UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year ended October 31, 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 No. 333-60247
---------
COYNE INTERNATIONAL ENTERPRISES CORP.
BLUE RIDGE TEXTILE MANUFACTURING, INC.
OHIO GARMENT RENTAL, INC.
_______________________________________________________________________________
(Exact name of Registrants as specified in their respective charters)
New York 16-6040758
Georgia 58-2018333
Ohio 34-1261376
_____________________________________________ _____________________________
(State or Other Jurisdiction of Incorporation (IRS Employer Identification
or Organization) No.)
140 Cortland Avenue, Syracuse, New York 13221
- --------------------------------------------- -----------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (315) 475-1626
--------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
----
Securities Registered Pursuant to Section 12(g) of the Act: NONE
----
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days.
YES X NO *
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. :
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................... 1
Item 2. Properties......................................................................................... 8
Item 3. Legal Proceedings.................................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders................................................ 10
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters............................... 10
Item 6. Selected Financial Data............................................................................ 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................ 12
Item 7a. Quantitative and Qualitative Disclosure About Market Risk.......................................... 17
Item 8. Financial Statements and Supplementary Data........................................................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 17
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 18
Item 11. Executive Compensation........................................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 21
Item 13. Certain Relationships and Related Transactions................................................... 22
PART IV
Item 14. Exhibits and Financial Statement Schedules....................................................... 24
Signatures....................................................................................... 25
Index to Consolidated Financial Statements....................................................... F-1
Coyne International Enterprises Corp. uses a 52/53 week fiscal year ending on
the last Saturday in October. For convenience, the dating of financial
information in this Annual Report on Form 10-K has been labeled as of and for
the years ended October 31, 2000, 1999 and 1998, as the case may be, rather than
the actual fiscal year end.
Forward-Looking Information
This Annual Report on Form 10-K includes forward-looking statements. Although
the Company believes that its plans, intentions and expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such plans, intentions or expectations will be achieved. When used in this
Annual Report on Form 10-K, the words "anticipate," "believe," "estimate,"
"expect," "intends," and similar expressions, as they relate to the Company, are
intended to identify forward-looking statements. Forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth in this
Annual Report on Form 10-K. Actual results could differ materially from those
expressed or implied in the forward-looking statements as a result of, but not
limited to, the following factors: (i) the Company's ability to generate
sufficient cash flow from operations, (ii) the availability of future borrowings
under the Company's credit facility, (iii) the availability of sufficient funds
at the time of any change of control to make any required repurchases of the
Company's senior subordinated notes, (iv) restrictions in the Company's credit
facility, (v) the Company's ability to compete with other firms in the textile
rental industry, (vi) general economic conditions in the Company's markets,
(vii) the timing of acquisitions,(vii) commencing start-up operations and
related costs, (ix) the Company's effectiveness of integrating acquired
businesses and start-up operations, (x) the timing of capital expenditures, (xi)
seasonal rental and purchasing patterns of the Company's customers, (xii) price
changes in response to competitive factors, (xii) the Company's ability to
attract and retain qualified employees, and a prolonged work stoppage or strike
by the Company's unionized work force,(xiii) the availiablity of sufficient
funds to meet shareholder redemption requests, and (xiv )the results of Internal
Revenue Service audits
PART I
Item 1. Business.
--------
General
Coyne International Enterprises Corp. ("CTS" or the "Company") provides
textile rental products and laundering services from 43 locations to customers
in diversified industries primarily throughout the eastern United States.
Textile rental products provided by the Company include workplace uniforms,
protective clothing, shop towels and other reusable absorbent products,
floormats; treated mops and other dust control products. The Company primarily
rents textile products to clients under laundry service contracts, but also
sells products to clients and launders client-owned items. Most of the Company's
accounts are subject to written service contracts. The Company's typical service
contract ranges in duration from three to five years with automatic "evergreen"
renewals, except upon prior written notice, and provides for significant
liquidated damages upon early termination by the customer. The Company's
products and services are distributed through its route-based distribution
system comprised of 18 industrial laundry plants, 24 sales, service and
distribution laundry terminals and one corporate sales office that allow the
Company to provide rental services to customers in geographic areas outside of
the immediate area of an industrial laundry plant. CTS manufactures shop towels,
dust mops, floormats and several other products used in the laundry business at
its Blue Ridge Textile Manufacturing, Inc., ("Blue Ridge"), manufacturing
subsidiary.
