-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GRSyH/oUyvGEQFncoyQJ8sNqrP04B4Jwr8FYrOn18UkytfI2fQ8sYw7VBfmoxK+8 B0rZN1OQQwu62KU5GVaKcw== 0000950130-99-006150.txt : 19991105 0000950130-99-006150.hdr.sgml : 19991105 ACCESSION NUMBER: 0000950130-99-006150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE LAUNDRY SYSTEMS LLC CENTRAL INDEX KEY: 0001063699 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 391927923 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-56857 FILM NUMBER: 99740641 BUSINESS ADDRESS: STREET 1: ALLIANCE LAUNDRY SYSTEMS STREET 2: P.O. BOX 990 CITY: RIPON STATE: WI ZIP: 54971-0990 BUSINESS PHONE: 9207481634 MAIL ADDRESS: STREET 1: ALLIANCE LAUNDRY SYSTEMS STREET 2: P.O. BOX 990 CITY: RIPON STATE: WI ZIP: 54971-0990 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE LAUNDRY CORP CENTRAL INDEX KEY: 0001063697 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 391928505 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-56857-01 FILM NUMBER: 99740642 BUSINESS ADDRESS: STREET 1: RAYTHEON COMMERCIAL LAUNDRY STREET 2: P.O. BOX 990 CITY: RIPON STATE: WI ZIP: 54971-0990 BUSINESS PHONE: 9207481634 MAIL ADDRESS: STREET 1: RAYTHEON COMMERCIAL LAUNDRY STREET 2: P.O. BOX 990 CITY: RIPON STATE: WI ZIP: 54971-0990 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE LAUNDRY HOLDINGS LLC CENTRAL INDEX KEY: 0001063698 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 522055893 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-56857-02 FILM NUMBER: 99740643 BUSINESS ADDRESS: STREET 1: RAYTHEON COMMERCIAL LAUNDRY STREET 2: P.O. BOX 990 CITY: RIPON STATE: WI ZIP: 54971-0990 BUSINESS PHONE: 9207481634 MAIL ADDRESS: STREET 1: RAYTHEON COMMERCIAL LAUNDRY STREET 2: P.O. BOX 990 CITY: RIPON STATE: WI ZIP: 54971-0990 10-Q 1 PURSUANT TO SECTION 13 OR 15(D) OF '34 ACT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____________to______________ COMMISSION FILE NUMBER 333-56857 333-56857-01 333-56857-02 ALLIANCE LAUNDRY SYSTEMS LLC ALLIANCE LAUNDRY CORPORATION ALLIANCE LAUNDRY HOLDINGS LLC (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 39-1927923 DELAWARE 39-1928505 DELAWARE 52-2055893 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) P.O. BOX 990 RIPON, WISCONSIN 54971-0990 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (920) 748-3121 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] On November 3, 1999, all of the voting units of Alliance Laundry Systems LLC were held by Alliance Laundry Holdings LLC and all of the common stock of Alliance Laundry Corporation were held by Alliance Laundry Systems LLC. Alliance Laundry Systems LLC Form 10-Q For The Periods Ended September 30, 1999 Table of Contents
Page No. -------- PART I Financial Information Item 1. Financial Statements Condensed Balance Sheets as of September 30, 1999 and December 31, 1998 3 Condensed Statements of Income for the periods ended September 30, 1999 and September 30, 1998 4 Condensed Statements of Cash Flows for the periods ended September 30, 1999 and September 30, 1998 5 Notes to Unaudited Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II Other Information 24 Item 1. Legal Proceedings 24 Item 2. Changes in Securities 24 Item 3. Defaults upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALLIANCE LAUNDRY HOLDINGS LLC CONDENSED BALANCE SHEETS (in thousands)
September 30, December 3l, 1999 1998 ------------ ----------- Assets (Unaudited) Current assets: Cash........................................ $ 1,218 $ 4,839 Cash-restricted............................. 821 2,084 Accounts receivable, net.................... 42,884 21,421 Inventories, net............................ 30,404 30,443 Prepaid expenses and other.................. 7,455 8,900 ----------- ---------- Total current assets................... 82,782 67,687 Notes receivable................................. 14,823 10,036 Property, plant and equipment, net............... 59,360 62,264 Goodwill, net.................................... 48,694 49,819 Debt issuance costs, net......................... 13,690 14,940 Other assets..................................... 9,361 9,458 ----------- ---------- Total assets........................... $ 228,710 $ 214,204 =========== ========== Liabilities and Members' Deficit Current liabilities: Accounts payable............................ $ 15,968 $ 8,617 Finance program obligation.................. 3,374 5,154 Other current liabilities................... 25,708 24,538 ----------- ---------- Total current liabilities.............. 45,050 38,309 Long-term debt: Senior credit facility...................... 200,000 200,000 Senior subordinated notes................... 110,000 110,000 Junior subordinated note.................... 11,535 10,124 Other long-term liabilities...................... 1,131 1,083 ----------- ---------- Total liabilities...................... 367,716 359,516 Commitments and contingencies (See Note 6)....... Mandatorily redeemable preferred equity.......... 6,000 6,000 Members' deficit................................. (145,006) (151,312) ----------- ---------- Total liabilities and members' deficit.. $ 228,710 $ 214,204 =========== ==========
3 ALLIANCE LAUNDRY HOLDINGS LLC STATEMENTS OF INCOME (in thousands)
Three Months Ended Nine Months Ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Net sales: Commercial laundry................................ $ 57,432 $ 55,053 $ 167,975 $ 168,315 Appliance Co. consumer laundry.................... 14,582 17,377 54,682 61,186 Service parts..................................... 7,836 8,570 24,626 24,838 ---------- --------- ----------- ----------- 79,850 81,000 247,283 254,339 Cost of sales.......................................... 59,234 60,523 183,338 194,191 ---------- --------- ----------- ----------- Gross profit........................................... 20,616 20,477 63,945 60,148 ---------- --------- ----------- ----------- Selling, general and administrative expense............ 10,309 10,716 31,434 33,436 Nonrecurring costs..................................... 730 464 1,624 1,705 ---------- --------- ----------- ----------- Total operating expenses............................... 11,039 11,180 33,058 35,141 ---------- --------- ----------- ----------- Operating income.................................. 9,577 9,297 30,887 25,007 Interest expense....................................... 7,898 8,416 23,945 13,308 Other income (expense), net............................ (78) (50) (222) 308 ---------- --------- ----------- ----------- Income before taxes............................... 1,601 831 6,720 12,007 Provision (benefit) for income taxes................... - - 29 2,391 ---------- --------- ----------- ----------- Net income....................................... $ 1,601 $ 831 $ 6,691 $ 9,616 ========== ========= =========== ===========
4 ALLIANCE LAUNDRY HOLDINGS LLC STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended ---------------------------------- September 30, September 30, 1999 1998 -------------- --------------- (Unaudited) Cash flows from operating activities: Net income...................................................... $ 6,691 $ 9,616 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................ 12,692 12,233 Non-cash Junior subordinated note interest................... 1,411 693 (Gain) loss on sale of property, plant and equipment......... 222 (308) Deferred income taxes........................................ - 180 Changes in assets and liabilities: Accounts and notes receivable............................ (26,250) (1,278) Inventories.............................................. 39 (3,842) Other assets............................................. 827 (9,964) Accounts payable......................................... 7,351 (947) Finance program obligation............................... (517) (10,283) Other liabilities........................................ 2,917 7,368 -------- --------- Net cash provided by (used in) operating activities.......... 5,383 3,468 -------- --------- Cash flows from investing activities: Additions to property, plant and equipment...................... (8,875) (5,895) Proceeds on disposal of property, plant and equipment........... 557 2,192 -------- --------- Net cash provided by (used in) investing activities.......... (8,318) (3,703) -------- --------- Cash flows from financing activities: Transfers to Parent............................................. - (15,553) Proceeds from senior term loan.................................. - 200,000 Proceeds from senior subordinated notes......................... - 110,000 Proceeds from junior subordinated note.......................... - 9,000 Issuance of mandatorily redeemable preferred equity............. - 6,000 Issuance of common units........................................ - 48,882 Debt financing costs............................................ (686) (16,272) Distribution to Parent and related transaction costs............ - (339,452) -------- --------- Net cash provided by (used in) financing activities.......... (686) 2,605 -------- --------- Increase (decrease) in cash......................................... (3,621) 2,370 Cash at beginning of period......................................... 4,839 1,208 -------- --------- Cash at end of period............................................... $ 1,218 $ 3,578 ======== =========
