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FORM 10-Q/A
AMENDMENT NO. 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 13, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-57883
SPINCYCLE, INC
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(Exact name of registrant as specified in its charter)
Delaware 41-1821793
(State of Incorporation) (I.R.S. Employer Identification No.)
15990 N. Greenway Hayden Loop, Suite #400, Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 707-9999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of June 30, 1999, the Company had 303,165 shares of capital stock
outstanding, comprised of 27,763 shares of common stock, 76,974 shares of series
A convertible preferred stock, 125,498 shares of series B convertible preferred
stock, and 72,930 shares of series C convertible preferred stock.
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SPINCYCLE, INC.
INDEX PAGE
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PART I - FINANCIAL INFORMATION........................................................................... 3
Item 1. Financial Statements............................................................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................................... 13
PART II - OTHER INFORMATION.............................................................................. 14
Item 1. Legal Proceedings............................................................................... 14
Item 2. Changes in Securities and Use of Proceeds....................................................... 14
Item 3. Defaults Upon Senior Securities................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............................................. 14
Item 5. Other Information............................................................................... 14
Item 6. Exhibits and Reports on Form 8-K................................................................ 14
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SPINCYCLE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
June 13, December 27,
1999 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,635,717 $ 4,239,099
Landlord allowances 498,393 781,628
Prepaid expenses 132,806 582,006
Inventory 278,481 112,964
Land held for sale-leaseback 2,138,809 2,194,533
Other current assets 680,593 687,483
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Total current assets 6,364,799 8,597,713
Property and equipment, net 102,923,997 100,657,304
Goodwill, net 13,204,726 13,610,471
Other assets 5,192,207 5,390,972
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Total assets $127,685,729 $128,256,460
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,510,066 $ 5,376,389
Accrued utilities 1,133,971 1,003,766
Accrued expenses 2,379,804 2,626,384
Current portion of deferred rent 478,516 311,557
Current portion of long-term debt 253,637 210,275
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Total current liabilities 6,755,994 9,528,371
Long-term debt 118,348,223 103,221,752
Deferred rent 2,707,012 2,650,724
Other liabilities 56,731 192,308
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Total liabilities 127,867,960 115,593,155
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Shareholders' equity:
Series A, Series B and Series C
convertible preferred stock, $.01
par value, 370,000 shares authorized,
275,402 shares issued and outstanding 50,845,810 50,845,810
Common stock, $.01 par value, 630,000
shares authorized 27,763 shares issued
and outstanding 278 278
Common stock warrants 5,625,000 5,625,000
Additional paid-in capital -
common stock 1,430,259 1,430,259
Accumulated deficit (58,083,578) (45,238,042)
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Total shareholders' equity (182,231) 12,663,305
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Total liabilities and shareholders'
equity $127,685,729 $128,256,460
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The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
STATEMENTS OF OPERATIONS
Quarters Ended Year-To-Date
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June 13, June 14, June 13, June 14,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Revenues $ 11,963,189 $ 6,204,440 $ 23,568,704 $ 11,475,235
Cost of revenues--store operating expenses, excluding
depreciation and amortization 9,228,078 4,974,609 17,939,693 9,209,624
--------------- --------------- --------------- ---------------
Gross operating profit 2,735,111 1,229,831 5,629,011 2,265,611
Preopening costs 1,012 110,486 114,384 201,251
