (18,130)
Land held for sale-leaseback................. (4,120,039) -- --
Acquisition of businesses, net of cash
acquired.................................. (12,063,521) -- --
Capitalized interest......................... (327,727) -- --
------------ ----------- -------
Net cash used in investing activities..... (22,861,777) (8,504,045) (18,130)
------------ ----------- -------
Cash flows provided by financing activities:
Advances from shareholder.................... (150,000) 93,600 56,400
Payments on notes payable.................... (23,974) (294,973) --
Debt issuance costs paid..................... -- (65,000) --
Proceeds from notes payable.................. -- -- --
Proceeds from stock subscriptions, net....... 39,897,927 6,745,000 --
------------ ----------- -------
Net cash provided by financing
activities.............................. 39,723,953 6,478,627 56,400
------------ ----------- -------
Net increase in cash and cash equivalents...... 7,889,155 355,005 5,001
Cash and cash equivalents, beginning of year... 360,006 5,001 --
------------ ----------- -------
Cash and cash equivalents, end of year......... $ 8,249,161 $ 360,006 $ 5,001
============ =========== =======
Supplemental disclosure of non-cash financing
activities:
Stock subscriptions for issuance of
Redeemable Preferred Stock................ $ 40,940,927 $ 6,745,000
Equipment financed with long-term debt....... $ 31,357,918 $ 4,886,817
Interest paid................................ $ 1,173,236 $ 49,371
The accompanying notes are an integral part of these financial statements.
F-6
102
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
SpinCycle, Inc. (the Company) is a specialty retailing company engaged in
the coin laundry business. The Company was incorporated under the laws of the
state of Minnesota on October 10, 1995 and subsequently reincorporated under the
laws of the State of Delaware. The Company was in the developmental stage from
October 10, 1995 (inception) to June 30, 1996. On October 1, 1997, the Company
dissolved its wholly-owned subsidiary, Pinnacle Financial, Inc., a commercial
equipment leasing company. This dissolution had no effect on the Company's
consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All intercompany balances and transactions have
been eliminated in consolidation.
Fiscal year change
Effective December 1997, the Company changed its fiscal year previously
ended December 31 to a thirteen period fiscal year, comprised of thirteen four
week periods. This change in fiscal year-end had an immaterial effect on the
Company's 1997 results of operations and financial condition.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying value
of cash equivalents approximates fair value. At December 28, 1997, $213,117 of
time deposits was pledged as collateral on outstanding letters of credit related
to agreements in place with suppliers and as collateral for the Company's
corporate office lease agreement.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, landlord allowances,
accounts payable and accrued expenses reported in the Company's balance sheet
approximate fair value because of the short maturity of those instruments. The
carrying amount of debt also approximates fair value as stated interest rates
approximate market interest rates for debt of same remaining maturities.
Concentration of risk
The Company places its cash with high credit quality institutions. At
times, cash balances may be in excess of the FDIC insurance limit. The Company
has not experienced any losses on its cash balances.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Landlord allowances and deferred rent
Landlord allowances represent incentives received by the Company on certain
of its store leases. Deferred rent represents the related unearned incentive
recorded at lease inception and is amortized as a reduction to rent expense over
the term of the related leases.
F-7
103
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) basis.
Property and equipment
Property and equipment are stated at cost. Capitalized amounts include
expenditures which materially extend the useful lives of existing facilities and
equipment. Expenditures for repairs and maintenance which do not materially
extend the useful lives of the related assets are charged to expense as
incurred.
Depreciation and amortization
Depreciation is provided principally on the straight-line method over the
following useful lives:
YEARS
-----
Laundry equipment...................... 10
Leasehold improvements................. Shorter of economic life or lease term.
Computer and office equipment.......... 5
Store equipment........................ 5
Goodwill
Goodwill represents the excess of cost over the net tangible and
identifiable intangible assets of acquired businesses. Goodwill is stated at
cost and is amortized on a straight-line basis over fifteen years. Pursuant to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company evaluates the recoverability
of goodwill and its other long-lived assets whenever a significant change in the
business environment indicates that expected future net cash flows (undiscounted
and without interest) would become less than the carrying amount of the asset.
Accumulated amortization of goodwill amounted to $30,000 at December 28, 1997.
Revenue recognition
The Company recognizes revenue upon performance of services.
Stock compensation
The Company measures compensation cost related to employee stock options
using the intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
Income taxes
The Company accounts for income taxes under the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using currently enacted tax rates.
As a result of the current uncertainty as to the future realizability of
the tax benefits associated with approximately $17,550,000 of net operating
losses incurred to date, no income tax benefit has been recorded in the
financial statements.
F-8
104
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising costs
The Company expenses advertising costs as incurred. The Company incurred
$1,574,839 and $364,831 in advertising costs for the years ended December 28,
1997 and December 31, 1996, respectively.
Preopening costs
The Company expenses preopening costs as incurred. The Company incurred
$456,920 and $472,811 in preopening costs during the years ended December 28,
1997 and December 31, 1996, respectively.
Capital stock
As more fully discussed in Note 7, in June 1997, the Company effected a
one-for-twenty-five reverse stock split of preferred and common stock. Per share
par value did not change as a result of this event. Share amounts presented in
these financial statements have been adjusted to reflect the stock split on a
retroactive basis.
Earnings per Share
The Company applies the principles of SFAS No. 128, "Earnings per Share,"
to calculate, present and disclose earnings per share. Basic earnings per share
is computed by dividing the net loss applicable to holders of common stock ("the
net loss") by the weighted average number of common shares outstanding during
each period. Diluted earnings per share is computed by dividing the net loss by
the weighted average number of common shares outstanding during the period
adjusted for dilutive stock options and dilutive common shares assumed to be
issued on conversion of Preferred Stock to common stock. Diluted earnings per
share has not been presented as the computation is anti-dilutive due to the
Company's net loss in each period.
Liquidity
During fiscal 1997, the Company experienced a net loss of $13,795,509 and
at December 28, 1997 had an accumulated deficit of $19,636,761. During the first
quarter of fiscal 1998, the Company raised approximately $3 million through the
issuance of its Series C Convertible Preferred Stock. The Company's management
believes that the proceeds from this offering, the availability of funds from
the LaSalle Credit Facility (see Note 9), the measures it has initiated to
control operating and development costs, as well as the availability of
additional capital in anticipated future offerings, will enable the Company to
maintain operations for the foreseeable future.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Leasehold improvements.................... $20,187,979 $ 6,736,192 $ --
Laundry equipment......................... 27,474,138 4,053,454 --
Construction in progress.................. 4,694,175 1,303,320 --
Store equipment........................... 1,906,795 689,408 --
Computer and office equipment............. 2,584,918 626,618 18,130
----------- ----------- -------
56,848,005 13,408,992 18,130
Less: Accumulated depreciation and
amortization............................ (2,878,623) (568,280) --
----------- ----------- -------
$53,969,382 $12,840,712 $18,130
=========== =========== =======
F-9
105
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS
During the year ended December 28, 1997, the Company acquired several
existing coin laundry businesses for a total cash outlay of $12,063,521, net of
cash acquired. These acquisitions were accounted for under the purchase method
of accounting. In connection with these acquisitions, the Company recorded
goodwill of $6,180,839 and did not assume any liabilities of the sellers.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the acquired coin laundry
businesses as if the acquisitions had occurred January 1, 1996.
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 31,
1997 1996
------------ ------------
Net Sales................................................ $ 14,315,787 $ 8,633,567
Net loss................................................. $(13,970,392) $(4,355,223)
Net loss per common share................................ $ (417.35) $ (131.33)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense as a result of a step-up in the basis of fixed assets, additional
amortization expense as a result of goodwill and other intangible assets, and
increased interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect on January 1, 1996 or of future results of
operations of the consolidated entities.