The Company focuses on the value-added aspects of the textile rental
business, such as the heavy soil (e.g., printing inks, oils and solvents) and
protective garment sectors. "Value-added" refers to the Company's attempt to
protect its customers from potential environmental liabilities by reducing the
amount of hazardous substances sent to landfills for disposal. In addition, the
Company assists its customers with OSHA compliance through its protective
garment programs. The Company's products and services assist customers with
their corporate image, the productivity and safety of their employees and the
environmental impact of their businesses. For example, the Company has built
industry-leading heavy soil laundry plants, which minimize its customers'
environmental exposure and have allowed the Company to carve out what it
believes is a leading position in the heavy soil sector of the textile rental
services industry. In addition, the Company works with clients to design, source
and manage protective uniform programs for specific applications, such as flame
or chemical retardant clothing for industrial workers. In addition, the Company
offers garment tracking technologies that provide its customers with superior
accountability for rented garments.
The Company's customer base is diversified across a variety of industries.
Customers range in size from large nationally-recognized businesses such as
ALCOA, AK Steel, Oneida Ltd., United Technologies and Bristol Myers Squibb, to
smaller businesses, such as gas stations and other retail businesses. In
particular, the Company believes it is a leading provider of textile rental
services to the printing industry throughout its service area, with customers
including The New York Times and USA Today.
The Company was founded and incorporated in New York in 1929 and has been
owned and operated by the Coyne family since its inception. The Company's
principal executive offices are located at 140 Cortland Avenue, Syracuse, New
York, 13221 and its telephone number is (315) 475-1626.
Industry Overview
The textile rental industry in the United States, which had 1999 revenues
of approximately $10 billion, consists of two segments: the industrial segment
(uniforms, protective clothing, shop towels, floormats and dust control
products) and the linen segment (sheets, tablecloths and other linen items). In
2000, approximately 96% of the Company's business was derived from the
industrial segment. The primary product in the industrial segment is uniforms,
which accounted for approximately 47% of the Company's revenues in 2000. The
Industry's trade association, Textile Rental Services Association (TRSA), has
estimated that the uniform rental services segment of the textile rental
industry grew at a rate of 5.3% in 1999 and 6.2% in 1998.
The Company believes that much of the uniform industry's overall growth has
resulted from an increasing number of companies choosing to use uniform rental
services to maintain a high-quality corporate image, improve employee safety,
productivity and morale, and reduce costs. In addition, the growth in jobs,
particularly in the service sector, has increased the number of potential
uniform wearers. The Company believes that the growth in the service sector will
continue to be the catalyst for overall rental industry growth. This growth
combined with projected growth rates of 29% for heating, ventilation and air
conditioning (HVAC) firms, 23% growth for moving and packing industry firms, and
17% growth in the automobile service industry should ensure continued growth in
revenue from the service sector. CTS also believes that growth in the rental
segment of the industry in particular will be driven by the broad trends to
outsource non-core business functions.
2
In addition, the Company believes its industry-leading environmental
capabilities and protective clothing expertise strategically position it to
realize long-term benefits from continuing government regulation of the
environment and the workplace. Increasingly stringent environmental regulations
have been the catalyst for a shift toward the outsourcing of laundering of heavy
soil items. In a report to Congress in connection with The Workers' Family
Protection Act, the National Institute for Occupational Safety and Health
(NIOSH), has stated that home laundering is inadequate in decontaminating work
clothes. The market for flame retardant clothing has been fueled by Occupational
Safety and Health Administration (OSHA) regulations holding employers
responsible for supplying appropriate clothing based on an evaluation of
potential workplace hazards. Employers are prohibited from supplying clothing
that, when exposed to flames or electrical arcs, could increase the extent of
wearer injury. Growth in demand for environmental services and protective
clothing is particularly valuable to the Company because these markets involve
long-term relationships with customers and make use of the Company's technical
knowledge of regulations, products, fabric types, climatic conditions and job
functions.
Although the industrial textile rental industry includes several national
companies, the industry remains highly fragmented. According to "Textile
Rental," an industry trade magazine, there are over 1,600 textile rental
companies operating in the industrial segment of the industry, many of which are
single facility operators. The Company believes that many of these smaller
companies are being forced to exit the market due to a lack of economies of
scale and the cost of complying with increasingly stringent environmental
standards. The Company further believes that the industry will continue to
experience consolidation in the future and that strategic acquisition
opportunities will become available.
Products and Services
The Company provides its customers with personalized workplace uniforms and
protective work clothing in a broad range of styles, colors, sizes and fabrics.