Depreciation and amortization 3,314,676 1,570,074 6,466,283 2,844,143
Selling, general and administrative expenses 2,489,875 2,302,802 5,005,832 4,476,332
Loss on disposal of property & equipment 43,735 - 75,235 -
--------------- --------------- --------------- ---------------
Operating loss (3,114,187) (2,753,531) (6,032,723) (5,256,115)
Interest income 26,462 334,330 63,588 460,228
Interest expense, net of amount capitalized (3,500,738) (2,204,158) (6,876,401) (3,050,478)
--------------- --------------- --------------- ---------------
Net loss before extraordinary loss $ (6,588,463) $ (4,623,359) $ (12,845,536) $ (7,846,365)
Extraordinary loss from early extinguishment of debt - (333,596) - (333,596)
--------------- --------------- --------------- ---------------
Net loss $ (6,588,463) $ (4,956,955) $ (12,845,536) $ (8,179,961)
Repricing of Series C preferred stock - (1,459,000) - (1,459,000)
Accretion of redeemable preferred stock - (226,700) - (755,667)
--------------- --------------- --------------- ---------------
Net loss applicable to holders of common stock $ (6,588,463) $ (6,642,655) $ (12,845,536) $ (10,394,628)
=============== =============== =============== ===============
Net loss per common share (both basic and diluted):
Net loss applicable to holders of common stock
before extraordinary loss $ (237.31) $ (244.05) $ (462.69) $ (338.72)
Extraordinary loss from early extinguishment of debt - (12.90) - (11.23)
--------------- --------------- --------------- ---------------
Net loss applicable to holders of common stock $ (237.31) $ (256.95) $ (462.69) $ (349.95)
=============== =============== =============== ===============
Weighted average number of common shares outstanding 27,763 25,852 27,763 29,703
--------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
STATEMENTS OF CASH FLOWS
YEAR-TO-DATE
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JUNE 13, JUNE 14,
1999 1998
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CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (12,845,536) $ (8,179,961)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,466,284 2,844,143
Extraordinary loss from early extinguishment of debt -- 333,596
Loss on disposal of property and equipment 75,235 --
Amortization of debt issuance costs 441,298 107,405
Amortization of discount on long-term debt 6,351,393 1,607,415
Changes in assets and liabilities:
Landlord allowances 283,235 378,897
Prepaid expenses 449,200 (254,441)
Inventory (165,517) 35,114
Other current assets 6,890 858
Other assets (34,406) 75,046
Accounts payable (2,476,930) (3,978,477)
Construction payables (389,393) (267,453)
Accrued utilities 130,205 126,576
Accrued expenses and other liabilities (382,157) (437,688)
Deferred rent 223,247 1,025,146
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Net cash provided by (used in) operating activities $ (1,866,952) $ (6,583,824)
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of fixed assets (8,102,599) (12,793,828)
Proceeds from sale of fixed assets 49,010 6,600
Net proceeds from sale-leaseback transactions -- 1,896,637
Acquisition of businesses, net of cash acquired -- (7,175,112)
Capitalized interest (134,946) (97,689)
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Net cash used in investing activities: $ (8,188,535) $ (18,163,392)
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CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments of debt (107,644) (46,660,286)
Debt issuance costs paid (230,251) (4,956,665)
Increase in debt 8,790,000 103,149,974
Proceeds from issuance of common stock warrants -- 5,625,000
Proceeds from stock subscriptions -- 2,904,500
Stock issuance costs paid -- (93,448)
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Net cash provided by financing activities $ 8,452,105 $ 59,969,075
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Net increase (decrease) in cash and cash equivalents (1,603,382) 35,221,859
Cash and cash equivalents, beginning of period 4,239,099 8,249,161
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Cash and cash equivalents, end of period $ 2,635,718 $ 43,471,020
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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Equipment financed with long-term debt $ 136,084 $ 1,998,428
Sale-leaseback financed with note receivable $ -- $ 4,930,381
Accretion of mandatorily redeemable preferred stock $ -- $ 2,107,719
CASH FLOW DURING THE YEAR FOR THE FOLLOWING:
Interest paid $ 185,457 $ 1,370,023
The accompanying notes are an integral part of these financial statements.
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SPINCYCLE, INC.