5. LONG-TERM DEBT
On November 22, 1996, the Company entered into a loan agreement with an
equipment manufacturer which provided for borrowings up to an initial maximum
amount of $20 million to finance the purchase and installation of new
coin-operated laundromat equipment. This agreement was amended to provide for
borrowings up to a maximum amount of $35 million and then $45 million in July
1997 and February 1998, respectively. Of the $45.0 million in place, $30.0
million is available for equipment financing and $15.0 million is available for
acquisition financing. Borrowings under the agreement, which aggregated
$35,925,788 at December 28, 1997, bear interest at prime plus 1.875% (10.375% at
December 28, 1997) and require interest only payments for a period of 12 months
following the date of the borrowings with principal and interest payments due
thereafter in 72 monthly installments. To enter into the agreement, the Company
paid a facility fee of $65,000 which is being amortized over the term of the
agreement. Borrowings under the agreement are secured by the related equipment
with a net book value of $49,996,357 at December 28, 1997. This security
collateral is shared equally pursuant to an inter-creditor agreement with
LaSalle National Bank (see Note 9) which was entered into in March 1998. At
December 28, 1997, the Company was not in compliance with its financial
covenants related to maintaining certain leverage and operating income ratios.
Accordingly, the Company obtained waivers from its lender with respect to such
covenants at December 28, 1997.
Long-term debt is scheduled to mature during future fiscal years as
follows:
1998.......................................... $ 578,360
1999.......................................... 2,198,154
2000.......................................... 2,437,376
2001.......................................... 2,702,632
2002.......................................... 2,996,756
Thereafter.................................... 25,012,510
-----------
$35,925,788
===========
F-10
106
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Deferred income tax assets (liabilities) consist of the following:
DECEMBER 28, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Deferred tax assets:
Net operating loss carryforwards..... $ 7,019,952 $ 1,509,331 $--
Other................................ 313,111 49,397 --
----------- ----------- ---
7,333,063 1,558,728 --
----------- ----------- ---
Deferred tax liabilities:
Depreciation......................... (257,969) (9,746) --
Other................................ (37,673) (1,217) --
----------- ----------- ---
(295,642) (10,963) --
----------- ----------- ---
Net deferred tax asset................. 7,037,421 1,547,765 --
Less: valuation allowance.............. (7,037,421) (1,547,765) --
=========== =========== ===
$ -- $ -- $--
=========== =========== ===
In assessing the realizability of its deferred tax assets, the Company
considers whether it is more likely than not that some or all of such assets
will be realized. As a result of historical operating losses, the Company has
fully reserved its net deferred tax assets as of December 28, 1997. The Company
will consider release of the valuation allowance once profitable operations have
been sustained.
As of December 28, 1997, the Company had net operating loss carryforwards
of approximately $17,550,000 which will begin to expire in 2011. In the event of
a change in ownership as defined by section 382 of the Internal Revenue Code, a
significant limitation may be imposed on the availability of the Company's net
operating loss carryforwards. It is possible that the Company has experienced
one or more ownership changes in 1996 and 1997 as a result of the Company
raising various rounds of private equity or that such an ownership change may
have occurred or be deemed to have occurred.
7. MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Mandatorily Redeemable Preferred Stock
The Company has issued nonvoting, Series A, Series B and Series C
Redeemable Preferred Stock (collectively, the Preferred Stock). Dividends are
payable only when declared by the Board of Directors and are noncumulative. Each
share of the Preferred Stock is mandatorily convertible into one share of common
stock prior to the closing of the first underwritten public offering pursuant to
a registration statement on Form S-1 in which the proceeds to the Company are at
least $5,000,000. The Company has reserved common shares equivalent to the
outstanding preferred shares. Holders of all three series of the Preferred Stock
have substantially the same rights except that holders of Series C stock were
granted the right to elect one member to the Company's Board of Directors. In
connection with the issuance of the Preferred Stock, the Company incurred
approximately $1,043,000 of issuance costs.
The Preferred Stock has a liquidating preference over the common stock. In
the event of liquidation, the holders of Preferred Stock are entitled to receive
an amount equal to the price paid for the shares to the Company and participate
on a pro rata basis with common stock shareholders for the remaining assets of
the Company. Holders of the Preferred Stock have the right to require the
Company to purchase all of the Preferred Stock at any time after June 1, 2001 at
a redemption price equal to the greater of the purchase price of the shares plus
accrued but unpaid dividends or the appraised value of the shares. Redemption of
such shares is further subject to the terms and conditions set forth in the Put
Agreement between the Company and
F-11
107
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the holders of the Preferred Stock. At December 28, 1997, the accreted value of
the Preferred Stock is approximately $48,793,000.
As of March 13, 1998, the Series C Redeemable Preferred Stock offering had
not yet been terminated. The Company has received approximately $16 million in
aggregate cash proceeds for this offering through March 13, 1998. See also Note
13 for further discussion.
Stock Split
On June 30, 1997, the Company effected a one-for-twenty-five reverse stock
split of its preferred and common stock. Per share par value did not change as a
result of this event. Accordingly, all references to shares issued and
outstanding in the financial statements have been retroactively restated to give
effect to this stock split.
Employee Stock Option Plan
The SpinCycle, Inc. 1995 Amended and Restated Stock Option Plan (the Plan)
provides for the issuance of employee stock options. Under the provisions of the
Plan, the Compensation and Organization Committee (the Committee), which is
appointed by the Board of Directors of the Company has the discretion to
determine, among other things, the employees to whom options may be granted; the
number of options to be granted; the vesting period assigned to the options; and
such other terms and conditions, consistent with the terms of the Plan, as the
Committee deems appropriate. Substantially all options currently outstanding at
December 28, 1997 vest ratably over a five year period from the date granted.
The Committee also has the discretion to determine whether options granted shall
be Incentive Stock Options (ISOs) within the meaning of section 411 (a) of the
Internal Revenue Code or non-qualified stock options. The Company has reserved
32,000 shares of its common stock for issuance in connection with the Plan.
During 1997, the Company's Board of Directors approved a similar stock
option plan for Directors and certain non-employees. Through March 13, 1998, 80
options have been granted under this new plan. The Company has reserved 2,000
shares of its common stock for issuance in connection with this plan.
