10-Q 1 p64130e10-q.txt 10-Q 1 FORM 10-Q 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 October 1, 2000 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. (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 November 14, 2000, 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. 2 SPINCYCLE, INC. --------------------------------------------------------------------------------

INDEX PAGE ----- ---- PART I - FINANCIAL INFORMATION...........................................~~.......~~ 3 Item 1. Financial Statements.............................................. 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 9 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................................................. 1614 Item 6. Exhibits and Reports on Form 8-K.................................. 1614

3 SPINCYCLE, INC. -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BALANCE SHEETS

~~JUNE~~OCTOBER 111, DECEMBER 26, 2000 1999 ~~(UNAUDITED)~~ ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 32,~~961~~249,~~818~~324 $ 4,125,919 Landlord allowances 77,250 176,340 Prepaid expenses ~~276~~252,~~359~~738 92,490 Inventory ~~296~~300,~~748~~920 298,477 Land held for sale-leaseback 1,919,209 1,919,209 Other current assets ~~866~~926,~~994~~319 685,508 ------------- ------------- Total current assets 75,~~398~~725,~~378~~760 7,297,943 Property and equipment, net 8986,~~794~~014,~~369~~350 95,241,610 Goodwill, net 12,~~210~~033,~~934~~140 12,634,520 Other assets 3,~~999~~792,~~187~~890 4,370,021 ------------- ------------- Total assets $ ~~113~~107,~~402~~566,~~868~~140 $ 119,544,094 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 1709,~~132,133~~923 $ 885,231 Accrued utilities 1953,~~183,092~~770 1,296,144 Accrued expenses 1,~~775~~393,~~969~~990 2,666,326 Current portion of deferred rent 493,335 493,335 Current portion of long-term debt ~~251~~6,~~007~~767,186 207,460 ------------- ------------- Total current liabilities 410,~~835~~318,~~536~~204 5,548,496 Long-term debt ~~134~~133,~~755~~001,~~200~~302 127,940,845 Deferred rent 2,~~993~~665,~~666~~962 3,407,741 Other liabilities ~~378~~345,~~468~~610 428,520 ------------- ------------- Total liabilities ~~142~~146,~~962~~331,~~870~~078 137,325,602 ------------- ------------- 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 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 (8796,~~461~~666,~~349~~285) (75,682,855) ------------- ------------- Total shareholders' equity (deficit) (2938,~~560~~764,~~002~~938) (17,781,508) ------------- ------------- Total liabilities and shareholders' equity $ ~~113~~107,~~402~~566,~~868~~140 $ 119,544,094 ============= =============

The accompanying notes are an integral part of these financial statements. -3- 4 SPINCYCLE, INC. -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS (UNAUDITED)

QUARTERS ENDED YEAR-TO-DATE ------------------------------- ------------------------------- ~~JUNE~~OCTOBER 111, ~~JUNE~~OCTOBER 133, ~~JUNE~~OCTOBER 111, ~~JUNE~~OCTOBER 133, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues $ 1215,~~508~~840,~~826~~532 $ 1116,~~963~~090,~~189~~868 $ 2541,~~806~~647,~~725~~256 $ 2339,~~568~~659,~~704~~572 Cost of revenues -- store operating expenses 811,~~746~~246,~~308~~043 912,~~228~~441,~~078~~902 1728,~~581~~827,~~948~~991 1730,~~939~~381,~~693~~595 Preopening costs -- 12,~~012~~586 -- ~~114~~116,~~384~~970 Depreciation and amortization 34,~~373~~517,~~369~~280 34,~~314~~465,~~676~~303 611,~~742~~260,~~828~~108 610,~~466~~931,~~283~~586 Selling, general and administrative expenses 23,~~657~~376,~~821~~010 2,~~489~~909,~~875~~680 48,~~970~~346,~~296~~306 57,~~005~~915,~~832~~512 Loss on disposal of property & equipment -- 43391,~~735~~246 -- 75466,~~235~~482 ------------ ------------ ------------ ------------ Operating loss (23,~~268~~298,~~672~~801) (34,~~114~~119,~~187~~849) (36,~~488~~787,~~347~~149) (610,~~032~~152,~~723~~573) Interest income 2018,~~174~~022 2635,~~462~~370 4563,~~495~~518 6398,~~588~~958 Interest expense, net of amount capitalized (45,~~323~~924,~~216~~157) (34,~~500~~969,~~738~~804) (814,~~335~~259,~~642~~799) (611,~~876~~846,~~401~~205) ------------ ------------ ------------ ------------ Net loss $ (69,~~571~~204,~~714~~936) $ (69,~~588~~054,~~463~~283) $(1120,~~778~~983,~~494~~430) $(1221,~~845~~899,~~536~~820) ------------ ------------ ------------ ------------ Net loss per common share $ (~~236~~331.7155) $ (~~237~~326.3113) $ (~~424~~755.2581) $ (~~462~~788.6981) ============ ============ ============ ============ Weighted average number of common shares outstanding 27,763 27,763 27,763 27,763 ~~============~~------------ ~~============~~------------ ~~============~~------------ ~~============~~------------