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NOTES TO FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL INFORMATION - BASIS OF PRESENTATION
The unaudited financial information presented herein has been prepared in
accordance with the instructions to Form 10-Q and Regulation S-X and does not
include all of the information and note disclosures required by generally
accepted accounting principles. Therefore, this information should be read in
conjunction with the audited financial statements for the year ended December
27, 1998 and notes thereto included in the Form 10-K of SpinCycle, Inc. (the
"Company") filed with the Securities and Exchange Commission ("SEC") on March
29, 1999. This information reflects all adjustments that are, in the opinion of
management, necessary for a fair statement of the Company's financial position,
results of operations and cash flows for the interim periods reported. These
adjustments are of a normal and recurring nature.
2. UNAUDITED INTERIM RESULTS OF OPERATIONS
The results of operations for the periods ended June 13, 1999 and June 14,
1998 are not necessarily indicative of the results to be expected for a full
fiscal year.
3. EARNINGS PER SHARE
Net loss per common share is computed using the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
requires the presentation of basic earnings per share ("EPS") and diluted EPS.
Basic EPS is computed by dividing the net loss applicable to holders of
common stock by the weighted average number of common shares outstanding during
each period. Diluted EPS is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period adjusted for
dilutive stock options and warrants and dilutive common shares assumed to be
issued on conversion of preferred stock to common stock. Diluted EPS has not
been presented, as the computation is anti-dilutive due to the Company's net
loss in each period.
4. ACQUISITIONS
During the quarter ended June 13, 1999, the Company did not acquire any
existing coin laundry businesses. During the quarter ended June 14, 1998, the
Company acquired three existing coin laundry businesses for a total cash outlay
of $1,392,000, all 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 $256,667
and did not assume any liabilities of the sellers. Goodwill is amortized on a
straight-line basis over 15 years.
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5. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Company's interest expense, net of amount capitalized, consists of the
following:
QUARTERS ENDED YEAR-TO-DATE
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JUNE 13, JUNE 14, JUNE 13, JUNE 14,
1999 1998 1999 1998
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Accretion of Senior Discount Notes $ 3,227,427 $ 1,607,415 $ 6,351,393 $ 1,607,415
Interest expense on Raytheon and LaSalle debt 0 486,875 0 1,419,240
Amortization of debt issue costs 184,785 107,405 441,300 107,405
Other interest expense 144,286 13,000 218,654 14,107
Capitalized interest (55,760) (10,537) (134,946) (97,689)
----------- ----------- ----------- -----------
Interest expense, net $ 3,500,738 $ 2,204,158 $ 6,876,401 $ 3,050,478
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6. LONG-TERM DEBT
At June 13, 1999 and December 27, 1998, long-term debt included the
following:
JUNE 13, DECEMBER 27,
1999 1998
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12.75% Senior Discount Notes Due 2005 ($144,990,000 principal
amount), net of unamortized discount $109,311,922 $102,960,529
Heller Credit Facility; interest at LIBOR plus 2.75% or prime
plus 0.50%, matures April 28, 2002 8,700,000 -
Other notes payable; interest at 11% due in various installments
through September 2001 589,938 471,498
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118,601,860 103,432,027
Less current portion (253,637) (210,275)
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$118,348,223 $103,221,752
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7. REDUCTION IN FORCE
On April 23, 1999, twenty general and administrative employees,
including the Company's Chief Information Officer, Mr. Patrick Boyer, were
released from their employment with the Company as part of a reduction in
force. In connection with this reduction in force, the Company paid
approximately $72,000 in severance and approximately $20,000 in accrued
vacation benefits to these employees. These expenses were recorded in the
second quarter of 1999.
As a result of the Company's slowed expansion and development and public
equity offering prospects, the Company's Chief Financial Officer, Mr. James
Puckett, left the Company effective May 6, 1999. In the Company's current
state of slowed growth, the day to day financial responsibilities will be
assumed by Mr. Peter Ax, the Company's Chairman and Chief Executive
Officer. Additionally, Mr. John S. Banas, III, the company's general
counsel, was terminated June 10, 1999. The company has no plans to hire
another general counsel.
8. RECLASSIFICATIONS
For comparative purposes, certain prior year amounts have been
reclassified to conform to the current year presentation.