5 Notes to Unaudited Condensed Financial Statements NOTE 1. BASIS OF PRESENTATION The unaudited financial statements as of September 30, 1999 and September 30, 1998, and for the periods ended September 30, 1999 present the financial position and results of operations of Alliance Laundry Holdings LLC (the "Company") following the May 1998 recapitalization (the "Recapitalization") and merger discussed in Note 2. The merger has been accounted for as a recapitalization and accordingly, the historical accounting basis of the assets and liabilities is unchanged. The financial statements as of September 30, 1999 and September 30, 1998, and for the periods ended September 30, 1999 represent the consolidated financial position and results of operations of the Company, including its wholly-owned direct and indirect subsidiaries, Alliance Laundry Systems LLC and Alliance Laundry Corporation which were formed in connection with the Recapitalization. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary (consisting only of normal recurring adjustments) to present fairly the financial position and operating results of the Company for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year. These financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations, although the Company believes the disclosures provided are adequate to prevent the information presented from being misleading. Certain amounts in the September 30, 1998 financial statements have been reclassified to conform to the current year financial presentation. This report on Form 10-Q for the periods ended September 30, 1999 should be read in conjunction with the audited financial statements presented in the Company's Registration Statement on Form S-4 (file no. 333-56857) filed with the Securities and Exchange Commission, which includes the audited financial statements of the Company as of and for the year ended December 31, 1998. NOTE 2. MERGER OF BUSINESS OVERVIEW On May 5, 1998, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among Bain/RCL, L.L.C., a Delaware limited liability company ("Bain LLC"), RCL Acquisitions LLC ("MergeCo"), Raytheon Commercial Laundry LLC and Raytheon Company ("Raytheon"), MergeCo was merged with and into Raytheon Commercial Laundry LLC (the "Merger") with Raytheon Commercial Laundry LLC being the surviving entity. Immediately following the merger Raytheon Commercial Laundry LLC was renamed to "Alliance Laundry Holdings LLC". Prior to the Merger, Raytheon owned 100% of the equity securities of Raytheon Commercial Laundry LLC, and Bain LLC, the BRS Investors (as defined), and certain members of management owned 100% of the equity securities of MergeCo. As a result of the Merger (i) Raytheon's limited liability company interest in Raytheon Commercial Laundry LLC was converted into the right to receive (a) an aggregate amount of cash equal to $339.5 million, subject to pre-closing and post-closing adjustments (b) a junior 6 subordinated promissory note from the Company in the original principal amount of $9.0 million which matures in 2009 (c) preferred membership interests of the Company with a liquidation value of approximately $6.0 million which are mandatorily redeemable in 2009 and (d) common membership units of the Company representing 7% of the total common membership interests of the Company and (ii) Bain LLC's, the BRS Investors' and certain management members' limited liability company interests in MergeCo were converted into the right to receive up to 93% of the total common membership interests of the Company. Simultaneous with the consummation of the Merger and each of the other related transactions (the "Closing"), the Company contributed substantially all of its assets and liabilities to Alliance Laundry Systems LLC, a newly formed limited liability company ("Alliance Laundry"). Immediately after the consummation of the transactions, Alliance Laundry became the only direct subsidiary of the Company and succeeded to substantially all of the assets and liabilities of the Company. Subsequent to May 4, 1998, Alliance Laundry comprises all of the operating activities of the Company. The transactions contemplated by the Merger Agreement (the "Transactions") were funded by: (i) $200.0 million of term loan borrowings by Alliance Laundry; (ii) $110.0 million of senior subordinated notes of Alliance Laundry and Alliance Laundry Corporation due in 2008 (substantially all of the amounts in clauses (i) and (ii) were distributed by Alliance Laundry to the Company to fund the Merger and to fund related fees and expenses); (iii) the issuance by the Company of a junior subordinated promissory note in the original principal amount of $9.0 million; (iv) the issuance by the Company of the mandatorily redeemable preferred membership interests with a liquidation value of $6.0 million; (v) the investors' equity contributions by Bain LLC, the BRS Investors and certain members of management of $47.1 million and (vi) retained equity of Raytheon of $3.5 million. Each of the transactions was conditioned upon consummation of each of the others, and consummation of each of the transactions occurred simultaneously. SENIOR CREDIT FACILITY In connection with the Transactions, Alliance Laundry entered into a credit agreement (the "Senior Credit Facility") with a syndicate of financial institutions (the "Lenders") for which Lehman Brothers Inc. acted as arranger and Lehman Commercial Paper Inc. acted as syndication agent. The Senior Credit Facility is comprised of a term loan facility aggregating $200.0 million (the "Term Loan Facility") and a $75.0 million revolving credit facility (the "Revolving Credit Facility"), which was made available in conjunction with the issuance of Alliance Laundry's senior subordinated notes. The Term Loan Facility requires no principal payments during the first two years and amortizes at the rate of $1.0 million per year for years three through five, $40.0 million for year six and $157.0 million for year seven. Alliance Laundry is required to make prepayments with the proceeds from the disposition of certain assets and from excess cash flow, as defined. No excess cash flow payment was required for the period ended September 30, 1999. Effective March 10, 1999, the Company entered into a $67 million interest rate swap agreement with a financial institution to hedge a portion of its interest rate risk related to its term loan borrowings under the Senior Credit Facility. Under the swap, which has a term of three years, the Company pays a fixed rate of 4.962% and receives quarterly interest payments based upon LIBOR. The differential between the fixed and floating interest rates under the swap is accrued as interest rates change and is recorded as an adjustment of interest expense. The fair value of the interest rate swap is the amount which the Company would receive or pay to terminate the instrument at the reporting date. 7 At September 30, 1999, the amount required to settle the swap would not have had a material adverse effect on the Company's business, financial condition and results of operations. SENIOR SUBORDINATED NOTES Also on May 5, 1998, Alliance Laundry and its wholly owned subsidiary, Alliance Laundry Corporation, issued $110.0 million of Series A 9 5/8% senior subordinated notes due in 2008 (the "Notes") to Lehman Brothers Inc. and Credit Suisse First Boston Corporation (the "Initial Purchasers"). The Initial Purchasers subsequently resold the Notes to qualified institutional buyers pursuant to Rule 144A of the Securities and Exchange Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. Following the Rule 144A resale, Alliance Laundry and Alliance Laundry Corporation conducted an exchange offer (the "Exchange Offer") pursuant to which they offered