The accompanying notes are an integral part of these financial statements. -4- 5 SPINCYCLE, INC. -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS (UNAUDITED)

YEAR-TO-DATE ------------------------------- ~~JUNE~~OCTOBER 111, ~~JUNE~~OCTOBER 133, 2000 1999 ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $(1120,~~778~~983,~~494~~430) $(1221,~~845~~899,~~536~~820) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 611,~~742~~260,~~828~~108 610,~~466~~931,~~284~~586 Loss on disposal of property and equipment --1,000 75466,~~235~~482 Amortization of debt issuance costs ~~406~~688,~~810~~192 ~~441~~757,~~298~~650 Amortization of discount on long-term debt 712,~~406~~757,~~167~~973 610,~~351~~780,~~393~~035 Changes in assets and liabilities: Landlord allowances 99,~~090~~091 ~~283~~550,~~235~~595 Prepaid expenses (~~183~~160,~~869~~249) ~~449~~374,~~200~~950 Inventory 1(2,~~729~~443) (~~165~~174,~~517~~611) Other current assets (~~181~~240,~~486~~812) 664,~~890~~126 Other assets ~~36,425~~ (3488,~~406~~087) 18,860 Accounts payable ~~246~~(175,~~902~~309) (2,~~476~~779,~~930~~167) Construction payables -- (389,393) Accrued utilities (~~113~~342,~~052~~374) ~~130~~(50,~~205~~427) Accrued expenses and other liabilities (~~940~~1,~~409~~355,245) (~~382~~567,~~157~~099) Deferred rent (~~414~~741,~~075~~779) ~~223~~180,~~247~~660 ------------ ------------ Net cash provided by (used in) operating activities 1716,~~328,566~~636 (1,~~866~~735,~~952~~573) ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Purchase of fixed assets (~~832~~1,~~902~~277,856) (89,~~102~~150,~~599~~053) Proceeds from sale of fixed assets -- 49,~~010~~760 Net proceeds from sale-leaseback transactions 534,333 Capitalized interest (1,612) (~~134~~156,~~946~~902) ------------ ------------ Net cash provided by (used in) investing activities (~~834~~1,~~514~~279,468) (8,~~188~~722,~~535~~862) ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Payments of debt (~~660~~1,~~512~~275,292) (~~107~~266,~~644~~597) Debt issuance costs paid (87153,~~641~~726) (~~230~~336,~~251~~909) Increase in debt 90115,~~000~~255 89,~~790~~390,000 ------------ ------------ Net cash provided by (used in) financing activities (~~658~~1,~~153~~313,763) 8,~~452~~786,~~105~~494 ------------ ------------ Net increase (decrease) in cash and cash equivalents (~~164~~1,~~101~~876,595) (1,~~603~~671,~~382~~941) Cash and cash equivalents, beginning of period 4,125,919 4,239,099 ------------ ------------ Cash and cash equivalents, end of period $ 32,~~961~~249,~~818~~324 $ 2,~~635~~567,~~717~~158 ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Equipment financed with long-term debt $ 22,247 $ ~~136~~152,~~084~~823 CASH FLOW DURING THE YEAR FOR THE FOLLOWING: Interest paid $ ~~575~~773,~~666~~418 $ ~~185~~353,~~457~~043