The option price for all non-qualified stock options is also determined by
the Committee, provided that in no event shall it be less than 85% of the fair
market value of the stock at the time the option is granted. The option price
for each option which is intended to qualify as an ISO shall be 100% of the fair
market value of the stock at the time the option is granted (110% if the
participant owns at least 10% of the stock immediately before the ISO is
granted). A summary of option activity under the Plan for each of the two years
in the period ended December 28, 1997 is as follows:
WEIGHTED
AVERAGE
OPTION SHARES EXERCISE PRICE
------------- --------------
Outstanding at December 31, 1995.......................... -- $ --
Granted................................................. 10,616 125.00
Exercised............................................... -- --
Expired/terminated...................................... -- --
Outstanding at December 31, 1996.......................... 10,616 125.00
Granted................................................. 18,979 154.37
Exercised............................................... -- --
Expired/terminated...................................... -- --
Outstanding at December 28, 1997.......................... 29,595 $143.84
------ -------
Exercisable at December 28, 1997.......................... 3,815 $159.21
Weighted average fair value of options granted during
fiscal 1997............................................. 18,979 $ 39.72
Weighted average fair value of options granted during
fiscal 1996............................................. 10,616 $ 19.83
F-12
108
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option agreements. Had compensation cost for the Company's agreements been
determined based on the fair value at the grant date for awards in 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per common share would have been increased to the pro forma amounts
indicated below:
1997 1996
----------- ----------
Net loss -- as reported.................................. $13,795,509 $3,893,923
Net loss -- pro forma.................................... 13,924,560 3,928,908
Net loss per common share -- as reported................. $ (412.76) $ (117.42)
Net loss per common share -- pro forma................... $ (416.15) $ (118.48)
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model applying the following assumptions:
1997 1996
------- -------
Expected dividend yield..................................... 0.00% 0.00%
Risk-free interest rate..................................... 6.16% 5.82%
Expected life of options.................................... 5 years 3 years
8. COMMITMENTS
The Company leases substantially all of its stores and corporate offices
under noncancelable operating leases. The leases expire at various dates through
2012. The Company has the option to extend the terms of the leases for periods
ranging from five to twenty years. Certain leases require payment of property
taxes, utilities, common area maintenance costs and insurance. Minimum lease
payments due under the agreements for future fiscal years are as follows:
1998.......................................... $ 3,126,841
1999.......................................... 3,212,303
2000.......................................... 3,226,981
2001.......................................... 3,060,239
2002.......................................... 2,588,435
Thereafter.................................... 12,038,865
-----------
$27,253,664
===========
The above commitments include five operating leases signed prior to
December 28, 1997 with lease terms beginning subsequent to December 28, 1997.
Rent expense totaled $2,518,937 and $386,550 for the years ended December
28, 1997 and December 31, 1996, respectively.
9. SUBSEQUENT EVENTS
LaSalle Credit Facility
In March 1998, the Company entered into a revolving loan agreement with
LaSalle National Bank which provides for borrowings up to a maximum amount of
$15 million primarily to finance working capital requirements. Future borrowings
under this facility may constitute Base Rate Loans or Eurodollar loans. For
those borrowings that constitute Base Rate Loans, the applicable interest rate
will equal the sum of the Base Rate, defined as the bank's prime interest rate
then in effect or the Federal Funds Rate plus 0.50%, whichever
F-13
109
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is higher, plus 1.25%. For those borrowings that constitute Eurodollar Loans,
the applicable interest rate will equal the Eurodollar Rate plus 3.0%. These
borrowings will be payable no later than March 2000. As discussed in Note 5, the
collateral securing these borrowings will be shared equally pursuant to an
inter-creditor agreement which was entered into in March 1998. The Company paid
an initial commitment fee of $272,000 to enter into the agreement that will be
amortized over the term of the agreement. The agreement also calls for an
ongoing commitment fee computed at an annual rate of one-half of one percent on
the average daily unused portion of the facility. The agreement also specifies
that the Company must comply with certain leverage and operating income ratios
and imposes a limitation on annual capital expenditures.
Sale-Leaseback Transactions
On December 31, 1997, the Company entered into a sale-leaseback transaction
with SpinDevCo., L.L.C. (SpinDevCo), a subsidiary of McMahon-Oliphant, Inc.
Eleven properties consisting of land of $2.5 million and improvements of $4.0
million thereon that were previously acquired by the Company were sold to
SpinDevCo for approximately $6.5 million, then leased back under an operating
lease of fifteen years. The Company received approximately $1.7 million in cash
and a note which is due and payable in April 1998, for the balance of the sales
price of $6.5 million. The note is secured by the properties. The transaction
also calls for the Company to contribute $2,450,000 in additional funds that
will be amortized to rent expense over the term of the related lease agreements.
The transaction qualifies for sale-leaseback accounting in accordance with
Statement of Financial Accounting Standards No. 98, "Accounting for
Leases -- Sale-Leaseback Transactions Involving Real Estate." No gain or loss
was recognized on the sale. As it is management's intent to sell remaining land
recorded on the balance sheet at December 28, 1997, under similar terms and
conditions, land of $4,120,039 has been reclassified to current assets.
10. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two of its key
executive officers. These agreements do not exceed four years in term, provide
for a covenant not to compete for a term of one year subsequent to termination
of the agreements, and provide for the payment of one year of base salary in the
event the employees are terminated for reasons other than for cause.
11. EXECUTIVE SEVERANCE AGREEMENT
As a result of the resignation of the Company's CEO and Chairman of the
Board of Directors, and in accordance with the terms of the related employment
agreement, the Company was obligated to pay this executive $400,000 over the
remaining two-year term of his employment agreement. This amount, including
related payroll taxes, was accrued at December 28, 1997. The current and
long-term portions of this liability are included in accrued expenses and other
liabilities, respectively, on the Company's balance sheet at December 28, 1997.
In addition, the Company forgave a loan outstanding to the executive of
$50,000, plus any interest accrued thereon. The expense associated with this
forgiveness of debt is included in general and administrative expenses in the
Company's statement of operations. This executive also relinquished rights to
any stock options previously granted to him by the Company.
In addition, subsequent to year-end, the Company agreed to repurchase
18,019 shares of common stock owned by this executive for a sum of $200,000.
F-14
110
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
Board of Directors
Two directors of the Company are partners in a law firm which provides
legal services to the Company. The Company paid approximately $400,000 in legal
fees to this firm during 1997.
Advances from Shareholder
During 1996, the Company received an advance of $150,000 from one of the
Company's shareholders. This advance, which was non-interest bearing, was repaid
in full in 1997.
13. SUBSEQUENT EVENTS (UNAUDITED)
Senior Discount Notes Offering
On April 3, 1998, the Company commenced the offering (the Offering) of
unsecured senior discount notes and an indeterminate number of warrants to
purchase Common Stock to "qualified institutional buyers" only as defined in
Rule 144A under the Securities Act. The offering was completed on April 29,
1998, with the Company selling $144,990,000 of 12 3/4% unsecured senior discount
notes ($1,000 principal amount) (the Notes) and warrants (the Warrants) to
purchase 26,661 shares of the Company's Common Stock with an exercise price of
$0.01 per share for gross proceeds to the Company of $100,001,053. The net
proceeds from the offering of approximately $96.8 million were used principally
to pay certain expenses of the offering, repay approximately $46.9 million in
existing indebtedness, to provide funds for investment in new stores and for
general corporate purposes. The Notes will mature on May 1, 2005. No cash
interest will accrue on the Notes prior to May 1, 2001. The Notes will begin to
accrue cash interest at a rate of 12 3/4% per annum commencing May 1, 2001, and
cash interest will be payable thereafter on November 1 and May 1 of each year,
commencing November 1, 2001. The Notes will be redeemable at the option of the
Company, in whole or in part, on or after May 1, 2002, at the redemption prices
set forth in the Prospectus. In addition, at any time and from time to time
prior to May 1, 2001, the Company may redeem in the aggregate up to 35% of the
Accreted Value of the Notes with the proceeds of one or more Public Equity
Offerings following which there is a Public Market, at a redemption price of
112.75% of the Accreted Value to the date of redemption; provided, however, that
at least $94.2 million of the aggregate principal amount of the Notes at
maturity remain outstanding after any such redemption. Upon a Change of Control
(as defined in the Indenture), each holder of the Notes (a Holder) will have the
right to require the Company to purchase all or any part of such Holder's Notes
at a purchase price equal to 101% of the Accreted Value thereof, plus accrued
and unpaid interest, if any, to the date of purchase. All terms used herein to
describe the Offering shall have the meaning ascribed to them in the Prospectus
unless otherwise noted.