to exchange the Notes for a like principal amount of their Series B 9 5/8% Senior Subordinated Notes due 2008, which have been registered under the Securities Act of 1933, as amended. The Exchange Offer expired by its terms on June 18, 1999 with all of the outstanding $110.0 million aggregate principal amount of Notes validly tendered. JUNIOR SUBORDINATED PROMISSORY NOTE Upon the consummation of the Merger, the Company issued a junior subordinated promissory note (the "Junior Note") in the principal amount of $9.0 million due August 21, 2009, to Raytheon. Pursuant to the terms of the Junior Note, interest accrues at the rate of 19.0% per annum until the eighth anniversary of the date of issuance of the Junior Note and at a rate of 13.0% thereafter. The Junior Note is subordinated in priority and subject in right and priority of payment to certain indebtedness described therein. Interest which accrues on the Junior Note is payable in-kind. PREFERRED EQUITY Upon consummation of the Merger, the Company issued mandatorily redeemable preferred membership interests (the "Seller Preferred Equity") with a liquidation value of $6.0 million to Raytheon. The Seller Preferred Equity does not accrete, accrue or pay dividends and is redeemable at the earlier of (i) a change of control (as defined in the Amended and Restated Limited Liability Company Agreement), (ii) any initial public offering or (iii) August 21, 2009. The holders of the Seller Preferred Equity are entitled to receive distributions from the Company in an amount equal to their unreturned capital (as defined therein) prior to distributions in respect of any other membership interests of the Company. ASSET BACKED FACILITY In connection with the Transactions, Alliance Laundry entered into a five year $250.0 million revolving loan agreement (the "Asset Backed Facility") through Alliance Laundry Receivables Warehouse LLC ("ALRW"), its special purpose single member limited liability company, to finance trade receivables and notes receivable related to equipment loans with Lehman Commercial Paper Inc. (the "Facility Lender"), an affiliate of Lehman Brothers Inc. Alliance Laundry offers equipment financing to end-users of its commercial laundry equipment to assist in their purchases of new equipment from Alliance Laundry's distributors or, in the case of route operators, from Alliance Laundry. Alliance Laundry, as servicing agent retains collection and administrative responsibilities for the accounts and notes sold. 8 NOTE 3 NONRECURRING ITEMS During the fourth quarter of 1998, the Company recorded a $4.5 million restructuring charge associated with the closing of the Company's Latin American coin laundromat operations. A decision was made to close these operations because of continued unprofitable performance. The charge includes $1.5 million for the estimated loss on the sale of company-owned dry-cleaning and laundry stores representing the excess of the carrying value of assets relating to these stores over estimated proceeds from sale, $1.4 million for the write-off of the unamortized balance of the LaveRap tradename and franchise rights which were purchased in 1996 for use in developing coin laundromats in Latin America, $0.9 million for severance and related benefits arising from the termination of 41 employees and $0.7 million for certain other expenses associated with discontinuing the Latin American operations. The carrying value of assets held for disposal at September 30, 1999 is not material. At September 30, 1999, the Company had one store remaining which is expected to be sold during 1999 and remaining reserves of approximately $0.1 million are expected to be adequate to provide for related costs. The Company's Latin American operations generated net sales of $0.2 million and an operating loss of $0.2 million for the nine months ended September 30, 1999. The Company entered into retention agreements with certain key executives, managers and commissioned sales people prior to the Recapitalization. During 1999, the Company incurred approximately $1.3 million in expense associated with payments under these agreements. Payments under this program continue through November of 1999. NOTE 4. INVENTORIES Inventories are stated at cost using the first-in, first-out method but not in excess of net realizable value, and consist of the following (in thousands): September 30, December 31, 1999 1998 ----------- ------------ (Unaudited) Materials and purchased parts $ 12,634 $ 14,296 Work in process 3,394 3,280 Finished goods 18,387 16,571 Less: inventory reserves (4,011) (3,704) ---------- ----------- $ 30,404 $ 30,443 ========== =========== NOTE 5. CONDENSED FINANCIAL INFORMATION OF ALLIANCE LAUNDRY SYSTEMS LLC As discussed more fully in Note 2, substantially all of the assets and liabilities of the Company were transferred to Alliance Laundry, a wholly owned subsidiary of the Company, in connection with the Merger. Therefore, the historical financial statements of Alliance Laundry are the same as the historical financial statements of the Company prior to the Merger inasmuch as 9 Alliance Laundry did not exist prior to that time. Subsequent to the Merger, Alliance Laundry is the only direct subsidiary of the Company and comprises all of the Company's operating activities. In connection with the Merger, Alliance Laundry and its wholly owned subsidiary, Alliance Laundry Corporation, issued the $110 million of senior subordinated notes. Alliance Laundry Corporation was incorporated for the sole purpose of serving as a co-issuer of the Notes in order to facilitate their issuance. Although summarized financial information normally would be provided for Alliance Laundry Corporation, as a co-issuer of the senior subordinated notes, Alliance Laundry Corporation does not have any substantial operations or assets of any kind. Alliance Laundry Holdings LLC has provided a full and unconditional guarantee of the Notes and has no operating activities independent of Alliance Laundry. Separate financial statements of Alliance Laundry are not presented because Company management has determined that they would not be material to investors. Summarized unaudited financial information of Alliance Laundry as of September 30, 1999 and for the three months and nine months then ended is presented below. September 30, 1999 ------------- (Unaudited) Current assets............................... $ 82,782 Noncurrent assets............................ 145,928 ------------- $ 228,710 ============= Current liabilities.......................... $ 45,050 Long-term debt............................... 310,000 Other long-term obligations.................. 1,131 Member's deficit............................. (127,471) ------------- $ 228,710 =============
Three Months Nine Months Ended Ended September 30, September 30, 1999 1999 ------------- -------------- (Unaudited) (Unaudited) Net sales.................................... $ 79,850 $ 247,283 Gross profit................................. 20,616 63,945 Selling, general and administrative expense.. 10,309 31,434 Nonrecurring costs........................... 730 1,624 ------------- ------------- Operating income............................. 9,577 30,887 Interest expense............................. 7,385 22,534 Other income (expense), net.................. (78) (222) ------------- ------------- Income before taxes.......................... $ 2,114 $ 8,131 ============= =============