The accompanying notes are an integral part of these financial statements. -5- 6 SPINCYCLE, INC. -------------------------------------------------------------------------------- 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, therefore, does not include all of the information and note disclosures required by generally accepted accounting principles for financial statements. Accordingly, this information should be read in conjunction with the audited financial statements for the year ended December 26, 1999 and notes thereto included in the Form 10-K of SpinCycle, Inc. (the "Company") filed with the Securities and Exchange Commission ("SEC") on March 27, 2000. In the opinion of management, this information reflects all adjustments of a normal recurring nature and necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods reported. The results of operations for the periods ended October 1, 2000 and October 3, 1999 are not necessarily indicative of the results to be expected for a full fiscal year. 2. LIQUIDITY During the year-to-date period ended October 1, 2000, the Company experienced a net loss of $20,983,430 and had an accumulated deficit of $96,666,285. The Company's history of losses has been largely due to depreciation and the accretion of interest on its senior discount notes, as well as the large general and administrative infrastructure it put in place to handle the rapid growth it has experienced. Year-to-date 2000, the Company has maintained positive earnings before interest, taxes, depreciation and amortization ("EBITDA") for all fiscal periods. Management believes that the availability of funds from the LaSalle Bank National Association credit facility and operating revenues from its 172 units opened as of fiscal quarter ended October 1, 2000, will enable the Company to maintain operations, excluding debt payments described below, for the foreseeable future. Beginning November 1, 2001, the Company will be required to make semi-annual cash payments of approximately $9.24 million on its senior discount notes. Additionally, on September 30, 2001, the Company will be required to repay the principal balance owing on the LaSalle facility. The principal balance outstanding on October 1, 2000 was approximately $6.5 million. These payments, which are substantially in excess of any historic net cash flow the Company has generated, will be in addition to its selling, general and administrative expenses and any other interest or other expenses incurred at that time. If the Company is unable to modify these debt service obligations, it is unlikely that the Company will be able to make these required cash payments when due, which could have a material and adverse effect on the Company. A special committee of the Company's Board of Directors has been formed to investigate possible alternatives. 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. -6- 7 4. JOINT VENTURES On January 7, 2000, the Company formed E-Wash, Inc., a Delaware corporation, as a wholly owned subsidiary. The Company's board of directors designated E-Wash, Inc. as an unrestricted subsidiary of the Company on February 3, 2000. On February 28, 2000, E-Wash, Inc. formed E-Wash, LLC, a Delaware single member limited liability company. These entities were re-named CleanWave, Inc. and CleanWave, LLC, respectively, on March 6, 2000. On May 30, 2000, these entities were renamed as Cleanwave, Inc. and Cleanwave, LLC, respectively. All references herein are to the entities as they were named as of the end of the Company's second quarter. On May 1, 2000, SpinCycle, Inc., through its wholly owned subsidiary, entered into an amended and restated limited liability company agreement for Cleanwave, LLC, and a unit purchase agreement, among other transaction documents, with Shell Chemical Company ("Shell"). Cleanwave, LLC now conducts the pick up and delivery laundry business, which the Company had been testing in its Miami, Florida market since August 1999. Pursuant to the unit purchase agreement, Shell acquired units representing a 30% interest in Cleanwave, LLC. The balance of Cleanwave, LLC units are owned by Cleanwave, Inc. (52.5%) and seven members of the Company's senior management (17.5% in the aggregate). The seven members of senior management of the Company own their units pursuant to restricted unit agreements, which provide that one-third of each individual's units vest as of the date of grant (February 28, 2000) and vest an additional one-third on each of the first two anniversaries of the grant date. As the remainder of these grants vest in the future, the Company will determine their current value at the vesting dates in order to recognize compensation expense. The Company's stockholders approved the grant of these restricted units as