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SPINCYCLE, INC.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SpinCycle is a specialty retailing company engaged in the coin laundry
business. We were founded in October 1995 to develop and implement SpinCycle's
unique concept of a national chain of branded coin-operated laundromats and to
serve as a platform for a nationwide consolidation in the coin-operated
laundromat industry. We were formed with the goal of becoming the leading
operator of high quality coin-operated laundromats in the United States by
establishing SpinCycle as a national brand, providing a superior level of
customer service and by exercising disciplined management control in our
expansion and business plan.
To date, our primary use of capital has been for the development and
acquisition of laundromats and for general corporate purposes. Our store count
has grown rapidly since our first store was opened in April 1996, and at year
end 1996, 1997 and 1998 we had opened a total of 14, 71 and 163 stores,
respectively. As of June 13, 1999, we had opened nine additional stores bringing
our total store count to 172, and had three others under construction. We also
have six signed leases for stores that we intend to develop and open by year-end
1999. No further commitments for acquisitions or new store developments have
been made. We closed one store during 1998, following a lease buyout by our
landlord at that location.
Our rapid development and acquisition of laundromats has required
significant capital resources. To date, we have not been profitable and have
generated net operating losses and negative cash flow from operations. As such,
our expansion has been facilitated through private equity investments, proceeds
from the issuance of our senior discount notes, borrowings from our credit
facilities and revenue generated from our stores. We had expected to access the
public equity markets in late 1998 or early 1999 to provide additional growth
capital for our planned expansion, but have found that SpinCycle's valuation
under current market conditions would provide an unfavorable return to our
investors. Until such time as we can access the public equity markets, or other
sources of capital, we have elected to proceed cautiously with our planned
expansion, slowing such expansion through development or acquisition to
judiciously utilize available sources of growth capital.
Because of our constrained sources of growth capital, as of June 13, 1999,
we have obligations to develop only nine additional stores in 1999, three of
which are under construction. We intend to develop these stores in 1999 with
proceeds from our credit facility or from cash generated from our stores. We
continue to maintain a significant backlog of potential acquisition and
development sites, but will not sign additional commitments to purchase or
develop stores prior to procuring additional growth capital or generating
sufficient cash flow from operations.
During the second quarter of 1999, we maintained positive EBITDA for the
second consecutive quarter. We ended the second quarter of 1999 with
approximately $235,000 of EBITDA. EBITDA for the quarter ended June 13, 1999
excludes the loss on disposal of property and equipment of $43,735. For the
remainder of 1999, we will continue to focus on strategies to improve unit level
economics and reduce general and administrative expenses.
During the fourth quarter of 1998 and the first and second quarters of 1999
we slowed our growth through acquisitions and development of new stores
dramatically as a result of our inability to access additional growth capital
through the equity capital markets. We had previously expected to be able to
access the equity capital markets during the fourth quarter of 1998 or the first
quarter of 1999. In response to our slowdown, we have initiated two reductions
in force during 1999. In February 1999 and again in April 1999 we reduced
general and administrative personnel. These reductions in force were primarily
focused on our growth-related personnel, including regional directors of
development and acquisitions, corporate and field level construction managers,
management information personnel and corporate level support personnel related
to these areas. Once all severance payments have been made, we believe that we
have reduced our general and administrative expenses by approximately 20% in
salary, benefit and travel
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related expenses through these reductions in force.
RESULTS OF OPERATIONS
Our first, second and third quarters consisted of three periods (12 weeks)
in 1998, while the fourth quarter contained four periods (16 weeks). In 1999 and
thereafter, our first, second and fourth quarters will contain three periods,
and our third quarter will contain four periods.
EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because we believe it is a widely accepted
financial indicator of an entity's ability to incur and service debt. While
EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles ("GAAP") and should not be considered
as an indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to provide
additional information with respect to our ability to meet our future debt
service, capital expenditures and working capital requirements.