The Notes will be senior, unsecured obligations of the Company ranking pari
passu in right of payment of principal and interest with all other existing and
future senior unsecured obligations of the Company and will rank senior to all
future subordinated debt of the Company. The Notes will be effectively
subordinated to all Secured Indebtedness of the Company, if any, to the extent
of the value of the assets securing such indebtedness and to all indebtedness
and other obligations (including trade payables) of the Company's future
subsidiaries, if any. The Warrants will be exercisable at any time on or after
the earlier of April 29, 1999 or 60 days after the consummation of an initial
public offering of the Company's Common Stock, and will expire on May 1, 2005.
Prior to the Offering, the Company had in place a $45.0 million credit
facility from Raytheon Commercial Laundry, LLC (Raytheon), one of the largest
commercial laundry equipment vendors, which most recently provided the Company
with approximately $30.0 million of equipment financing and $15.0 million of
acquisition financing. This facility has provided 100% financing for commercial
laundry equipment purchases (based upon list prices) and store acquisitions. The
Company procured a bank credit facility with
F-15
111
SPINCYCLE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LaSalle National Bank in March 1998, which provided the Company with $15.0
million for acquisitions and general corporate purposes. On April 29, 1998, the
Company repaid all indebtedness outstanding under these two facilities with the
net proceeds from the Offering and terminated the related loan agreements.
On April 29, 1998, the Company also closed a secured revolving credit
facility in the maximum principal amount of $40 million with Heller Financial,
Inc. (the Heller Facility). The Heller Facility will mature on April 28, 2002.
The Company will be entitled to draw amounts under the Heller Facility, subject
to availability pursuant to a borrowing base formula based upon income from
store operations and net book value of laundry equipment, in order to fund
ongoing working capital, capital expenditures and general corporate purposes.
Interest will accrue on the Heller Facility with reference to the base rate (the
Base Rate) plus 0.50%. The Company may elect that all or a portion of the loans
bear interest at the LIBOR rate (the LIBOR Rate) plus 2.75%. The Base Rate is
defined as, on any date, the "Bank Prime Loan" rate published by the Board of
Governors of the Federal Reserve System plus 0.50%. The LIBOR Rate is defined as
an amount equal to the rate posted on the Reuters Screen LIBO Page on the day
which is three business days prior to the first day of such interest period.
Preferred Stock Put Agreements
In April 1998, the Company received consent of the holders of Preferred
Stock to terminate their put rights subject to the closing of the Company's $100
million bond offering.
Series C Preferred Stock Repricing and Termination of Series C Offering
In April 1998, the Company modified the price of its Series C Preferred
Stock. The repricing required approval of 51% of the holders of the Company's
Common and Series B Preferred Stock and 76% of the holders of the Company's
Series A Preferred Stock. The repricing was also affirmed by all subscribers for
Series C Preferred Stock. The requisite approvals were obtained as of April 14,
1998 and the "Series C Units," comprised of ten shares of Series C Preferred
Stock and one share of Common Stock were then issued to subscribers in the
Series C offering. This unit offering was terminated on April 14, 1998. A total
of approximately $16 million was raised in the sale of 72,930 shares of Series C
Preferred Stock and 7,293 shares of Common Stock.
Common Stock Reserved for Stock Option Plan
In April 1998, the Company's Board of Directors reserved, with the consent
of the stockholders, an additional 10,724 shares of the Company's Common Stock
for issuance pursuant to the Company's Amended and Restated Stock Option Plan.
F-16
112
SPINCYCLE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 6, DECEMBER 28,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 27,077,165 $ 8,249,161
Landlord allowances....................................... 532,931 1,081,396
Prepaid expenses.......................................... 774,609 483,828
Inventory................................................. 138,295 71,517
Note receivable, principal and interest................... 4,850,663 --
Land held for sale-leaseback.............................. 1,480,167 4,120,039
Other current assets...................................... 919,921 952,881
------------ -----------
Total current assets.................................... 35,773,751 14,958,822
Property and equipment, net................................. 76,536,658 53,969,382
Goodwill, net............................................... 9,535,349 6,150,839
Prepaid rent -- long-term portion........................... 2,740,580 --
Other assets................................................ 5,121,679 417,123
------------ -----------
Total assets....................................... $129,708,017 $75,496,166
============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,715,923 $ 5,950,086
Construction payables..................................... 427,288 951,242
Accrued utilities......................................... 801,437 616,779
Accrued expenses.......................................... 1,719,983 1,453,455
Current portion of deferred rent.......................... 250,157 --
Current portion of long-term debt......................... 22,300 578,360
------------ -----------
Total current liabilities............................... 4,937,088 9,549,922
Long-term debt.............................................. 98,918,771 35,347,428
Deferred rent............................................... 2,184,488 1,225,728
Other liabilities........................................... 407,386 207,386
------------ -----------
Total liabilities.................................. 106,447,733 46,330,464
------------ -----------
Commitments and Contingencies............................... -- --
Series A, Series B and Series C mandatorily redeemable
preferred stock, $.01 par value, 370,000 shares
authorized, 262,213 shares issued and outstanding at
December 28, 1997......................................... -- 48,792,805
------------ -----------
Shareholders' equity (deficit):
Series A, Series B and Series C convertible preferred
stock, $.01 par value, 370,000 shares authorized,
275,402 shares issued and outstanding at June 14,
1998.................................................... 50,845,810 --
Common stock, $.01 par value, 630,000 shares authorized,
27,763 and 38,487 shares issued and outstanding,
respectively............................................ 278 385
Common stock warrants..................................... 5,625,000 --
Additional paid-in capital................................ 1,442,053 9,273
Accumulated deficit....................................... (34,652,857) (19,636,761)
------------ -----------
Total shareholders' equity (deficit)...................... 23,260,284 (19,627,103)
------------ -----------
Total liabilities, mandatorily redeemable preferred stock
and shareholders' equity (deficit)........................ $129,708,017 $75,496,166
============ ===========
The accompanying notes are an integral part of these financial statements.