NOTE 6. COMMITMENTS AND CONTINGENCIES 10 On April 17, 1998, Amana Company, L.P. ("Appliance Co.") filed suit in the United States District Court for the Southern District of New York against Raytheon and Alliance Laundry seeking (i) declaratory relief that Alliance Laundry is bound by a non-compete agreement between Appliance Co. and Raytheon that prohibits the participation by Raytheon and corporate affiliates of Raytheon in the U.S. consumer retail distribution laundry market, (ii) unspecified damages from Raytheon for breach of the non-compete agreement, and (iii) an injunction against the Company and Alliance Laundry prohibiting them from competing in the U.S. consumer retail distribution laundry market. On June 2, 1998, Appliance Co. filed an amended complaint reiterating the allegations of the original complaint and also asserting that, by virtue of the manner in which they consummated the sale of Alliance Laundry by Raytheon, both Alliance Laundry and Bain Capital, Inc. ("Bain") tortiously interfered with the non-compete agreement between Appliance Co. and Raytheon. Appliance Co. now claims to be entitled to damages in excess of $100 million. The defendants dispute all of Appliance Co.'s allegations and deny that Appliance Co. is entitled to any damages. On August 30, 1999, the Court denied defendants' motion to dismiss the non-compete claims and the tortious interference claim against Bain. The Court granted defendants' motion to dismiss plaintiffs' claim for declaratory judgment, which would have allowed plaintiffs to compete in the commercial laundry market in the event defendants prevail and are able to compete in the U.S. consumer retail distribution laundry market. Raytheon has agreed to pay the attorneys' fees and costs incurred by the Company, Alliance Laundry and Bain in contesting this lawsuit. There can be no assurance, however, that Alliance Laundry will prevail in the lawsuit and, accordingly, Alliance Laundry may be prohibited for some period of time from participating in the U.S. consumer retail distribution laundry market. Alliance Laundry does not currently participate in this market. In addition, although the Company and Alliance Laundry do not believe that it is reasonably likely that Appliance Co. will prevail in the lawsuit, if Appliance Co. did prevail, the Company and/or Alliance Laundry could conceivably be required to pay some portion of the claimed damages in excess of $100 million. If so, such a payment could have a material adverse effect on the business, financial condition and results of operations of the Company and Alliance Laundry. In late January 1999, Appliance Co. filed another amended complaint to add claims against Raytheon and the Company in connection with the Horizon washing machine, a "single-pocket" frontload washing machine that was being readied for volume production as of the time when Raytheon (the former parent of the Company) was completing the sale of its consumer appliances business to Appliance Co. (the "Appliance Co. Transaction"). Appliance Co. alleges that both Raytheon and the Company breached the acquisition agreement between Appliance Co. and Raytheon and negligently misrepresented the readiness of Horizon for volume production. On August 30, 1999, the Court dismissed plaintiffs' claims against Raytheon and the Company for breach of contract and negligent misrepresentation relating to the Horizon issues. Appliance Co. also alleges that the Company subsequently breached its contractual obligations to provide engineering services in connection with preparing Horizon for volume production and also breached its alleged duty of due care in the course of providing Appliance Co. with these engineering services. Appliance Co. seeks damages for (i) the profits it claims to have lost by virtue of not being able to sell Horizons, (ii) the damage to its commercial standing that is allegedly attributable to its sale of defective washers to critical customers, and (iii) the expenses it incurred in preparing for volume production of Horizon. Raytheon has agreed to hold the Company harmless against the claims pertaining to Horizon and to reimburse the Company for any fees incurred in defending these claims. 11 On January 28, 1999 Alliance Laundry filed a counterclaim against Appliance Co. seeking payment of $0.6 million owed for Libra top-load washing machines and parts sold pursuant to a Supply Agreement between the companies. Appliance Co. has withheld payment of this amount based on its claim that Alliance Laundry had violated the "Epidemic Failure" provision of the Supply Agreement and therefore owed Appliance Co. for excess warranty costs. On May 5, 1999 Appliance Co. filed a Reply Counterclaim for breach of the Supply Agreement, claiming that Alliance Laundry had violated the Epidemic Failure provision and breached the representation that it would sell top-load Libra washing machines that were merchantable and fit for the use for which they were intended. Alliance Laundry has denied all allegations. In September 1999, Appliance Co. stopped making substantially all payments to Alliance Laundry on outstanding invoices for Libra washing machines and parts, claiming that it is entitled to offset the damages claimed in the Reply Counterclaim. Appliance Co. currently owes approximately $12.0 million on these outstanding invoices and claims to be entitled to damages of at least this amount. In October 1999, Appliance Co. was granted leave to file another claim that seeks to revise the cross-license agreement between the two companies to restrict the degree to which the Company can use intellectual property whose ownership was retained by the Company as part of the 1997 transaction between Appliance Co. and Raytheon to compete against Appliance Co. in the U.S. consumer retail distribution laundry market. The defendants deny that there are any grounds for such a reformation of the cross-license agreement. All of the above claims are now set to begin jury trial on February 7, 2000. On February 8, 1999, Raytheon commenced an arbitration under the Commercial Arbitration Rules of the American Arbitration Association in Boston, Massachusetts against the Company, seeking damages of $12.2 million plus interest thereon and attorney's fees for breach of the Merger Agreement based on Raytheon's claim for indemnification for a payment made to a third party allegedly on behalf of the Company and Alliance Laundry following the Closing. Raytheon also filed suit that same day in Massachusetts Superior Court for the county of Middlesex seeking the same relief; the suit was dismissed by Raytheon without prejudice in March 1999. The Company believes that Raytheon owed the $12.2 million to the third party and that neither the Company nor Alliance Laundry is liable for such amount. In addition, the Company and Bain LLC have filed counterclaims and claims, respectively, seeking damages in excess of $30 million from Raytheon. Pursuant to the Merger Agreement, Bain LLC, the Company and Raytheon have agreed on a post-closing price adjustment of $2.8 million due to the Company from Raytheon, as a result of a dispute regarding working capital levels as of the Closing. The parties have agreed this amount will not be paid to the Company until the resolution of the arbitration discussed above or this amount will be offset against any amounts due to Raytheon from the Company as a result of such arbitration, and as such, this amount has not been reflected in the accompanying financial statements. Various claims and legal proceedings generally incidental to the normal course of business are pending or threatened against the Company. While the ultimate liability from these proceedings is difficult to determine, in the opinion of management, any additional liability will not have a material effect on the Company's financial position, liquidity or results of operations. NOTE 7. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The standard requires that certain items recognized under accounting principles as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other financial statements. Total Comprehensive Income totaled $6,306,000 and $12,416,000 for the nine months ended September 30, 1999 and September 30, 1998, respectively. Total Comprehensive Income for the nine months ended September 30, 1999 is comprised of net income of $6,691,000 and Other Comprehensive Income (Loss) of ($385,000). Total Comprehensive Income for the nine months ended September 30, 1998 is comprised of net income of $9,616,000 and Other Comprehensive Income (Loss) of $2,800,000. Other Comprehensive Income (Loss) is comprised entirely of unrealized holding gains and losses on available-for-sale securities. 12 NOTE 8. SEGMENT INFORMATION Based upon the information used by management for making operating decisions and assessing performance, the Company has organized its business into categories based upon products and services broken down primarily by markets. Commercial laundry equipment and service parts, including sales to international markets, are combined to form the commercial laundry segment. Commercial laundry net sales include amounts related to the Company's finance program which supports its commercial laundry operations. The Company's primary measure of operating performance is gross profit which does not include an allocation of any selling or product distribution expenses. Such amounts are reviewed on a consolidated basis by management. In determining gross profit for its operating units, the Company also does not allocate certain manufacturing costs, including manufacturing variances and warranty and service support costs. Gross profit is determined by subtracting cost of sales from net sales. Cost of sales is comprised of the costs of raw materials and component parts, plus costs incurred at the manufacturing plant level, including, but not limited to, labor and related fringe benefits, depreciation, tools, supplies, utilities, property taxes and insurance. The Company does not allocate assets internally in assessing operating performance. Net sales and gross profit as determined by the Company for its operating segments are as follows:
Quarter Ended -------------------------------------------------- September 30, 1999 September 30, 1998 ----------------------- --------------------- Net Gross Net Gross Sales Profit Sales Profit ----------------------- --------------------- Commercial laundry.................... 65,268 $ 23,871 $ 63,623 $ 22,936 Appliance Co. consumer laundry........ 14,582 411 17,377 617 ---------------------- --------------------- 79,850 24,282 $ 81,000 23,553 ======= ========= Other manufacturing costs............. (3,666) (3,076) --------- --------- Gross profit as reported............ $ 20,616 $ 20,477 ========= =========
Nine Months Ended -------------------------------------------------- September 30, 1999 September 30, 1998 ------------------------ --------------------- Net Gross Net Gross Sales Profit Sales Profit ----------------------- --------------------- Commercial laundry.................... $192,601 $ 70,570 $193,153 $ 69,015 Appliance Co. consumer laundry........ 54,682 1,523 61,186 2,119 ---------------------- --------------------- $247,283 72,093 $254,339 71,134 ======== ======== Other manufacturing costs............. (8,148) (10,986) -------- -------- Gross profit as reported............ $ 63,945 $ 60,148 ======== ========
NOTE 9. SUBSEQUENT EVENT In October 1999, the Company announced a plan which calls for the closure of its Madisonville, Kentucky manufacturing facility, and the transfer of related 13 production to the Company's Ripon, Wisconsin plant. The Company expects to record a provision for related costs and expenses in the fourth quarter of 1999 which is currently expected to total less than $2.8 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The following discussion and analysis of the financial condition and results of operations covers periods before the consummation of the Transactions. In connection with the Transactions, the Company has entered into financing arrangements and significantly altered its capital structure. As a result of the Transactions, the Company is operating as a stand-alone entity for the first time, and the historical financial statements reflect management's estimates of certain costs associated with operating as a stand-alone entity and reflect taxes that are not applicable to the Company following the consummation of the Transactions. Accordingly, the results of operations for the periods subsequent to the consummation of the Transactions will not necessarily be comparable to prior periods. The Company believes it is the leading designer, manufacturer and marketer of stand-alone commercial laundry equipment in North America and a leader worldwide. Under the well-known brand names of Speed Queen, UniMac and Huebsch, the Company produces a full line of commercial washing machines and dryers with load capacities from 16 to 250 pounds. The Company's commercial products are sold to three distinct customer groups: (i) laundromats; (ii) multi-housing laundries, consisting primarily of common laundry facilities in apartment buildings, universities and military installations; and (iii) on-premise laundries, consisting primarily of in-house laundry facilities of hotels, hospitals, nursing homes and prisons. In addition, pursuant to a supply agreement with Appliance Co., the Company supplied consumer washing machines to the consumer appliance business of Appliance Co. for sale at retail. This supply agreement was completed and concluded on September 10, 1999. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company's Registration Statement on Form S-4 (file no. 333-56857) filed with the Securities and Exchange Commission, which includes the audited financial position and operating results of the Company as of and for the year ended December 31, 1998. RESULTS OF OPERATIONS Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998 The following table sets forth the Company's historical net sales for the periods indicated: Quarter Ended ----------------------------------- September 30, September 30, 1999 1998 ---------------- ---------------- (Dollars in millions) Net sales Commercial laundry $57.5 $55.1 Appliance Co. consumer laundry 14.6 17.4 Service parts 7.8 8.5 -------- -------- $79.9 $81.0 ======== ======== 14 The following table sets forth certain condensed historical financial data for the Company expressed as a percentage of net sales for each of the periods indicated:
Quarter Ended ---------------------------------------- September 30, September 30, 1999 1998 ---------------- ------------------ Net sales 100.0% 100.0% Cost of sales 74.2% 74.7% Gross profit 25.8% 25.3% Selling, general and administrative expense 12.9% 13.2% Nonrecurring costs 0.9% 0.6% Operating income 12.0% 11.5% Net income 2.0% 1.0%
Net sales. Net sales for the quarter ended September 30, 1999 decreased $1.1 million, or 1.4%, to $79.9 million from $81.0 million for the quarter ended September 30, 1998. This decrease was attributable to lower consumer laundry equipment sales of $2.8 million and service part sales of $0.7 million partly offset by increases in commercial laundry sales of $2.4 million. The decrease in consumer laundry sales is due to the completion and conclusion of the two year supply agreement with Appliance Co. as of September 10, 1999. The increase in commercial laundry sales was primarily due to higher sales for multi-housing laundries, $2.7 million, and for laundromats, $1.9 million, partly offset by a decrease in sales for on-premise laundries, $2.4 million. Gross profit. Gross profit for the quarter ended September 30, 1999 increased $0.1 million, or 0.7%, to $20.6 million from $20.5 million for the quarter ended September 30, 1998. This increase was attributable to manufacturing efficiencies which were partially offset by higher field service expenses of $1.2 million related to a recent new product introduction. Gross profit as a percentage of net sales increased to 25.8% for the quarter ended September 30, 1999 from 25.3% for the quarter ended September 30, 1998. The increase in gross profit as a percentage of net sales is primarily attributable to the manufacturing efficiencies noted above. Selling, general and administrative expense. Selling, general and administrative expenses for the quarter ended September 30, 1999 decreased $0.4 million, or 3.8%, to $10.3 million from $10.7 million for the quarter ended September 30, 1998. The decrease in selling, general and administrative expenses was primarily due to lower loss recognition related to reduced sales of trade receivables through the Company's off-balance sheet special purpose entity. Selling, general and administrative expenses as a percentage of net sales decreased to 12.9% for the quarter ended September 30, 1999 from 13.2% for the quarter ended September 30, 1998 as a result of the lower expenses noted above. Nonrecurring costs. Nonrecurring costs for the quarter ended September 30, 1999 increased $0.2 million, or 57.3%, to $0.7 million from $0.5 million for the quarter ended September 30, 1998. The increase relates to a one-time $0.3 million pension curtailment charge associated with a recent layoff which occurred after the completion of the Appliance Co. supply agreement. Other nonrecurring costs for both time periods are comprised of employee retention costs. 15 Operating income. As a result of the foregoing, operating income for the quarter ended September 30, 1999 increased $0.3 million, or 3.0%, to $9.6 million from $9.3 million for the quarter ended September 30, 1998. Operating income as a percentage of net sales increased to 12.0% for the quarter ended September 30, 1999 from 11.5% for the quarter ended September 30, 1998. Interest Expense. Interest expense for the quarter ended September 30, 1999 decreased $0.5 million, or 6.2%, to $7.9 million from $8.4 million for the quarter ended September 30, 1998. The decrease is attributable to lower interest rates related to the Senior Credit Facility as a result of a $67.0 million interest rate swap agreement entered into in March 1999. Net Income. As a result of the foregoing, net income for the quarter ended September 30, 1999 increased $0.8 million, or 92.7%, to $1.6 million from $0.8 million for the quarter ended September 30, 1998. Net income as a percentage of net sales increased to 2.0% for the quarter ended September 30, 1999 from 1.0% for the quarter ended September 30, 1998. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 The following table sets forth the Company's historical net sales for the periods indicated:
Nine months Ended ------------------------------------- September 30, September 30, 1999 1998 ----------------- ----------------- (Dollars in millions) Net sales Commercial laundry $168.0 $168.3 Appliance Co. consumer laundry 54.7 61.2 Service parts 24.6 24.8 ----------------- ----------------- $247.3 $254.3 ================= =================
The following table sets forth certain condensed historical financial data for the Company expressed as a percentage of net sales for each of the periods indicated:
Nine months Ended -------------------------------- September 30, September 30, 1999 1998 --------------- --------------- Net sales 100.0% 100.0% Cost of sales 74.1% 76.4% Gross profit 25.9% 23.6% Selling, general and administrative expense 12.7% 13.1% Nonrecurring costs 0.7% 0.7% Operating income 12.5% 9.8% Net income 2.7% 3.8%
16 Net sales. Net sales for the nine months ended September 30, 1999 decreased $7.0 million, or 2.8%, to $247.3 million from $254.3 million for the nine months ended September 30, 1998. This decrease was attributable to lower consumer laundry equipment sales of $6.5 million, commercial laundry sales of $0.4 million and service part sales of $0.2 million. The decrease in consumer laundry sales was due to lower sales to Appliance Co. and due to the completion and conclusion of the Appliance Co. supply agreement as of September 10, 1999. The decrease in commercial laundry sales was primarily due to lower international sales of $3.1 million and lower earnings from the Company's equipment financing program of $0.6 million, which were partially offset by higher North American equipment sales of $3.4 million. International sales are affected by (i) lower sales of $1.8 million due to the closure of the Company's Latin American coin laundromat operations and (ii) lower sales to Australia and Europe. North American equipment sales were higher to multi-housing laundries and for laundromats. Gross profit. Gross profit for the nine months ended September 30, 1999 increased $3.8 million, or 6.3%, to $63.9 million from $60.1 million for the nine months ended September 30, 1998. This increase was primarily attributable to manufacturing efficiencies implemented during 1998 and the first nine months of 1999 as well as margins related to the increase in North American equipment sales. The increase was partially offset by the decreased volume of consumer laundry sales to Appliance Co. and lower earnings related to the Company's off- balance sheet equipment financing program. Gross profit as a percentage of net sales increased to 25.9% for the nine months ended September 30, 1999 from 23.6% for the nine months ended September 30, 1998. The increase in gross profit as a percentage of net sales is primarily attributable to the manufacturing efficiencies noted above and higher margins attributable to the increased North American equipment sales as compared to consumer laundry sales. Selling, general and administrative expense. Selling, general and administrative expenses for the nine months ended September 30, 1999 decreased $2.0 million, or 6.0%, to $31.4 million from $33.4 million for the nine months ended September 30, 1998. The decrease in selling, general and administrative expenses was primarily due to lower selling and distribution expenses of $1.0 million, lower loss recognition related to decreased sales of trade receivables through the Company's off-balance sheet special purpose entity of $1.2 million, lower expenses resulting from the closure of the Company's Latin American coin laundromat operations of $0.9 million and lower salaried fringe benefit costs of $0.4 million, which were partially offset by costs of being a stand-alone business entity (resulting from the May 5, 1998 transaction). Selling, general and administrative expenses as a percentage of net sales decreased to 12.7% for the nine months ended September 30, 1999 from 13.1% for the nine months ended September 30, 1998. Nonrecurring costs. Nonrecurring costs for the nine months ended September 30, 1999 decreased $0.1 million, or 4.8%, to $1.6 million from $1.7 million for the nine months ended September 30, 1998. Nonrecurring costs are comprised of employee retention costs and a one-time $0.3 million pension curtailment charge associated with a recent layoff which occurred after the completion of the Appliance Co. supply agreement. Operating income. As a result of the foregoing, operating income for the nine months ended September 30, 1999 increased $5.9 million, or 23.5%, to $30.9 million from $25.0 million for the nine months ended September 30, 1998. Operating income as a percentage of net sales increased to 12.5% for the nine months ended September 30, 1999 from 9.8% for the nine months ended September 30, 1998. 17 Interest Expense. Interest expense for the nine months ended September 30, 1999 increased $10.7 million, or 79.9%, to $24.0 million from $13.3 million for the nine months ended September 30, 1998. The increase is attributable to interest expense on debt issued in connection with the Recapitalization. Income Taxes. There was no provision for income taxes for the nine months ended September 30, 1999, as compared to a provision of $2.4 million for the nine months ended September 30, 1998. Effective May 5, 1998 the Company is a stand-alone limited liability company and is no longer subject to federal and most state income taxes. Net Income. As a result of the foregoing, net income for the nine months ended September 30, 1999 decreased $2.9 million, or 30.4%, to $6.7 million from $9.6 million for the nine months ended September 30, 1998. Net income as a percentage of net sales decreased to 2.7% for the nine months ended September 30, 1999 from 3.8% for the nine months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Post-Transactions. Following the Transactions, the Company's principal sources of liquidity are cash flows generated from operations and borrowings under the $75.0 million Revolving Credit Facility. The Company's principal uses of liquidity are to meet debt service requirements, finance the Company's capital expenditures and provide working capital. The Company expects that capital expenditures in 1999 will not exceed $13.0 million. The Company expects the ongoing requirements for debt service, capital expenditures and working capital will be funded by internally generated cash flow and borrowings under the Revolving Credit Facility. The Company has incurred substantial indebtedness in connection with the Transactions. As of September 30, 1999, the Company has $321.5 million of combined indebtedness outstanding. At September 30, 1999 the Company had outstanding debt of $200.0 million under the Term Loan Facility, $110.0 million of senior subordinated notes, $11.5 million of junior subordinated notes and had $63.5 million of its $75.0 million Revolving Credit Facility available subject to certain limitations under the Senior Credit Facility. After considering such limitations, the Company could have borrowed up to $52.0 million at September 30, 1999 in additional indebtedness under the Revolving Credit Facility. The $200.0 million Term Loan Facility amortizes quarterly and is repayable in the following aggregate annual amounts:
Amount Due ---------- Year (Dollars in ---- millions) 1999....... $ 0.0 2000....... $ 0.5 2001....... $ 1.0 2002....... $ 1.0 2003....... $ 20.5 2004....... $ 98.5 2005....... $ 78.5