of June 30, 2000. Shell received one-third (10%) of its 30% interest in Cleanwave, LLC in exchange for services rendered and expenses undertaken on behalf of the venture prior to closing: these expenses related primarily to market research. Shell purchased the remaining two-thirds (20%) of its interest for $5.0 million in cash. The $5.0 million is expected to be used to operate the Cleanwave business in the Miami market through year end 2000, and to pay certain expenses incurred by the parties prior to closing, such as branding and capital expenditures. Shell also has the opportunity to earn up to an additional 11% ownership interest in Cleanwave, LLC if and when Cleanwave, LLC enters into certain strategic relationships with specified third parties and/or Shell provides certain services to Cleanwave, LLC. Cleanwave, LLC and Shell, and certain related parties of each, concurrently entered into an intellectual property transfer and license agreement regarding the ownership and licensing of existing intellectual property owned by the Company and/or contributed to Cleanwave, LLC and future intellectual property created by and/or on behalf of the Company, Cleanwave, LLC or Shell. Cleanwave and Shell also entered into an interim services and products agreement pursuant to which Cleanwave agrees to grant Shell a right of first refusal to provide certain products and services to Cleanwave. The Company is providing the laundry processing services (personnel and facilities) to Cleanwave, LLC for a one-year period, subject to extension and termination as agreed by the parties. All personnel previously hired to drive vans and staff the call center have become Cleanwave employees. SpinCycle is being compensated for providing laundry processing services on a price per pound basis as well as with fees to offset training and field management services and to offset occupancy costs. The Company has also agreed to provide certain administrative services, such as payroll processing, human resources, executive staffing and information systems, to Cleanwave, LLC for a term of one year, subject to extension by the parties. For these services the Company will receive 5% of Cleanwave, LLC's annual gross revenues, subject to a minimum annual amount of $250,000. Intercompany expenses between Cleanwave, LLC and the Company were immaterial for the fiscal quarter ended October 1, 2000. Currently, Cleanwave, LLC's only officers are Peter Ax and Christopher Lombardi, who are also officers of the Company. Cleanwave, LLC has a board of directors, currently comprised of Peter Ax, Christopher Lombardi, John H. Muehlstein, Daniel K. Carlson and R. Krug Fenz. Messrs. Carlson and Fenz are Shell's representatives on the board. -7- 8 The Company was required to and did obtain a waiver from its lenders, LaSalle Bank National Association and Alliance Laundry Systems LLC, in connection with this transaction. Based on the substantive participation rights granted to Shell under the amended and restated limited liability company agreement, the Company is not deemed to have effective control of Cleanwave, LLC, therefore the equity method of accounting is being applied. Additionally, the Company does not have a cash investment nor has it loaned any funds to Cleanwave, LLC constituting a basis in its interest in Cleanwave, LLC. As a consequence, the Company has not recorded any of Cleanwave, LLC's losses to date under the equity method or eliminated its portion of any intercompany transactions. The Company will continue this accounting treatment until such time as Cleanwave, LLC becomes profitable, which is not expected to occur in the foreseeable future. 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 --------------------------~~----~~ ------------------------------- ~~JUNE~~OCTOBER 111, ~~2000~~OCTOBER ~~JUNE 13~~3, ~~1999~~OCTOBER ~~JUNE~~1, 11OCTOBER 3, 2000 ~~JUNE~~1999 ~~13,~~2000 1999 ----------~~---~~ ------------- ------------- ------------- Accretion of Senior Discount Notes $ 35,~~871~~351,~~200~~807 $ 34,~~227~~428,~~427~~643 $ 712,~~406~~757,~~167~~973 $ 610,~~351~~780,~~393~~035 Interest expense on Alliance and LaSalle debt ~~229~~278,~~971~~980 -- ~~462~~741,~~041~~022 -- Interest expense on Heller -- 230,028 -- 422,842 Amortization of debt issue costs ~~211~~281,~~218~~382 ~~184~~316,~~785~~351 ~~406~~688,~~810~~192 ~~441~~757,~~300~~650 Other interest expense 1011,~~827~~988 ~~144~~16,~~286~~738 6274,~~236~~224 ~~218~~42,~~654~~580 Capitalized interest -- (5521,~~760~~956) (1,612) (~~134~~156,~~946~~902) ----------- ----------- ------------ ------------ Interest expense, net $ 45,~~323~~924,~~216~~157 $ 34,~~500~~969,~~738~~804 $ 814,~~335~~259,~~642~~799 $ 611,~~876~~846,~~401~~205 =========== =========== ============ ============