F-17
113
SPINCYCLE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
QUARTERS ENDED YEAR-TO-DATE
---------------------------- ----------------------------
SEPTEMBER 6, SEPTEMBER 30, SEPTEMBER 6, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------- ------------ -------------
Revenues................................. $ 6,925,053 $ 2,017,188 $ 18,400,288 $ 4,739,913
Cost of revenues -- store operating
expenses, excluding depreciation and
amortization........................... 5,901,454 1,876,566 15,111,076 4,675,990
----------- ----------- ------------ -----------
Gross operating profit (loss).......... 1,023,599 140,622 3,289,212 63,923
Preopening costs......................... 162,232 102,719 363,483 246,510
Depreciation and amortization............ 1,451,024 590,694 4,295,166 1,404,326
Selling, general and administrative
expenses............................... 2,657,008 2,941,615 7,133,347 6,078,009
Loss on disposal of property &
equipment.............................. 3,175 -- 3,175 --
----------- ----------- ------------ -----------
Operating loss......................... (3,249,840) (3,494,406) (8,505,959) (7,664,922)
Interest income.......................... 514,306 135,464 974,534 365,913
Interest expense, net of amount
capitalized............................ (3,154,387) (256,991) (6,204,865) (562,477)
----------- ----------- ------------ -----------
Net loss before extraordinary loss..... $(5,889,921) $(3,615,933) $(13,736,290) $(7,861,486)
Extraordinary loss from early
extinguishment of debt................. -- -- (333,596) --
----------- ----------- ------------ -----------
Net loss............................... $(5,889,921) $(3,615,933) $(14,069,886) $(7,861,486)
Repricing of Series C preferred stock.... -- -- (1,459,000) --
Accretion of redeemable preferred
stock.................................. -- (579,344) (755,667) (1,381,425)
----------- ----------- ------------ -----------
Net loss applicable to holders of
common stock........................ $(5,889,921) $(4,195,277) $(16,284,553) $(9,242,911)
=========== =========== ============ ===========
Net loss per common share (both basic and
diluted):
Net loss applicable to holders of
common stock before extraordinary
loss................................ $ (212.15) $ (109.01) $ (548.97) $ (243.18)
Extraordinary loss from early
extinguishment of debt.............. -- -- (11.48) --
----------- ----------- ------------ -----------
Net loss applicable to holders of
common stock........................ $ (212.15) $ (109.01) $ (560.45) $ (243.18)
=========== =========== ============ ===========
Weighted average number of common shares
outstanding............................ 27,763 38,487 29,056 38,009
=========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-18
114
SPINCYCLE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
YEAR-TO-DATE
-----------------------------
SEPTEMBER 6, SEPTEMBER 30,
1998 1997
------------ -------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss.................................................. $(14,069,886) $ (7,861,486)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 4,295,166 1,404,326
Extraordinary loss from early extinguishment of debt... 333,596 --
Amortization of debt issuance costs.................... 388,221 --
Amortization of discount on long-term debt............. 4,542,718 --
Changes in assets and liabilities:
Landlord allowances.................................. 548,465 (245,000)
Prepaid expenses..................................... (290,780) (174,603)
Inventory............................................ (66,778) (26,940)
Other current assets................................. 112,678 (750,147)
Prepaid rent......................................... (2,740,580) --
Other assets......................................... (160,791) (414,627)
Accounts payable..................................... (4,234,163) (2,717,922)
Construction payables................................ (523,954) (504,026)
Accrued utilities.................................... 184,658 297,569
Accrued expenses..................................... 266,528 (90,991)
Deferred rent........................................ 1,208,917 (59,804)
------------ ------------
Net cash used in operating activities............. $(10,205,985) $(11,143,651)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of fixed assets.................................. (17,371,001) (7,603,258)
Proceeds from sale of fixed assets........................ 17,743 --
Net proceeds from sale-leaseback transactions............. 1,896,637 --
Acquisition of businesses, net of cash acquired........... (14,874,852) (4,154,517)
Capitalized interest...................................... (103,227) --
------------ ------------
Net cash used in investing activities:............ $(30,434,700) $(11,757,775)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repayment of advances from shareholder.................... -- (150,000)
Payments of debt.......................................... (46,675,836) (8,025,328)
Debt issuance costs paid.................................. (5,369,916) --
Increase in debt.......................................... 103,149,974 12,187,821
Proceeds from issuance of common stock warrants........... 5,625,000 --
Proceeds from issuance of stock........................... 2,904,500 26,901,361
Stock issuance costs paid................................. (165,033) --
------------ ------------
Net cash provided by financing activities......... $ 59,468,689 $ 30,913,854
------------ ------------
Net increase in cash and cash equivalents................... 18,828,004 8,012,428
Cash and cash equivalents, beginning of period.............. 8,249,161 360,006
------------ ------------
Cash and cash equivalents, end of period.................... $ 27,077,165 $ 8,372,434
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment financed with long-term debt.................... $ 1,998,428 $ 4,621,692
Sale-leaseback financed with note receivable.............. $ 4,930,381 $ --
Interest paid............................................. $ 1,370,023 $ 562,477
The accompanying notes are an integral part of these financial statements.
F-19
115
SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION -- BASIS OF PRESENTATION
The unaudited financial information presented herein has been prepared in
accordance with the instructions to Form 10-Q and Regulation S-X and does not
include all of the information and note disclosures required by generally
accepted accounting principles. Therefore, this information should be read in
conjunction with the audited financial statements for the year ended December
28, 1997 and notes thereto included in the Form S-4 Registration Statement, as
amended (the "Exchange Offer Registration Statement") of SpinCycle, Inc. (the
"Company") filed with the Securities and Exchange Commission ("SEC") on June 26,
1998 or the Form S-1 Registration Statement, as amended (the "Shelf Registration
Statement" and together with the Exchange Offer Registration Statement, the
"Registration Statements"). This information reflects all adjustments that are,
in the opinion of management, necessary for a fair statement of the Company's
financial position, results of operations and cash flows for the interim periods
reported. These adjustments are of a normal and recurring nature.
2. UNAUDITED INTERIM RESULTS OF OPERATIONS
The results of operations for the quarters and year-to-date periods ended
September 6, 1998 and September 30, 1997 are not necessarily indicative of the
results to be expected for a full fiscal year.
3. FISCAL YEAR
As of December 1, 1997, the Company changed its basis of reporting from 12
calendar months to 13 periods per annum. This change allows the Company to
report and compare results on 13 equivalent periods, with each period containing
four Monday through Sunday weeks. The Company's fiscal year ends on the last
Sunday in December. The fiscal year ended December 27, 1998 will include 52
weeks divided into quarters as follows:
1st Quarter: Three four week periods
2nd Quarter: Three four week periods
3rd Quarter: Three four week periods
4th Quarter: Four four week periods
Accordingly, the Company's fiscal third quarter included 12 weeks in 1998
and 13 weeks in 1997. The first three quarters of the Company's fiscal year
included 36 weeks in 1998 and 39 weeks in 1997.
4. COMPANY EXPANSION
During the fiscal quarter ended September 6, 1998, the Company opened
developed or acquired 27 new stores in seven existing markets and in three new
markets (Milwaukee, Wisconsin, West Palm Beach, Florida and Washington, D.C.).
Fifteen of the new store openings were acquired stores. As of September 6, 1998
the Company had opened or acquired 134 stores in 25 markets throughout the
United States. On September 20, 1998, the Company closed one store in
Albuquerque, New Mexico. The owner of the real property offered to terminate the
Company's lease in order to provide for expansion of an anchor tenant. Based on
the pre and post acquisition performance of this store, the Company elected to
accept the offer, received $100,000 in cash and removed all of its equipment.
This store closure had no material adverse effect on the financial condition or
results of operations of the Company.
5. DEPRECIATION AND USEFUL LIVES
Effective June 15, 1998, the Company revised its estimate of the useful
lives of its laundry equipment and tenant improvements. Laundry equipment was
previously depreciated over 10 years and those lives have now been changed to
periods from seven up to 15 years. Tenant improvements, which were previously
depreciated over an average useful life of ten years have been extended to an
average term of 15 years. These useful life
F-20
116
SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
changes for laundry equipment and tenant improvements were made to better
reflect the estimated periods during which such assets will remain in service.
The revised lives have been adopted for previously recorded assets and newly
acquired assets. The effect of the change was a reduction to depreciation
expense and a corresponding increase to net income applicable to holders of
common stock for the quarter ended September 6, 1998 of approximately $400,000,
or $14.40 per share.
6. EARNINGS PER SHARE
Net loss per common share is computed using the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
requires the presentation of basic earnings per share ("EPS") and diluted EPS.
Basic EPS is computed by dividing the net loss applicable to holders of
common stock by the weighted average number of common shares outstanding during
each period. Diluted EPS is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period adjusted for
dilutive stock options and warrants and dilutive common shares assumed to be
issued on conversion of preferred stock to common stock. Diluted EPS has not
been presented as the computation is anti-dilutive due to the Company's net loss
in each period. The number of common shares outstanding increased by 7,295
shares in April 1998 as a result of a repricing of the Series C Preferred Stock
offering (See Note 7).