18 The Term Loan Facility is also subject to mandatory prepayment with the proceeds of certain debt incurrences, asset sales and a portion of Excess Cash Flow (as defined in the Senior Credit Facility). The Revolving Credit Facility will terminate in 2003. Concurrent with the Closing of the other Transactions, the Company entered into the Asset Backed Facility, which provides $250.0 million of off-balance sheet financing for trade receivables and equipment loans. The finance programs have been and will continue to be structured in a manner that qualifies for off- balance sheet treatment in accordance with generally accepted accounting principles. It is expected that under the Asset Backed Facility, the Company will continue to act as originator and servicer of the equipment financing promissory notes and the trade receivables. The Company's ability to make scheduled payments of principal or to pay the interest or liquidated damages, if any, or to refinance its indebtedness, or to fund planned capital expenditures, will depend upon its future performance, which in turn is subject to general economic, financial, competitive and other factors that are beyond its control. Based upon the current level of operations and anticipated growth, management believes that future cash flow from operations, together with available borrowings under the Revolving Credit Facility, will be adequate to meet the Company's anticipated requirements for capital expenditures, working capital, interest payments and scheduled principal payments. There can be no assurance, however, that the Company's business will continue to generate sufficient cash flow from operations in the future to service its debt and make necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, the Company may be required to refinance all or a portion of its existing debt, to sell assets or to obtain additional financing. There can be no assurance that any such refinancing would be available or that any such sales of assets or additional financing could be obtained. Historical Cash generated from operations for the nine months ended September 30, 1999, of $5.4 million was principally derived from the Company's earnings before depreciation and amortization partially offset by changes in working capital. The working capital investment in accounts receivable at September 30, 1999 of $42.9 million increased $21.5 million as compared to the balance of $21.4 million at December 31, 1998, which was primarily attributable to selling fewer accounts receivable through Alliance Laundry Receivable Warehouse ("ALRW"), a special-purpose single member limited liability company and also due to $7.0 million of past due Appliance Co. receivables, which were ineligible for sale. The working capital investment in accounts payable at September 30, 1999 of $16.0 million decreased $7.4 million as compared to the balance of $8.6 million at December 31, 1998. The accounts payable balance at December 31, 1998 reflected lower purchases and production in December 1998 as compared to September 1999. Net cash provided by operating activities for the nine months ended September 30, 1999 of $5.4 million increased by $1.9 million as compared to the nine months ended September 30, 1998. This increase was primarily due to higher net cash provided by changes in assets and liabilities of $3.3 million, partially offset by lower net income, adjusted for non-cash adjustments, of $1.4 million. The net cash reduction from changes in assets and liabilities for the nine months ended September 30, 1998 of $18.9 million was largely due to (i) a decrease in finance program obligations resulting from the payment of $7.8 million to Raytheon Commercial Appliances Receivables Corporation ("RAYCAR") for collections by the Company as sub-servicer of accounts receivable which had 19 previously been sold (ii) an increase in the Company's retained interest in trade receivables which had been sold of $7.3 million and (iii) an increase in finished goods inventories of $3.8 million. Prior to the Transactions, cash had been transferred between the Company and Raytheon based on the Company's cash position. For the period from January 1, 1998 through May 4, 1998, the Company transferred cash to Raytheon of $17.5 million, which was generated substantially through the sale of trade receivables during the first nine months of 1998 and from the Company's earnings before depreciation and amortization. Capital Expenditures The Company's capital expenditures for the nine months ended September 30, 1999 and September 30, 1998 were $8.9 million and $5.9 million, respectively. Capital spending in 1999 was principally oriented toward transitioning dryer production from Appliance Co. to the Ripon manufacturing facility and reducing manufacturing costs, while spending in 1998 was principally oriented toward reducing manufacturing costs and transitioning frontload washer production from Appliance Co. to the Company's Ripon manufacturing facility. YEAR 2000 The Company has completed the evaluation of its computer operating systems that would potentially be disrupted upon the turn of the century as a result of the Year 2000 Issue. As of October 1999, the Company estimates that it is Year 2000 compliant on over 95% of all business-related software and hardware and that it will be fully compliant by the end of the fourth quarter of 1999. The Company's current status with respect to both information technology ("IT") and Non-IT systems is as follows: IT software/hardware The Company believes that its Infinium financial system applications, including general ledger, accounts receivable, payroll, human resources and accounts payable subsystems, and its Mapics manufacturing systems applications are currently Year 2000 ready. In addition, the Company has conducted a comprehensive analysis of its Data3 manufacturing and internally developed order processing and warehouse location inventory systems for which Year 2000 readiness may be an issue. Impacted files within such systems and the programs which access them have been triaged according to urgency based on critical functionality and the time period during which readiness will become an issue. As of October 1999, the Company estimates that all identified files and programs are Year 2000 ready and in use in a production environment. In addition, software suppliers have provided Year 2000 ready releases of the Company's Strategy Loan Management and Sales Tax Reporting systems which have been implemented, and are currently in use. Based on the triage approach, ongoing testing in a development environment and advanced implementation of changes to critical systems, the Company currently anticipates that any Year 2000 vulnerability with respect to its IT software and hardware will be encountered and corrected in advance of a crisis situation. All effectivity date processing changes and critical date display functions were completed and implemented by the end of the first quarter of 1999. 20 The Company has completed an audit of IT hardware within the organization. Results indicate that the AS400 processing platform is Year 2000 ready and, as of October 1999, over 95% of the network, network software, printers and PCs in place throughout the organization are Year 2000 compliant. The network and network software were upgraded with Year 2000 ready releases provided by suppliers during the third quarter of 1999. Continued phased upgrades to Company PCs and printers will continue during the fourth quarter of 1999 with ongoing reassessment to ensure Year 2000 readiness. The Company's phone system was upgraded for Year 2000 readiness in the second quarter of 1999. The Company currently believes that the worst case scenario with regard to IT would be the malfunction of a non-critical or sporadically used application. Although the Company believes this scenario to be unlikely, manual back-up procedures for these types of functions currently exist and would be initiated in the event of a Year 2000 readiness issue. Such malfunctions, if they were to occur, would be prioritized in conjunction with other critical projects being addressed at the time that the Year 2000 readiness issue arises. Non-IT software/hardware The Company began implementation of a coordinated effort in September 1998 to include every department in the challenge of ensuring Year 2000 readiness in Non-IT areas. Areas that were assessed included office machines, security access devices, Uninterrupted Power Sources, maintenance control chips within equipment used throughout the organization, robotics, process control devices, HVAC and electrical systems and Year 2000 date sensitive controlled devices. Under the direction of each functional Vice President, the Company has begun to implement programs to correct Year 2000 issues in Non-IT areas. In addition to such remedial actions, the programs include the development of contingency plans (such as additional inventory, alternate manufacturing processes, manual/procedures, etc.) for areas where Year 2000 readiness may be an issue. As of October 1999, the Company currently estimates that Year 2000 readiness for Non-IT areas is 90% complete in the Ripon facility, 90% complete in the Madisonville