Store EBITDA is defined as EBITDA before allocation of any selling, general
and administrative expenses. While Store EBITDA is not intended to represent
operating income or loss as defined by GAAP, (as GAAP operating income or loss
includes such allocation of selling, general and administrative expenses) and
should not be considered as an indicator of operating performance as measured by
GAAP, it is included herein to provide additional information with respect to
store-level cash operating margins.
Second Quarter and Year-To-Date 1999 Compared to Second Quarter and Year-To-Date
1998
Revenues. Our revenues were approximately $12.0 million for the second
quarter 1999, an increase of approximately $5.8 million from approximately $6.2
million in the corresponding period in 1998. Revenues were approximately $23.6
million for year-to-date 1999, an increase of approximately $12.1 million from
approximately $11.5 million for the corresponding period of 1998. Our growth in
revenue was primarily attributable to the addition of 65 stores since the end of
the second quarter of 1998. The continued maturation of our developed and
acquired stores during fiscal 1998 also contributed substantial incremental
revenue to the second quarter of 1999.
Store Operating Expenses, excluding depreciation and amortization. Our store
operating expenses, excluding depreciation and amortization ("store operating
expenses") were approximately $9.2 million in the second quarter of 1999, an
increase of approximately $4.2 million from approximately $5.0 million in the
corresponding period in 1998. Store operating expenses for year-to-date 1999
were approximately $17.9 million, an increase of approximately $8.7 million from
approximately $9.2 million in the corresponding period of 1998. The increase in
store operating expenses was primarily attributable to the addition of 65 stores
since the end of the second quarter of 1998. Operating expenses as a percentage
of revenues were approximately 80% during our second quarter and year-to-date
1998. Operating expenses as a percentage of revenues decreased to approximately
77% for the second quarter of 1999, and approximately 76% for year-to-date 1999,
which is a result of the maturation of certain of our stores' revenue and our
implementation of initiatives designed to reduce store operating expenses.
Gross Operating Profit (Loss). Our gross operating profit was approximately
$2.7 million in the second quarter of 1999, an increase of approximately $1.5
million from approximately $1.2 million in the corresponding period in 1998.
Gross operating profit was approximately $5.6 million year-to-date 1999, an
increase of approximately $3.3 million from a profit of approximately $2.3
million in the corresponding period in 1998. The increases were primarily
attributable to our aforementioned increase in revenues during the period and
our initiatives to reduce store operating expenses.
Preopening Costs. Our preopening costs were approximately $1,000 in the
second quarter of 1999, a decrease of approximately $109,000 from approximately
$110,000 in the corresponding period in 1998. Preopening costs were
approximately $114,000 year-to-date 1999, a decrease of approximately $87,000
from approximately $201,000 in the corresponding period of 1998. We expense
preopening costs as incurred. During the second quarter of 1998 we opened 12
stores and had 17 stores under construction. For the year-to-date period ended
June 14, 1998 we had opened 36 stores and had 12 under construction. During the
second quarter of 1999 we opened no stores and had three stores under
construction. For the year-to-date period ended June 13, 1999 we had opened nine
stores and had three under construction. We have delayed the opening of
approximately six stores until later in fiscal 1999.
Store EBITDA. Our store EBITDA was approximately $2.7 million in the second
quarter of 1999, an increase of approximately $1.6 million from approximately
$1.1 million for the corresponding period in 1998. Store EBITDA was
approximately $5.5 million year-to-date 1999, an increase of approximately $3.4
million from approximately $2.1 million in the corresponding period of 1998. The
increases were
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primarily attributable to increased revenue from the maturation of our stores
and a reduction in our store operating expenses.
Depreciation and Amortization. Our depreciation and amortization expense was
approximately $3.3 million in the second quarter of 1999, an increase of
approximately $1.7 million from approximately $1.6 million for the corresponding
period in 1998. Depreciation and amortization expense was approximately $6.5
million year-to-date 1999, an increase of approximately $3.7 million from
approximately $2.8 million in the corresponding period in 1998. The increases
were due to property and equipment acquired in connection with our expansion.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were approximately $2.5 million in the second quarter of
1999, an increase of approximately $200,000 from approximately $2.3 million in
the corresponding period of 1998. Selling, general and administrative expenses
were approximately $5.0 million year-to-date 1999, an increase of approximately
$500,000 from approximately $4.5 million for the corresponding period in 1998.