7. REPRICING OF SERIES C CONVERTIBLE PREFERRED STOCK OFFERING
On April 14, 1998, 7,295 shares of the Company's common stock ("Common
Stock") were issued to Series C stockholders in connection with the repricing of
the Series C Convertible Preferred Stock offering, originally priced at $220 per
share. Pursuant to a stockholder consent dated March 18, 1998 and obtained as of
April 14, 1998, the Series C offering was converted to a unit offering, whereby
each Series C unit offered was comprised of ten shares of Series C preferred
stock and one share of Common Stock for $2,200 per unit. In accordance with
existing authoritative guidance, the additional fair value of the consideration
transferred to Series C stockholders of $1,459,000 (i.e. the 7,295 shares of
Common Stock issued in connection with the conversion of the original offering
to a unit offering multiplied by $200 per share) has been treated as a return to
Series C stockholders. Accordingly, $1,459,000 has been deducted from the
Company's net loss for the year-to-date period ended September 6, 1998 in
determining the net loss applicable to common shareholders for the calculation
of earnings per share.
8. SALE-LEASEBACK TRANSACTION
On December 31, 1997, the Company entered into a sale-leaseback transaction
with newly formed SpinDevCo, L.L.C. (SpinDevCo), a subsidiary of
McMahon-Oliphant, Inc. SpinDevCo, McMahon-Oliphant, Inc. and their affiliates
have no relationship or connection with the Company or any of its affiliates
other than the transaction described in this note. Eleven properties consisting
of land of $2.4 million and improvements of $4.0 million thereon that were
previously acquired by the Company were sold to SpinDevCo for approximately $6.4
million, then leased back under an operating lease with a 20 year term. The
Company received approximately $1.5 million in cash and a note in the principal
amount of approximately $4.9 million, which was originally due and payable on
April 30, 1998. The note is secured by mortgages on the properties. The
transaction also required the Company to contribute in cash approximately
$2,450,000, reflecting prepaid rent to be amortized over the terms of the
related lease agreements. SpinDevCo requested, and on May 30, 1998 the Company
granted, an extension (the "Extended Note") of the maturity date of the note
through September 30, 1998 in return for the payment of $125,000 of accrued
interest and additional interest payments through that date. The purpose of this
extension is to allow SpinDevCo additional time to obtain the permanent
financing with which to repay the Company's note. The transaction qualifies for
sale-leaseback accounting in accordance with Statement of Financial Accounting
Standards (SFAS) No. 98, "Accounting
F-21
117
SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for Leases -- Sale-Leaseback Transactions Involving Real Estate." No gain or
loss was recognized on the sale. See Note 14.
9. SENIOR DISCOUNT NOTES OFFERING
On April 3, 1998, the Company commenced the offering of unsecured senior
discount notes and an indeterminate number of warrants to purchase Common Stock
to "qualified institutional buyers" only as defined in Rule 144A under the
Securities Act of 1933, as amended (the "Offering"). The Offering was completed
on April 29, 1998, with the Company selling $144,990,000 aggregate principal
amount at maturity of 12 3/4% unsecured senior discount notes (the "Notes") and
warrants (the "Warrants") to purchase 26,661 shares of the Company's Common
Stock with an exercise price of $0.01 per share for gross proceeds to the
Company of $100,001,053. All terms used herein to describe the Offering shall
have the meaning ascribed to them in the Registration Statements unless
otherwise noted. The net proceeds from the Offering of approximately $96.8
million, net of underwriting expenses, were used principally to pay certain
other expenses of the Offering (see note 10), repay approximately $46.7 million
in existing indebtedness, to provide funds for investment in new stores and for
general corporate purposes. The Notes will mature on May 1, 2005. No cash
interest will accrue on the Notes prior to May 1, 2001. The Notes will begin to
accrue cash interest at a rate of 12 3/4% per annum commencing May 1, 2001, and
cash interest will be payable thereafter on November 1 and May 1 of each year,
commencing November 1, 2001. The Notes will be redeemable at the option of the
Company, in whole or in part, on or after May 1, 2002, at the redemption prices
set forth in the Registration Statements. In addition, at any time and from time
to time prior to May 1, 2001, the Company may redeem in the aggregate up to 35%
of the Accreted Value of the Notes with the proceeds of one or more Public
Equity Offerings following which there is a Public Market, at a redemption price
of 112.75% of the Accreted Value to the date of redemption; provided, however,
that at least $94.2 million of the aggregate principal amount of the Notes at
maturity remain outstanding after any such redemption. Upon a Change of Control,
each holder of the Notes (a "Holder") will have the right to require the Company
to purchase all or any part of such Holder's Notes at a purchase price equal to
101% of the Accreted Value thereof, plus accrued and unpaid interest, if any, to
the date of purchase.
The Notes are senior, unsecured obligations of the Company ranking pari
passu in right of payment of principal and interest with all other existing and
future senior unsecured obligations of the Company and will rank senior to all
future subordinated debt of the Company. The Notes will be effectively
subordinated to all Secured Indebtedness of the Company, if any, to the extent
of the value of the assets securing such indebtedness and to all indebtedness
and other obligations (including trade payables) of the Company's future
subsidiaries, if any. The Warrants will be exercisable at any time on or after
the earlier of April 29, 1999 or 60 days after the consummation of an initial
public offering of the Company's Common Stock, and will expire on May 1, 2005.
Prior to the Offering, the Company had in place a $45.0 million credit
facility from Raytheon Commercial Laundry, LLC ("Raytheon"), one of the largest
commercial laundry equipment vendors, which had most recently provided the
Company with approximately $30.0 million of equipment financing and $15.0
million of acquisition financing. This facility provided 100% financing for
commercial laundry equipment purchases (based upon list prices) and store
acquisitions. The Company procured a bank credit facility with LaSalle National
Bank ("LaSalle") in March 1998, which provided the Company with $15.0 million
for acquisitions and general corporate purposes. On April 29, 1998, the Company
repaid all indebtedness outstanding under these two facilities with the net
proceeds from the Offering and terminated the related loan agreements.
On April 29, 1998, the Company also closed a secured revolving credit
facility in the maximum principal amount of $40.0 million with Heller Financial,
Inc. (the "Heller Facility"). As of August 1998, the Heller Facility was
syndicated such that Heller is obligated to provide up to $25.0 million and
FINOVA Capital
F-22
118
SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Corporation ("FINOVA") is obligated to provide up to $15.0 million of the $40.0
million Heller Facility. The Heller Facility will mature on April 28, 2002 and
is collateralized by a first priority security interest upon (i) all of the
Company's now owned and hereafter acquired real and personal property and all
proceeds thereof and (ii) all general intangibles and other intangible assets
(including, without limitation, trademarks and trade names) of the Company, if
any, and proceeds thereof. The Company will be entitled to draw amounts under
the Heller Facility, subject to availability pursuant to a borrowing base
formula based upon income from store operations and net book value of laundry
equipment, in order to fund ongoing working capital, capital expenditures and
general corporate purposes. As of September 6, 1998, this borrowing base was
approximately $14.3 million. The Heller Facility requires the Company to
maintain compliance with certain covenants. The Company was in compliance with
all but one of these covenants at September 6, 1998. The Company has, however,
obtained the waiver of the lenders with respect to this breach and thus it will
not restrict the Company's ability to borrow under the Heller Facility.
As a condition of the Heller Facility, the Company was required (within 90
days after the closing of such agreement) to cause the lenders ("Collecting
Banks") holding the Company's deposit accounts ("Blocked Accounts") to enter
blocked account agreements with all banks at which it maintains deposit
accounts. Upon the occurrence of certain events of default, and the lapse of any
applicable cure periods under the Heller Facility, Heller can require the
Collecting Banks to promptly transfer all payments or deposits from the Blocked
Accounts to Heller. As of July 28, 1998, the Company obtained a 60 day extension
of this requirement from Heller in order to complete the required paperwork for
the Blocked Account agreements. As of August 31, 1998, the Company had obtained
all required Blocked Account agreements.