6. LONG-TERM DEBT At October 1, 2000 and December 26, 1999, long-term debt included the following:

~~JUNE~~OCTOBER 111, DECEMBER 26, 2000 1999 ------------- ------------- 12.75% Senior Discount Notes Due 2005 ($144,990,000 principal amount), net of unamortized discount $ ~~124~~129,~~610~~962,~~536~~343 $ 117,204,370 Alliance Laundry Systems LLC Credit Facility; interest at prime plus 1.0%; due in installments through 2006 3,000,000 3,000,000 LaSalle Bank National Association Credit Facility; interest at either prime plus 1.0% or LIBOR plus 3.0%; due September 30, 2001 76,~~058~~494,~~327~~051 7,494,051 Other notes payable; interest at 11% due in various installments through September 2001 ~~337~~312,~~344~~094 449,884 ------------- ------------- ~~135~~139,~~006~~768,~~207~~488 128,148,305 Less current portion (~~251~~6,~~007~~767,186) (207,460) ------------- ------------- $ ~~134~~133,~~755~~001,~~200~~502 $ 127,940,845 ============= =============

Effective September 30, 2000, the Company and LaSalle Bank National Association executed an amendment to the LaSalle Facility that modified the minimum tangible net worth and capitalized expenditure covenants. Additionally, effective September 30, 2000, the Company and Alliance Laundry Systems LLC executed an amendment to the Alliance Facility that modified the minimum tangible net worth covenant and capitalized expenditure covenant. The minimum tangible net worth covenant was the covenant for which the Company received waivers in its previous three quarters. -8- 9 SPINCYCLE, INC. -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW SpinCycle, Inc. ("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. During 1999, we began to explore the demand for and viability of a pick-up and delivery service for home laundry. We began offering this service in the greater Miami, Florida area in August of 1999. As of May 1, 2000, Cleanwave, LLC of which SpinCycle owns 52.5%, offers this service. Miami area consumers can currently order this service by calling a toll free number or accessing the Cleanwave web site at www.cleanwave.com. Cleanwave's objective is to pick-up, wash, dry, fold, package and return each customer's laundry within 24 hours. The laundry is currently being processed by our employees at three of our Miami locations during the hours these stores are closed to retail customers, thus allowing us to leverage our assets. Cleanwave's demand to date have been promising and we expect to expand this service to the entire Miami market and expand to other SpinCycle markets as demand dictates and resources permit. To date, our primary use of capital has been for the development and acquisition of laundromats and for general corporate purposes. Our store count grew rapidly in our first three years, from our first store opening in April 1996, through year end 1996, 1997 and 1998 when we had a total of 14, 71 and 163 stores, respectively. By year-end 1999 SpinCycle operated 172 stores. As of October 1, 2000, we had not opened any additional stores, we had no other stores under construction and were party to three leases for stores that we do not currently plan to develop. We continue to maintain a significant backlog of potential acquisition and development sites, but do not expect to enter into any commitments to purchase or develop stores prior to procuring additional growth capital or generating sufficient cash flow from operations. To date we have closed four stores: one during 1998, following a lease buyout by our landlord at that location and three additional stores during 1999 due to poor performance. In connection with these store closures, we recognized approximately $1.0 million in losses on impairment and disposal of long-lived assets during fiscal 1999. We do not presently foresee closing any additional stores. We are actively pursuing the sale or alternative use of two of the locations that we closed during 1999. Our rapid development and acquisition of laundromats has required significant capital resources. 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. From inception to date, we have not been profitable and have generated net operating losses and negative cash flow from operations. 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 found that SpinCycle's valuation then and 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 not to add stores, and expect to continue to proceed cautiously with our planned expansion to judiciously utilize available sources of growth capital. -9- 10 RESULTS OF OPERATIONS 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. Third Quarter and Year-To-Date 2000 Compared to Third Quarter and Year-To-Date 1999 Revenues. Our revenues were approximately $15.8 million for the third quarter of 2000, a decrease of approximately $250,000 from approximately $16.1 million in the corresponding period in 1999. Our decrease in revenues for the quarter was primarily attributable to a larger adverse seasonal impact during 2000. Revenues were approximately $41.6 million for year-to-date 2000, an increase of approximately $1.9 million from approximately $39.7 million for the corresponding period in 1999. Our year-to-date growth in revenue was primarily attributable to the continued maturation of our developed and acquired stores. Store operating expenses, excluding depreciation and amortization. Our store operating expenses, excluding depreciation and amortization were approximately $11.2 million in the third quarter of 2000, a decrease of approximately $1.2 million from approximately $12.4 million in the corresponding period in 1999. Store operating expenses were approximately $28.8 million for year-to-date 2000, a decrease of approximately $1.6 million from approximately $30.4 million for the corresponding period in 1999. The decreases in our store operating expenses, excluding depreciation and amortization were primarily attributable to our measures to reduce store operating expenses, specifically repair and maintenance, labor, and telecom, partially offset by our increase in utility expenses due to our increased customer volume. Operating expenses as a percentage of revenues were approximately 