The increases were primarily attributable to the building of our corporate
infrastructure in order to manage our nationwide expansion from 107 stores at
the end of the second quarter of 1998 to 172 stores at the end of the second
quarter of 1999. Second quarter 1999 selling, general and administrative
expenses decreased as a percentage of revenues from 37% for the quarter ended
June 14, 1998 to 21% for the quarter ended June 13, 1999. Selling, general and
administrative expenses decreased as a percentage of revenues from 39% for
year-to-date 1998 to 21% for year-to-date 1999. These decreases were due to the
maturation of our stores opened in 1998 and our implementation of certain
initiatives to reduce these expenses, including our February and April
reductions in force.
EBITDA. Our EBITDA in the second quarter of 1999 was approximately $235,000,
an improvement of $1.4 million from our loss of approximately $1.2 million for
the corresponding period in 1998. EBIDTA was approximately $509,000 year-to-date
1999, an increase of approximately $2.9 million from a loss of approximately
$2.4 million for year-to-date 1998. The increases were primarily attributable to
increased gross profits from additional stores opened as well as from the
maturation of our stores, partially offset by the increase in selling, general
and administrative expenses to accommodate our 1998 expansion as discussed
above.
Interest Income and Interest Expense, net. Our interest income decreased to
approximately $26,000 in the second quarter of 1999 a decrease of approximately
$308,000 from approximately $334,000 in the second quarter of 1998. Interest
income was approximately $64,000 year-to-date 1999, a decrease of approximately
$396,000 from approximately $460,000 for the corresponding period in 1998. The
decrease in interest income was primarily attributable to a lower average cash
balance during the second quarter and year-to-date 1999 compared to the second
quarter and year-to-date 1998. Our interest expense, net of capitalized interest
was approximately $3.5 million in the second quarter of 1999, an increase of
approximately $1.3 million from approximately $2.2 million in the corresponding
period in 1998. Interest expense, net was approximately $6.9 million
year-to-date 1999, an increase of approximately $3.8 million from approximately
$3.1 million for the corresponding period of 1998. The increase in interest
expense, net was primarily attributable to the accretion of interest expense
related to our April 1998 offering of senior discount notes and warrants and
interest expense accrued for borrowings on our Heller facility. Our outstanding
borrowings under the Heller facility increased from $0 at the end of fiscal year
1998 to approximately $8.7 million at the end of the second quarter of 1999.
Net Loss. Our net loss recorded in the second quarter of 1999 was $6.6
million, an increase of approximately $1.6 million from our $5.0 million net
loss recorded in the corresponding period of 1998. Net loss was approximately
$12.8 million year-to-date 1999, an increase of approximately $4.6 million from
$8.2 million for the corresponding period in 1998. The increased loss was
primarily attributable to the depreciation and amortization associated with the
65 new stores that we both acquired and developed since the end of the second
quarter of 1998 and the interest expense related to our April 1998 offering of
senior discount notes and warrants.
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LIQUIDITY AND CAPITAL RESOURCES
At June 13, 1999, we had total assets of approximately $128.0 million,
including current assets of approximately $6.4 million. Cash and cash
equivalents were approximately $2.6 million.
Our cash used in operations during the second quarter of 1999 was
approximately $800,000, a $3.2 million decrease from our cash used in operations
during the corresponding period in 1998 of approximately $4.0 million. Our use
of cash in each period was primarily attributable to the use of working capital
for the payment of our corporate expenses.
Our cash used in investing activities during the second quarter of 1999 was
approximately $2.5 million, a $4.5 million decrease from our cash used in
investing activities of approximately $7.0 million for the corresponding period
in 1998. Our reduced spending on investing activities in the second quarter of
1999 is due to our slow down of expansion activities. We expect to aggregate
approximately $14.0 million in capital expenditures for fiscal 1999 to fund our
planned 1999 store rollout.