The Company's uniform products include shirts, pants, jackets, coveralls,
jumpsuits, smocks, aprons and specialized protective wear, such as fire
retardant and chemical protective garments. The Company also offers non-garment
items and services, such as shop towels, floor mats, dust-control mops and other
textile products.
3
The Company offers its customers a range of garment service options,
including full-service rental programs in which garments are owned, cleaned and
serviced by the Company and lease programs in which garments are cleaned and
maintained by its customers' individual employees. The Company also offers the
opportunity to purchase garments and related items directly. As part of its
full-service rental business, the Company picks up a customer's soiled uniforms
or other items on a periodic basis (usually weekly) and, at the same time,
delivers cleaned and processed replacement items. The Company's centralized
services, specialized equipment and economies of scale generally allow it to be
more cost-effective in providing garment services than customers could be by
themselves, particularly those customers with high employee turnover rates.
Accordingly, the Company believes its services are appealing to customers who
seek to outsource non-core functions. The Company's uniform programs help
customers foster greater corporate identity, present a consistent, high-quality
image and improve employee safety, productivity and morale.
The Company offers its customers "green" programs which focus on pollution
prevention. These programs are based on the Company's shop towel product which
is highly absorbent and reusable. CTS is endorsed by many of the state and
regional printing associations and services large printing operations such as
The New York Times and USA Today. Further, the Company offers its customers
Reusable Absorbent Systems ("RAS") socks and pads. RAS products provide
customers with environmentally responsible alternatives to single-use disposable
absorbents and promote the EPA policy of waste minimization. RAS programs are in
place at many large national accounts such as General Motors and United
Technologies.
The Company's industry-leading wastewater treatment capabilities allow it
to process textiles contaminated with petroleum, chemical solvents or printing
inks that require specialized cleaning services that comply with environmental
regulations. These facilities capture waste solvents and oils in liquid form and
then recycle this liquid waste as a supplemental fuel in a secondary fuel
recycling program. This technology reduces the amount of wastewater sludge sent
to landfills for disposal and reduces the customer's exposure to environmental
liability. As a result of the Company's superior environmental capabilities in
the heavy soil sector market, the Company estimates that most of the printing
associations in the eastern United States have endorsed CTS as the preferred
provider of heavy soil textile services. All CTS environmental matters are
managed by the Company's environmental team that includes a senior manager with
extensive experience both in the industry and as a former appointed official of
the EPA. This individual is recognized by both of the industry's principal trade
associations, the TRSA and the Uniform and Textile Service Association (UTSA),
as a leading industry expert in environmental matters and serves on their
respective environmental committees.
Finally, the Company processes heavy soil textile products for many of its
competitors because these competitors do not have the same waste treatment
capabilities as CTS. This permits the Company to develop relationships with
laundries that may be sold in the ongoing market consolidation
4
The Company believes that it is one of the first industrial launderers to
implement bar-coding and radio frequency garment identification technologies.
These technologies allow the Company and its customers to track a garment from
pick-up at the customer's location through processing at the Company and
delivery back to the customer. Garment tracking is particularly important for
protective clothing because of its higher replacement cost. The Company is able
to provide customers with valuable information concerning the age of garments,
their physical location and usage history. In addition, customized reports are
available and customers have the option to have direct-link PC capability,
allowing them access to real-time information about individual employee
garments.
Soiled textile items are returned to the laundry plant directly from the
route system. These items are sorted by soil type and water washed in highly
automated industrial laundry equipment using customized wash formulas that
ensure the cleanliness of these products while maximizing wear-life. Items are
then dried, sorted, folded and moved to the route staging area in the plant or
sent back to the terminal for distribution to the customer. Chemicals used in
dry cleaning operations are recycled. Waste-water from water washing is
processed in plant waste-water treatment facilities and discharged in accordance
with local municipal requirements.
Sourcing Activities
The Company actively manages its supply chain and has, from time to time,
brought certain items in-house for manufacture on an opportunistic basis. For
example, due to the cost and inconsistent quality of shop towels available, the
Company began manufacturing shop towels in 1992. The Company is currently one of
the largest shop towel manufacturers in the United States. All of the shop
towels used in the Company's laundry business are produced at the Company's Blue
Ridge, Georgia manufacturing facility and are marketed under the Blue Ridge
name. Approximately one-half of Blue Ridge manufactured shop towels are sold to
customers other than CTS. Although other sources of shop towels are available,
the Company believes that the superior performance of the Blue Ridge shop towel,
particularly in terms of durability and absorption, is a significant advantage
in securing heavy soil business. Blue Ridge also manufactures dust mops, aprons,
laundry bags, walk-off mats and RAS socks. The Blue Ridge operations
represented approximately 3.6% of the Company's external revenues in fiscal
2000.