76% for the third quarter 1999 and approximately 77% for year-to-date 1999. Operating expenses as a percentage of revenues decreased to approximately 71% for the third quarter of 2000 and approximately 69% for year-to-date 2000, which is a result of the continued maturation of our stores' revenue and our implementation of initiatives designed to reduce store operating expenses. Preopening costs. We had no preopening costs in the third quarter of 2000, a decrease of approximately $3,000 from approximately $3,000 in the corresponding period in 1999. We had no preopening costs for year-to-date 2000, a decrease of approximately $117,000 from approximately $117,000 for the corresponding period in 1999. We expense preopening costs as incurred. During the third quarter of 1999 we opened three stores. For the year-to-date period ended October 3, 1999 we had opened 12 stores. During the third quarter and year-to-date 2000 we did not open any stores or have any stores under construction. We have delayed indefinitely the opening of three stores that we have under lease. Store EBITDA. Our store EBITDA was approximately $4.6 million in the third quarter of 2000, an increase of approximately $1.0 million from approximately $3.6 million for the corresponding period in 1999. Store EBITDA was approximately $12.8 million for year-to-date 2000, an increase of approximately $3.6 million from approximately $9.2 million for the corresponding period in 1999. The increase was primarily attributable to increased revenue from the maturation of our stores. Our store EBITDA increases as revenues increase due to the fixed nature of many of the store level expenses. -10- 11 Depreciation and amortization. Our depreciation and amortization expense was approximately $4.5 million in the third quarter of 2000, an increase of approximately $50,000 from approximately $4.4 million for the corresponding period in 1999. Depreciation and amortization was approximately $11.3 million for year-to-date 2000, an increase of approximately $400,000 from approximately $10.9 million for the corresponding period in 1999. The increase was principally due to property and equipment acquired in connection with our 1999 expansion. Selling, general and administrative expenses. Our selling, general and administrative expenses were approximately $3.4 million in the third quarter of 2000, an increase of approximately $500,000 from approximately $2.9 million in the corresponding period of 1999. Selling, general and administrative expenses were approximately $8.3 million for year-to-date 2000, a $400,000 increase from $7.9 million for the corresponding period in 1999. Selling, general and administrative expenses as a percentage of revenue were approximately 21% for the third quarter of 2000 and 20% for the corresponding quarter 1999. Selling, general and administrative expenses decreased as a percentage of revenue from approximately 21% for year-to-date 1999 to approximately 20% for year-to-date 2000. The decrease was due to the maturation of our stores and our implementation of certain initiatives to reduce these expenses, including our 1999 reductions in force. EBITDA. Our EBITDA in the third quarter of 2000 was approximately $1.2 million, an increase of approximately $460,000 from our EBITDA of approximately $740,000 for the corresponding period in 1999. EBITDA was approximately $4.5 million for year-to-date 2000, an increase of approximately $3.3 million from approximately $1.2 million for the corresponding period in 1999. The increase was primarily attributable to the continued maturation of our stores. The EBITDA generated in the first three quarters of 2000 exceeded the EBITDA generated during all of fiscal 1999 by approximately $2.0 million and marked the sixth consecutive quarter that we achieved positive EBITDA. For the remainder of 2000, we will continue to focus on strategies to improve unit level economics and reduce general and administrative expenses. Interest income and interest expense, net. Our interest income was approximately $18,000 in the third quarter of 2000, a decrease of approximately $17,000 from approximately $35,000 in the third quarter of 1999. Our interest income was approximately $64,000 year-to-date 2000, a decrease of approximately $35,000 from approximately $99,000 year-to-date 1999. The decrease in interest income was primarily attributable to a lower average cash balance during the third quarter and year-to-date 2000 compared to the third quarter and year-to-date 1999. Our interest expense, net of capitalized interest was approximately $5.9 million in the third quarter of 2000, an increase of approximately $900,000 from approximately $5.0 million in the corresponding period in 1999. Interest expense, net of capitalized interest was approximately $14.3 million year-to-date 2000, an increase of approximately $2.5 million from approximately $11.8 million in the corresponding period in 1999. The increase in interest expense, net was primarily attributable to the increase in accretion of interest expense related to our April 1998 offering of senior discount notes and warrants and interest expense accrued for borrowings under our existing credit facilities. We had approximately $9.3 million in borrowings under our former credit facility at the end of the third quarter of 1999 and had approximately $9.5 million in borrowings at the end of the third quarter of 2000 under our existing credit facilities. Net loss. Our net loss recorded in the third quarter of 2000 was approximately $9.2 million, an increase of approximately $100,000 from approximately $9.1 million in the third quarter of 1999. The net loss recorded year-to-date 2000 was approximately $21.0 million, a decrease of approximately $1.0 million from the $22.0 million net loss recorded in the corresponding period of 1999. The decreased loss was primarily attributable to the additional income provided by our operations, partially offset by the increase in interest expense related to our April 1998 offering of senior discount notes and warrants, and the interest expense associated with our outstanding borrowings under our credit facilities. -11- 