Obligations under the Heller Facility shall bear interest with reference to
either the "Base Rate" or the "LIBOR Rate," as determined by the Company at the
time each such obligation is incurred. "Base Rate Loans" shall bear interest at
the rate of 0.50% plus the greater of (a) the "Bank Prime Loan" rate published
by the Board of Governors of the Federal Reserve System or (b) 0.50% plus the
Federal Funds Effective Rate. "LIBOR Rate Loans" shall bear interest at the rate
of 2.75% plus the rate determined by dividing (a) the rate at which U.S. dollar
deposits for the relevant interest period are being offered based upon
information presented on the Reuters Screen LIBOR Page as of 11:00 A.M. (London
time) on the day which is two business days prior to the first day of such
interest period by (b) 1.0 minus the aggregate (without duplication) of the
rates (expressed as a decimal) of reserve requirements on the day which is two
business days prior to the beginning of such interest period for Eurocurrency
funding required to be maintained by a member bank of the Federal Reserve
System, rounded to the nearest 1/16 of 1%.
In July 1998 the Company and Heller Financial executed an amendment to the
Heller Facility pursuant to which the Company agreed to changes in the borrowing
base formula and the minimum Mature Store average EBITDA financial covenant
thresholds. These thresholds were adjusted to conform to accounting changes
effected by the Company. Changes were also made to certain of the Company's
reporting requirements pursuant to the Heller Facility and a limitation on
advertising expenses, to a maximum of 4% of annual revenues, was added.
10. DEBT ISSUE COSTS AND LOSS ON EARLY EXTINGUISHMENT OF DEBT
In connection with the Company's Offering of the Notes (as discussed in
Note 9), the Company paid approximately $4,600,000 of debt issue costs, which
are being amortized over the term of the Notes. The unamortized balance of these
debt issue costs is included as a component of other assets on the Company's
balance sheet at September 6, 1998.
In connection with the termination of the Raytheon and LaSalle loan
agreements (as discussed in Note 9), the Company recognized an extraordinary
loss of approximately $334,000 (approximately $300,000 of which was related to
termination of the LaSalle agreement) during its fiscal 1998 second quarter on
the
F-23
119
SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
early extinguishment of debt for the writeoff of the unamortized balance of debt
issue costs related to these agreements.
11. ACQUISITIONS
During the year ended December 28, 1997, the Company acquired 27 existing
coin laundromats for a total cash outlay of $12,063,521, net of cash acquired.
These acquisitions were accounted for under the purchase method of accounting.
In connection with these acquisitions, the Company recorded goodwill of
$6,180,839 and did not assume any liabilities of the sellers. Goodwill is
amortized on a straight-line basis over 15 years.
During the year-to-date period ended September 6, 1998, the Company
acquired 26 existing coin laundry businesses for a total cash outlay of
$14,874,852, nine of which were financed, net of cash acquired. These
acquisitions were accounted for under the purchase method of accounting. In
connection with these acquisitions, the Company recorded goodwill of $3,706,458
and did not assume any material liabilities of the sellers other than, in
certain cases, assuming the leases of the related real property.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the acquired coin laundry
businesses as if the acquisitions had occurred January 1, 1997.
YEAR TO DATE YEAR TO DATE
SEPTEMBER 6, 1998 SEPTEMBER 30, 1997
----------------- ------------------
Net sales.......................................... $ 21,160,831 $ 14,565,617
Net loss........................................... $(14,263,724) $ (9,042,807)
Net loss per common share.......................... $ (567.13) $ (274.26)
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense as a result of a step-up in the basis of fixed assets, additional
amortization expense as a result of goodwill and other intangible assets, and an
increased interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect on January 1, 1997 or of future results of
operations of the consolidated entities.
12. REDEEMABLE PREFERRED STOCK
The put rights on the shares of the Preferred Stock were terminated
pursuant to a stockholder consent dated April 2, 1998 ("the April 2, 1998
Consent") as of April 14, 1998 contingent upon the closing of the Offering,
which occurred on April 29, 1998. Prior to the termination of the put rights,
each class of holders of the Series A, Series B and Series C Convertible
Preferred Stock (collectively, the "Preferred Stock") had the right, upon the
demand of those holding 51% of each of the classes, to require the Company to
purchase all of the Preferred Stock at any time after June 1, 2001, at a
redemption price equal to the greater of the purchase price of the shares plus
accrued but unpaid dividends, if any, or, the appraised value of the shares. The
accreted value of the Preferred Stock at September 6, 1998 and December 28, 1997
was $50,845,810 and $48,792,805, respectively.
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SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Company's interest expense, net of amount capitalized, consists of the
following:
QUARTERS ENDED YEAR-TO-DATE
----------------------------- -----------------------------
SEPTEMBER 6, SEPTEMBER 30, SEPTEMBER 6, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------- ------------ -------------
Accretion of Senior Discount Notes...... $2,935,302 $ -- $4,542,717 $ --
Interest expense on Raytheon And LaSalle
debt.................................. -- 256,991 1,348,531 562,477
Amortization of debt issue costs........ 210,107 -- 388,221 --
Other interest expense.................. 14,516 -- 28,623 --
Capitalized interest.................... (5,538) -- (103,227) --
---------- -------- ---------- --------
Interest expense, net................... $3,154,387 $256,991 $6,204,865 $562,477
========== ======== ========== ========
14. SUBSEQUENT EVENTS
A. On September 18, 1998, the Company entered into an agreement with
PeopleSoft USA, Inc. for the purchase of a new accounting software
system and the related hardware, installation and training fees. The
transaction was financed by a note payable to Newcourt Financial USA,
Inc. in the amount of $560,000. The Company will begin utilizing the
software for substantially all of its accounting processes at the
beginning of its fiscal 1999 second quarter. PeopleSoft has verified
to the Company that its products are Year 2000 compliant.
B. On September 25, 1998 and October 20, 1998, the Company filed
pre-effective amendments to its Exchange Offer Registration Statement
with the SEC. On September 28, 1998 and October 20, 1998, the Company
filed pre-effective amendments to its Shelf Registration Statement
with the SEC.
C. On October 15, 1998, the Company received approximately $4.9 million
in cash from SpinDevCo in repayment of outstanding principal and
interest on the Extended Note. Simultaneously, the Company purchased
three sites from SpinDevCo for approximately $1.75 million in cash,
the same amount for which it had previously sold them to SpinDevCo.
The Company is currently operating stores at these three sites. The
Company has an agreement with a third party to sell these three
properties for $1.75 million in cash. After the sale, the properties
will be subject to more favorable leases, including lower rental
rates, than the leases the Company had with SpinDevCo.
D. Management and Mr. Bruce Mosby, the Company's former Chief Operating
Officer agreed to submit their dispute regarding Mr. Mosby's
termination from the Company to mediation. The mediation took place on
October 14, 1998. The results of the mediation were that no agreement
was reached between the Company and Mr. Mosby. Management is
continuing severance discussions with Mr. Mosby. The Company does not
believe that the resolution of this matter will have a material
adverse effect on the financial condition or results of the operations
of the Company.
E. The written stockholder solicitation regarding the reservation of
additional shares of Common Stock for the grant of options pursuant to
the Company's 1995 Plan commenced on August 26, 1998 and concluded on
September 24, 1998. Reserving additional shares for the 1995 Plan
requires the consent of the holders of a majority of the Common Stock,
76% of the Series A Convertible Preferred Stock ("Series A Stock"),
51% of the Series B Convertible Preferred Stock ("Series B Stock") and
51% of the Series C Convertible Preferred Stock ("Series C Stock").