Our cash provided by financing activities was approximately $2.8 million
during the second quarter of 1999 compared to approximately $50.1 million
provided by financing activities during the corresponding period in 1998. We
borrowed funds primarily to pay for our capital expenditures related to our 1999
store rollout plan. The funds were obtained primarily from our Heller facility.
In the comparable 1998 period, our borrowings related to the proceeds from our
senior discount notes.
We generated approximately $235,000 of positive EBITDA during our second
quarter of fiscal 1999. We expect to generate positive EBITDA in all 13 periods
of 1999. As of June 13, 1999 we had drawn $8.7 million from our Heller facility,
and had approximately $1.3 million of additional borrowing capacity on this
credit facility. Subsequent to quarter end, we drew an additional $600,000 on
July 7, 1999, resulting in unused availability of approximately $700,000 as of
July 28, 1999. Because of our current development commitments, we expect to
borrow the entire amount available from Heller by August 8, 1999. Thereafter we
expect to meet our obligations with cash flows from our store operations.
However, we are currently in negotiations with several financial institutions in
order to secure additional lines of credit to satisfy our short term capital
requirements. We believe that our cash flow from operations along with the
existing borrowing availability under Heller and the potential additional
borrowing capacity provided by Heller and other financial institutions will
provide us with sufficient capital resources through June of 2000. Significant
variances in budgeted store revenue or Store EBITDA, unforeseen capital
requirements, or our inability to acquire additional lines of credit could
result in insufficient capital resources.
Beginning November 1, 2001, we will be required to make semi-annual cash
payments of approximately $9.24 million on our senior discount notes. These
payments, which are substantially in excess of any historic net cash flow we
have generated, will be in addition to our selling, general and administrative
expense and any other interest or other expenses we may have at that time.
POTENTIAL LOSS OF NET OPERATING LOSSES
As of June 13, 1999, we had net operating losses ("NOLs") of approximately
$41.5 million for U.S. federal income tax purposes. These NOLs, if not utilized
to offset taxable income in future periods, will begin to expire in 2011.
Section 382 of the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder, impose limitations on the ability of corporations to use
NOLs if the corporation experiences a more than 50% change in ownership during
any three-year period. It is probable that we have experienced one or more
ownership changes in 1996, 1997 and 1998 as a result of raising various rounds
of private equity or that such an ownership change may have occurred or be
deemed to have occurred due to events beyond our control (such as transfers of
common stock by certain stockholders or the exercise or treatment of our issued
and outstanding warrants, conversion rights or stock options). Further, there
can be no assurance that we will not take additional actions, such as the
issuance of additional stock, that would cause an ownership change to occur. In
addition, the NOLs are subject to examination by the Internal Revenue Service
("IRS"), and are thus subject to adjustment or disallowance resulting from any
such IRS examination.
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DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS; YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of many management information systems
("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 a year,
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.
We depend on MIS to monitor daily revenues and machine utilization in each
of our stores, exercise centralized cash and management controls and compile and
analyze critical marketing and operations data. Any disruption in the operation
of our MIS, the loss of employees knowledgeable about such systems or our
failure to continue to effectively modify such systems as we expand could have a
material adverse effect on our business, financial condition and results of
operations.
SpinCycle's Readiness. Based on our initial tests and certifications
received from MIS providers, we believe that both our critical software systems
and store hardware systems are currently Year 2000 compliant. Our assessment of
exposure to Year 2000 problems began in March 1998 with a test of all MIS for
Year 2000 readiness. Since that time, management has obtained certifications
from providers of our accounting, revenue control and other critical software
systems that such MIS are Year 2000 compliant. We are completing final test
procedures for Year 2000 compliance and believe that our MIS are 100% Year 2000
compliant. However, if our final testing is not completed on a timely basis or
does not resolve all Year 2000 issues, such issues could have a material adverse
effect on our operations.