12 LIQUIDITY AND CAPITAL RESOURCES At October 1, 2000, we had total assets of approximately $107.6 million, including current assets of approximately $5.7 million. Cash and cash equivalents were approximately $2.2 million. Our cash provided by operations during the year-to-date period ended October 1, 2000 was approximately $700,000, a $2.5 million increase from our cash used in operations during the corresponding period in 1999 of approximately $1.7 million. Our cash provided by operations year-to-date 2000 was primarily attributable to the store EBITDA realized during the period. The increase in our cash provided by operating activities in the year-to-date period ended October 1, 2000 was the result of the continued maturation of our stores. Our cash used in investing activities during the year-to-date period ended October 1, 2000 was approximately $1.3 million, a $7.4 million decrease from our cash used in investing activities of approximately $8.7 million for the corresponding period in 1999. Our reduced spending on investing activities in the year-to-date period ended October 1, 2000 is due to the substantial decrease in our expansion activities. Our cash used in financing activities was approximately $1.3 million during the year-to-date period ended October 1, 2000, a decrease of approximately $10.1 million from our cash provided by financing activities of approximately $8.8 million during the corresponding period in 1999. We borrowed funds primarily to pay for our capital expenditures related to our 1999 store rollout plan. The funds were obtained primarily from our former credit facility. We generated approximately $4.5 million of positive EBITDA during our first three fiscal quarters of 2000. We expect to generate positive EBITDA in all 13 periods of 2000. As of October 1, 2000 we had drawn approximately $9.5 million from our existing facilities, and had $5.5 million additional borrowing capacity on these credit facilities based on the applicable financial covenants. We expect to be able to meet our current operating obligations with cash flows from our store operations. We believe that our cash flow from operations will provide us with sufficient capital resources through the third quarter of 2001. Significant variances in budgeted store revenue, store EBITDA, or unforeseen capital requirements could result in insufficient capital resources if they exceed our cash flow from operations or availability on our credit facilities. As we have not received the requisite number of landlord consents required at closing, borrowing availability under the LaSalle facility could be reduced by $1.0 million. LaSalle has not notified us that our availability has been limited. Effective September 30, 2000, the Company and LaSalle Bank National Association executed an amendment to the LaSalle Facility that modified the minimum tangible net worth and capitalized expenditure covenants. Additionally, effective September 30, 2000, the Company and Alliance Laundry Systems LLC executed an amendment to the Alliance Facility that modified the minimum tangible net worth covenant and capitalized expenditure covenants. The terms of the covenants and modification to the covenants for both of these facilities are substantially identical. The amendment to the tangible net worth covenant reduces the tangible net worth that we must maintain in order to remain in compliance. The capital expenditure covenant was increased for fiscal 2000 from $1.0 million to $2.0 million in order to allow for certain non-recurring capital expenditures. We have approximately $5.5 million of borrowing capacity remaining on the LaSalle Facility and no remaining capacity on the Alliance Facility. Beginning November 1, 2001, we will be required to make semi-annual cash payments of approximately $9.24 million on our senior discount notes. Additionally, on September 30, 2001, we will be required to repay the principal balance owing on the LaSalle facility. The principal balance on October 1, 2000 was approximately $6.5 million. 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. Absent our ability to modify these debt service obligations, it is unlikely that we will be able to make these required cash payments when due, which could have a material and adverse effect on the Company. A special committee of our Board of Directors has been formed to investigate possible alternatives. -12- 13 POTENTIAL LOSS OF NET OPERATING LOSSES As of October 1, 2000, we had net operating losses ("NOLs") of approximately $64.1 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. SEASONALITY Coin-operated laundromat industry data, as well as data generated from our mature 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 during the spring and summer months, which results in lower laundry machine usage. We observed the effect of such seasonality in the 90 stores that were mature for the entire 1999 fiscal year. During the 1999 fiscal year, revenues in these stores decreased approximately 8.8%, from a peak during the third period to a low in the eighth period. These 90 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 2000 budgets to account for the seasonal patterns experienced in 1999. 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. -13- 14 SPINCYCLE, INC. -------------------------------------------------------------------------------- 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. SpinCycle, Inc.'s stockholders were solicited beginning on May 25, 2000 regarding election of directors and the grant of restricted units in Cleanwave, LLC to SpinCycle management. The requisite consents were obtained as of June 30, 2000 and were previously reported in our Quarterly Report on Form 10-Q for the period ended June 11, 2000 filed on July 26, 2000. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a). Exhibit 10.1 First Amendment to Loan and Security Agreement between SpinCycle, Inc. and LaSalle Bank National Association dated September 30, 2000. Exhibit 10.2 First Amendment to Loan and Security Agreement between SpinCycle, Inc. and Alliance Laundry Systems, LLC dated September 30, 2000. Exhibit 27.1 Financial Data Schedule