facility and more than 85% complete in the Marianna facility. The Company currently anticipates that all Non-IT Year 2000 issues will be addressed by December 1999. Products, customers and suppliers The Company, an industry leader in the use of electronic display controls, uses micro controls, embedded chips and related software in several of its products. The Company evaluated 100% of its products for Year 2000 readiness between November 1997 and November 1998 and currently believes that its products are Year 2000 ready. The Company has prepared a product-related Year 2000 readiness Field Bulletin that is distributed to customers upon request. The Field Bulletin has been in use since the fourth quarter of 1998. The Company sent out Year 2000 readiness questionnaires to all suppliers in December 1998. As of October 1999, more than 95% of the Company's suppliers have responded to the questionnaire and indicated when its products and facilities will be Year 2000 ready. Based on the response to the initial questionnaire, the Company will prioritize the suppliers that could potentially have Year 2000 problems which could have a material adverse effect on the Company's operations and will formulate contingency plans to mitigate Year 2000 risk. The Company plans to routinely follow-up with suppliers to reassess and monitor Year 2000 compliance allowing contingency plans to be modified as required. Based upon our initial assessment, the Company does not believe there are significant Year 2000 issues that would have a material adverse effect on the Company's financial condition or results of operations. 21 Costs In 1996, the Company utilized outside consultants to determine the scope of the Year 2000 readiness project. This cost was commissioned by the Company's former parent and was not incurred locally. The Company secured the services of one consultant that was used for a period of 18 months to assist with some of the initial code changes required for system conversions of the highest priority. In addition, expenses incurred by the Company related to Year 2000 readiness included operating and application software upgrades, personal computer and network computer upgrades, central computer upgrade and internal IT resources required to upgrade in-house developed application software. During 1998, expenditures related to Year 2000 were $1.2 million ($0.6 million in expense and $0.6 million in capital). In 1999, the Company has budgeted another $1.5 million ($0.9 million in expense and $0.6 million in capital) to support Year 2000 related projects. The Company estimates that $0.8 million ($0.6 million in expense and $0.2 million in capital) will be needed in 2000 for equipment upgrades and clean-up projects for seldom used low priority applications that have little impact on the Company's operations or performance. Certain of the Company's other IT projects have been delayed due to the allocation of internal IT development staff to Year 2000 readiness issues. However, quarterly project prioritization reviews occur at which time competing critical priorities are assessed. Up to this point, resources have been considered adequate to maintain progress on the Year 2000 readiness project while supporting other strategic projects. The Company believes that such deferrals will not have a material adverse effect on the Company's financial condition and results of operations. While the Company believes that new software being installed into its computer system will address the Year 2000 Issue, there can be no assurance that all of the new software will be installed in time to remedy the Year 2000 Issue or that the Company's computer operating systems will not be disrupted upon the turn of the century. Any such disruption, whether caused by the Company's systems or those of any of its suppliers or customers, could have a material adverse effect on the Company's business, financial condition and results of operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on the Company's results of operations or its financial position. This Statement is effective for fiscal years beginning after June 15, 2000. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is potentially exposed to market risk associated with changes in interest and foreign exchange rates. The Company does not and currently does not intend to hedge exchange rate fluctuations between United States dollars and foreign currencies. However, from time to time, the Company may enter into derivative financial instruments to hedge its interest rate exposures. An instrument will be treated as a hedge if it is effective in offsetting the 22 impact of volatility in the Company's underlying interest rate exposures. The Company does not enter into derivatives for speculative purposes. There have been no material changes in the Company's market risk exposures as compared to those discussed in the Company's Registration Statement on Form S-4 (file no. 333-56857) except for the interest rate swap entered into by the Company as discussed in Note 2 to the financial statements for the quarter ended September 30, 1999. FORWARD-LOOKING STATEMENTS With the exception of the reported actual results, the information presented herein contains predictions, estimates or other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, including items specifically discussed in "Note 6 - Commitments and Contingencies" and "Year 2000" sections of this document. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by such forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that such plans, intentions, expectations, objectives or goals will be achieved. Important factors that could cause actual results to differ materially from those included in forward-looking statements include: impact of competition; continued sales to key customers; possible fluctuations in the cost of raw materials and components; possible fluctuations in currency exchange rates, which affect the competitiveness of the Company's products abroad; market acceptance of new and enhanced versions of the Company's products; the impact of substantial leverage and debt service on the Company and other risks listed from time to time in the Company's reports, including but not limited to the Company's Registration Statement on Form S-4 (file no. 333-56857). 23 PART II OTHER INFORMATION Item 1. Legal Proceedings. Legal actions relating to Appliance Co. are described in Footnote 6 to the Financial Statements in Part I hereto and are incorporated by reference into Part II. Item 2. Changes in Securities. 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) List of Exhibits. 27.1 Financial Data Schedule (b) Reports on Form 8-K. None. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Alliance Laundry Systems LLC has duly caused this quarterly report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Ripon, state of Wisconsin, on the 3rd day of November 1999. Signature Title Date --------- ----- ---- Chairman and CEO ____________________________________ _______________________ Thomas L'Esperance Vice President and Chief Financial Officer ____________________________________ _______________________ Bruce P. Rounds
Pursuant to the requirements of the Securities Exchange Act of 1934, Alliance Laundry Corp. has duly caused this quarterly report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Ripon, state of Wisconsin, on the 3rd day of November 1999. Signature Title Date --------- ----- ---- Chairman and CEO ____________________________________ _______________________ Thomas L'Esperance Vice President and Chief Financial Officer ____________________________________ _______________________ Bruce P. Rounds
Pursuant to the requirements of the Securities Exchange Act of 1934, Alliance Laundry Holdings LLC has duly caused this quarterly report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Ripon, state of Wisconsin, on the 3rd day of November 1999.
Signature Title Date --------- ----- ---- Chairman and CEO ____________________________________ _______________________ Thomas L'Esperance Vice President and Chief Financial Officer ____________________________________ _______________________ Bruce P. Rounds
25 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001063698 ALLIANCE LAUNDRY HOLDINGS LLC 1,000 9-MOS DEC-31-1999 SEP-30-1999 2,039 0 43,256 (372) 30,404 82,782 174,439 (115,079) 228,710 45,050 321,535 6,000 0 50,645 (195,651) 228,710 247,283 247,283 183,338 183,338 0 321 23,945 6,720 29 6,691 0 0 0 6,691 0 0
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