Readiness of Third Parties. We have taken reasonable precautions to verify
the Year 2000 readiness of any third party that could cause a material impact on
our operations. Alliance, the major supplier of our laundry machines, has
represented that the electronic controls embedded in their machines will not
experience problems as a result of the Year 2000. Alliance further represented
that the electronic controls embedded in their machines have been tested without
incident by simulating the Year 2000 date change. In addition, SpinCycle's
providers of essential software systems have certified that such systems are
Year 2000 compliant.
Historical and Estimated Costs. We have not established a separate Year 2000
compliance budget and do not expect to do so in the immediate future. To date,
the only costs for Year 2000 compliance have been the expenditure of
approximately $50,000 to replace certain personal computers in our stores.
Although no assurances can be given, we do not expect future costs related to
Year 2000 compliance to have a material adverse effect on 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 us would be our inability to implement variable
pricing in our laundry machines in an effort to boost off-peak customer traffic,
revenues and profitability. Variable pricing may temporarily malfunction on
January 2, 2000, since the machines recognize each day of the week based upon
the calendar date contained in their embedded computer chips and the price
programmed for a certain day of the week may in fact appear on a different day.
Although we do 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 can not be reset, store
personnel will be able to manually set the laundry machines to charge a fixed
price until such time as we resolve defects in our variable pricing system.
SEASONALITY
Coin-operated laundromat industry data, as well as data generated from our
mature and maturing stores, indicates that the coin-operated laundry business
experiences seasonal variations in operating performance during the later spring
and summer seasons. We believe this seasonality is a result of the reduced
volume of heavier clothing worn
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during the spring and summer months, which results in lower laundry machine
usage. We observed the effect of such seasonality in the 70 stores opened for
the entire 1998 fiscal year. During the first nine periods ending September 6,
1998, revenues in these stores fluctuated approximately 11.5%, from a peak
during the third period to a low in the ninth period. These 70 stores
experienced a significant increase in revenues in the final quarter of the year,
completing the seasonal cycle. As we now have a significant base of data
regarding seasonality, we have adjusted our 1999 budgets to account for the
seasonal patterns experienced in 1998.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about our
confidence in our prospects, strategies and expectations about expansion into
new markets, growth in existing markets, comparable store sales and ability to
attract new sources of financing, are forward-looking statements that involve
risks and uncertainties. These risks and uncertainties include, but are not
limited to, (1) our historical and anticipated losses and negative cash flow;
(2) debt service requirements, restrictions and covenants related to our
substantially leveraged financial position; (3) considerable competition from
local and regional operators in all of our markets; (4) our ability to hire,
train, retain and assimilate competent management and store-level employees; (5)
our ability to identify new markets in which to successfully compete; (6) our
ability to locate suitable sites for building or acquisition; (7) our ability to
negotiate acceptable lease terms; (7) our ability to adopt purchasing systems
and MIS to accommodate expanded operations; (8) our dependence on timely
fulfillment by landlords and others of their contractual obligations; and (9)
our maintenance of construction schedules and the speed with which local zoning
and construction permits can be obtained. No assurance can be given that new
stores will achieve sales and profitability comparable to the existing stores or
to our strategic plan. There can be no assurance that an adequate revenue base
will be established or that we will generate positive cash flow from operations.
Any investor or potential investor in SpinCycle must consider these risks and
others that are detailed in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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SPINCYCLE, INC.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently involved in various legal proceedings of a character
normally incident to businesses of our nature. We do not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition or results of operations of SpinCycle.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a). Exhibit 27.1 Financial Data Schedule.
(b). None.
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The Company has duly caused this amended report to be signed on behalf by
the undersigned thereunto duly authorized.
SPINCYCLE, INC.
Date: August 18, 1999 By /s/ Peter L. Ax
-------------------------------
Peter L. Ax
Chief Executive Officer
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Exhibit Index
Exhibit 27.1 Financial Data Schedule