In order to take advantage of the opportunities presented by the North
American Free Trade Agreement, the Company manufactures garments in Mexico under
a subcontract agreement with a Mexican manufacturer. While the Company does not
anticipate substantial growth in its manufacturing operations, it continues to
consider manufacturing opportunities in order to gain an advantage in the
marketplace.
In cooperation with a New Zealand based manufacturer, the Company
participated in the development of chemically protective and flame retardant
garments that comply with American National Standards Institute ("ANSI")
standards for exclusive distribution by CTS in the United States.
5
The Company purchases other rental merchandise from a variety of sources
including Red Kap Industries, Alliance Textiles, Ltd., Best Manufacturing Inc.,
Eagle Work Clothes, Inc. and Workrite. The Company believes that it is not
dependent on any one supplier and that alternative sources are available at
comparable prices. The availability of alternative manufacturers and the
Company's ability to change suppliers and manufacture textile products allow it
to optimally meet its merchandise requirements in terms of quantity, quality and
price.
Customers
The Company's customer base is diversified across a variety of industries
and customers range in size from large nationally-recognized businesses such as
ALCOA, Oneida Ltd., United Technologies and Bristol Myers Squibb, to smaller
businesses, such as gas stations and other retail businesses. Typical customers
include automobile service centers and dealers, delivery services, food and
general merchandise retailers, food processors and service operations,
manufacturers, maintenance facilities, printers and publishers, restaurants,
service companies, soft and durable goods wholesalers, transportation companies,
and others who require employee clothing for image, identification, protection
or utility purposes. The Company currently services approximately 40,000
accounts in diversified industries from 42 locations throughout the eastern
United States. During the past five years, no single customer accounted for more
than 8.0% of total revenues in any year.
Sales, Marketing and Distribution
In 1996, the Company made a strategic decision to leverage its investment
in laundry plants, laundry terminals and their waste-water treatment facilities
by focusing on the development of its professional sales force. The sales team
has grown from 25 professionals in 1996 to 65 in 2000. Sales associates market
the Company's products and services to potential customers and develop new
accounts. The selling efforts of the sales force are managed by regional sales
managers who are also responsible for major account relationships within their
region. Rental and direct sales programs on the national level are handled by
the National Account Marketing Department, which call directly on existing and
prospective rental and direct sale national accounts. The regional sales
managers and National Account Marketing Department report directly to the Vice
President of Sales and Marketing
The Company's route salespeople continue to be an integral component of the
Company's sales and marketing efforts. Route salespeople have responsibility for
increasing sales to existing customers and establishing new customer
relationships along their routes. All of the Company's route salespeople are
paid commissions based on the weekly revenue of their route. Further, route
salespeople are incented to obtain an executed written contract from every
customer. CTS believes that its approach results in a professional sales team
that is highly motivated.
6
Competition
The industrial segment of the textile rental industry is highly
competitive. The Company believes that there are four competitors in the
industry with annual revenues in excess of $250 million each. These companies
account for over half of the industry's revenues. The Company believes that it
is one of a small group of companies that have revenues of $50 million to $250
million and which collectively account for approximately 25% of revenues from
the industrial segment. The remainder of the industry is made up of over 1,600
smaller businesses, many of which serve one or a limited number of markets or
geographic service areas.
The Company believes that the primary competitive factors that affect its
operations are price and its ability to meet customers' product specifications,
which include design, quality and service. The Company believes it maintains
prices comparable to those of its major competitors. The Company also believes
that its ability to compete effectively is enhanced by its environmental
capabilities and its superior customer service and support.
Employees
As of October 31, 2000, the Company had approximately 1,850 employees. CTS
is a party to 30 collective bargaining agreements covering approximately 800
employees. These bargaining agreements expire periodically through 2004. The
Company had no work stoppages in 2000 and one that occurred in 1999 with respect
to a bargaining unit of one of the Company's facilities. This stoppage
represented a limited number of employees and had no material impact on the
Company's operations. The Company believes that its relationships with both its
union and non-union employees are good.
Environmental Matters
The Company and its operations are subject to various federal, state and
local laws and regulations governing, among other things, the generation,
handling, storage, transportation, treatment and disposal of hazardous wastes
and other substances. In particular, industrial laundries use and must dispose
of detergent wastewater and other residues. The Company is attentive to the
environmental concerns surrounding the disposal of these materials and has
through the years taken measures to avoid their improper disposal.