(b). None. -14- 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. SPINCYCLE, INC. Date: November 13, 2000 By /s/ Peter L. Ax --------------------------------- Peter L. Ax Chief Executive Officer -15- 16 EXHIBIT INDEX (a). Exhibit 10.1 First Amendment to Loan and Security Agreement between SpinCycle, Inc. and LaSalle Bank National Association dated September 30, 2000. Exhibit 10.2 First Amendment to Loan and Security Agreement between SpinCycle, Inc. and Alliance Laundry Systems, LLC dated September 30, 2000. Exhibit 27.1 Financial Data Schedule

APPROVED DISAPPROVED ABSTAINED Series A Stock 60,850 1,000 152 Series B Stock 79,270 2,421 3,632

APPROVED DISAPPROVED ABSTAINED Series C Stock 48,625 0 0

APPROVED DISAPPROVED ABSTAINED Common Stock 19,896 0 5,555 Series A Stock 61,730 1,000 72 Series B Stock 82,691 2,421 0 Series C Stock 39,856 0 0

APPROVED DISAPPROVED ABSTAINED Series A Stock 60,476 1,606 720 Series B Stock 74,217 5,053 6,053 Series C Stock 48,545 0 80

APPROVED DISAPPROVED ABSTAINED Series A Stock 52,276 1,606 8,920 Series B Stock 72,886 6,384 6,053 Series C Stock 46,495 0 2,130

APPROVED DISAPPROVED ABSTAINED Series A Stock 58,076 1,606 3,120 Series B Stock 72,886 6,384 6,053 Series C Stock 47,405 0 1,220

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