The addition of
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SPINCYCLE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26,546 shares to the 1995 Plan, for a total of 69,270 shares available
under the 1995 Plan, was approved by the requisite vote of the
stockholders. As of the date hereof, those results were as follows:
APPROVED DISAPPROVED ABSTAINED NOT RECEIVED
-------- ----------- --------- ------------
Common Stock................... 19,327 0 0 8,436
Series A Stock................. 61,850 0 0 14,724
Series B Stock................. 102,363 968 0 22,167
Series C Stock................. 63,610 0 0 9,320
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 4
Risk Factors.......................... 15
Use of Proceeds....................... 22
Capitalization........................ 23
Selected Financial and Other Data..... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 43
Management............................ 51
Principal Stockholders................ 57
Certain Transactions.................. 58
Description of the Heller Facility.... 59
Description of the New Notes.......... 60
Description of Capital Stock.......... 83
Book-Entry; Delivery and Form......... 85
Federal Income Tax Consequences....... 88
Plan of Distribution.................. 92
Notice to Canadian Residents.......... 93
Legal Matters......................... 94
Experts............................... 94
Available Information................. 94
Index to Consolidated Financial
Statements.......................... F-1
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[SPINCYCLE LOGO]
SPINCYCLE, INC.
OFFER TO EXCHANGE 144,990
12 3/4% SENIOR DISCOUNT NOTES
DUE 2005,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY
AND ALL OF ITS OUTSTANDING 12 3/4% SENIOR DISCOUNT NOTES DUE 2005
---------------------------------------------------
PRELIMINARY PROSPECTUS
---------------------------------------------------
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123
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "Delaware Act")
authorizes indemnification of directors, officers, employees and agents of the
Company; allows the advancement of costs of defending against litigation; and
permits companies incorporated in Delaware to purchase insurance on behalf of
directors, officers, employees and agents against liabilities whether or not in
the circumstances such companies would have the power to indemnify against such
liabilities under the provisions of the statute.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides for indemnification of the Company's officers and
directors to the fullest extent permitted by Section 145 of the Delaware Act.
The Company intends to obtain directors and officers insurance covering its
executive officers and directors.
The Certificate eliminates, to the fullest extent permitted by Delaware
law, liability of a director to the Company of its stockholders for monetary
damages for a breach of such director's fiduciary duty of care except for
liability where a director: (a) breaches his or her duty of loyalty to the
Company or its stockholders; (b) fails to act in good faith or engages in
intentional misconduct or knowing violation of law; (c) authorizes payment of an
illegal dividend or stock repurchase; or (d) obtains an improper personal
benefit. While liability for monetary damages has been eliminated, equitable
remedies such as injunctive relief or rescission remain available. In addition,
a director is not relieved of his or her responsibilities under any other law,
including the federal securities laws.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, the Company has been advised that in the opinion of the
Securities and Exchange Commission (the "Commission"), such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits to the Registration Statement are listed in the Exhibit Index
which appears elsewhere in this Registration Statement and is incorporated
herein by this reference.
All other schedules are omitted because of the absence of the condition
under which they are required or because the information is included in the
consolidated financial statements or notes thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate
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124
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted directors, officers and controlling persons
of the Company pursuant to the provisions described under Item 14 above or
otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted against the Company by such director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted against the Company by such
director, officer, or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(b) Not applicable.
(c) Not applicable.
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125
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused Amendment No. 5 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Scottsdale, in the State of Arizona, on November 20, 1998.
SPINCYCLE, INC.
By: /s/ PETER L. AX
------------------------------------
Peter L. Ax
Chairman and Chief Executive Officer
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126
Pursuant to the requirements of the Securities Act of 1933, as amended,
Amendment No. 5 to this Registration Statement has been signed below by the
following persons in the capacities indicated on November 20, 1998.
SIGNATURE TITLE
--------- -----
/s/ PETER L. AX Chairman and Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
Peter L. Ax
/s/ JAMES R. PUCKETT Chief Financial Officer (Chief Accounting
- ----------------------------------------------------- Officer)
James R. Puckett
/s/ ALFREDO BRENER* Director
- -----------------------------------------------------
Alfredo Brener
/s/ DEAN L. BUNTROCK* Director
- -----------------------------------------------------
Dean L. Buntrock
/s/ JAMES E. HUTTON* Director
- -----------------------------------------------------
James E. Hutton
/s/ JOHN H. MUEHLSTEIN* Director
- -----------------------------------------------------
John H. Muehlstein
/s/ PEER PEDERSEN* Director
- -----------------------------------------------------
Peer Pedersen
/s/ JOHN WALLACE* Director
- -----------------------------------------------------
John Wallace
* Signed by James R. Puckett pursuant to power of attorney.
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127
EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
1.1* Purchase Agreement, dated April 24, 1998 between the Company
and Credit Suisse First Boston Corporation, as Initial
Purchaser
3.1* Amended and Restated Certificate of Incorporation of the
Company as filed on April 27, 1998
3.2* Bylaws of the Company
4.1* Indenture dated as of April 29, 1998 between the Company and
Norwest Bank Minnesota, N.A., as Trustee
4.2* Form of the 12 3/4 Senior Discount Notes due 2005
4.3* Registration Rights Agreement dated April 29, 1998 between
the Company and Credit Suisse First Boston Corporation, as
Initial Purchaser
5.1 Form of Legal Opinion of Pedersen & Houpt, P.C. regarding
legality of securities
8.1* Form of Legal Opinion of Pedersen & Houpt, P.C. regarding
tax matters
10.1* Loan and Security Agreement dated as of April 29, 1998 among
the Company, as Borrower, various financial institutions, as
Lenders, and Heller Financial, Inc., as Agent and as Lender
10.2* Collateral Assignment of Leases dated as of April 29, 1998
between the Company, as Borrower, and Heller Financial,
Inc., as Agent for the Lenders under the Loan and Security
Agreement
10.3* Assignment for Security of Patents, Trademarks and
Copyrights dated as of April 29, 1998 between the Company,
as Assignor, and Heller Financial, Inc., as Agent for the
Lenders under the Loan and Security Agreement
10.4* Amended and Restated Supply Agreement dated as of February
19, 1998 between the Company, as Buyer, and Raytheon
Commercial Laundry LLC, as Seller
10.5* Employment Agreement dated December 1, 1996 between the
Company and Peter Ax
10.6* Employment Agreement dated June 1, 1997 between the Company
and Chris Lombardi
10.7* Second Amended and Restated Supply Agreement dated as of
September 1, 1998 between the Company, as Buyer, and
Alliance Laundry Systems LLC, as Seller
10.8* First Amendment to Loan and Security Agreement dated as of
July 1998
11.1* Statement regarding Computation of Per Share Earnings
23.1 Consent of Pedersen & Houpt, P.C.
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Coin Laundry Association
24.1* Power of Attorney
25.1* Statement of Eligibility of Norwest Bank Minnesota, N.A., as
Trustee
27.1* Financial Data Schedule
99.1* Form of Letter of Transmittal to 12 3/4% Senior Discount
Notes due 2005 of the Company
99.2* Form of Notice of Guaranteed Delivery for 12 3/4% Senior
Discount Notes due 2005 of the Company
99.3* Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees for 12 3/4% Senior Discount
Notes due 2005 of the Company
99.4* Form of Letter to Clients of Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees for 12 3/4% Senior
Discount Notes due 2005 of the Company
99.5* Form of Instruction from Owner of 12 3/4% Senior Discount
Notes due 2005 of the Company
- ---------------
* Previously filed.
II-5