In the past, the Company has settled, or contributed to the settlement of,
actions or claims brought against the Company relating to the disposal of
hazardous materials and there can be no assurance that the Company will not have
to expend material amounts to remediate the consequences of any such disposal in
the future. There have been no environmental claims brought against the Company
that have had a material adverse effect.
Under the Federal Comprehensive Environmental Response, Compensation and
Liability Act, the U.S. Environmental Protection Agency ("EPA") is authorized
to, among other things, designate certain contaminated facilities as Superfund
sites and seek from responsible parties the cost to clean-up that contamination.
The Company has in the past responded to a number of requests for information
from the EPA concerning the Company's alleged disposal of hazardous substances
at Superfund sites. The extent of
7
liability, if any, depends on a number of factors, such as (1) whether the
Company disposed of hazardous substances at one or more of those facilities, (2)
whether the Company or its waste hauling contractor selected the particular
disposal location, (3) the quantity and, under certain circumstances, the
toxicity of hazardous substances that were disposed and (4) whether the Company
was contractually indemnified by its waste hauling contractor for such potential
liability. The Company's policy is to accrue and charge to operations
environmental investigation and remediation expense when it is probable that a
liability has been incurred and an amount is reasonably estimable. The Company
continues to evaluate its exposures as additional information becomes available,
but it is not possible to accurately determine the extent of liability, if any,
at this time. The Company will vigorously defend itself against these claims.
Further, under environmental laws, an owner or lessee of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in or emanating from such property, as well as related
costs of investigation and property damage. Such laws often impose liability
without regard to whether the owner or lessee knew of or was responsible for the
presence of such hazardous or toxic substances. There can be no assurances that
acquired or leased locations have been operated in compliance with environmental
laws and regulations or that future uses or conditions will not result in the
imposition of liability upon the Company under such laws or expose the Company
to third-party actions such as tort suits.
In 1999, the EPA withdrew proposed categorical pre-treatment standards,
which would have formed the basis for a federal environmental regulatory
framework applicable to industrial laundry operations. Therefore, there will be
no additional cost of compliance due to this federal effort.
Item 2. Properties.
----------
As of October 31, 2000, the Company provided textile rental services from 43
facilities. The Company owns 22 of its facilities, including its corporate
headquarters in Syracuse, New York, and leases the balance of its facilities
pursuant to leases expiring between January 2001 and March 2005. The Company has
options to renew in most cases, except for leases for certain garages and small
distribution facilities which are leased on a month-to-month basis. The
Company's facilities consist primarily of laundry plants and laundry terminals.
A laundry plant processes and delivers textile rental products to customers or
to laundry terminals. A laundry terminal does not engage in production work, but
collects soiled inventory, transports it to the laundry plant for processing and
delivers processed inventory to customers. A laundry plant can also perform all
of the functions of a laundry terminal.
8
The following table summarizes certain information concerning the Company's
facilities.
Approximate
Location Principal Use Square
Footage
- -------------------------- ----------------------------------- -----------------
Albany, NY* Corporate Satellite Office 1,110
Atlanta, GA* Laundry Plant/Laundry Terminal 18,000
Baltimore, MD** Laundry Plant/Laundry Terminal 85,000
Beckley, WV* Laundry Terminal 7,500
Belleville, NJ** Laundry Plant/Laundry Terminal 22,800
Betsy Layne, KY* Laundry Terminal 6,500
Blue Ridge, GA Manufacturing 42,500
Bristol, TN Laundry Plant/Laundry Terminal 27,200
Buffalo, NY*** Laundry Plant/Laundry Terminal 92,000
Burlington, VT Laundry Terminal 9,180
Charlotte, NC* Laundry Terminal 7,500
Chattanooga, TN* Laundry Terminal 8,200
Chicago, IL* Laundry Terminal 7,500
Cinnaminson, NJ* Laundry Terminal 10,000
Cleveland, OH Laundry Plant/Laundry Terminal 85,000
Erie, PA Laundry Terminal 47,000
Evansville, IN* Laundry Terminal 7,500
Fairmont, WV* Laundry Terminal 6,500
Fort Myers, FL* Laundry Terminal 2,000
Greenville, SC* Laundry Terminal 5,000
Hazleton, PA* Laundry Terminal 7,500
Huntington, WV Laundry Plant/Laundry Terminal 180,000
Lakeland, FL Laundry Plant/Laundry Terminal 12,000
Lewiston, ME* Laundry Terminal 6,500
London, KY** Laundry Plant/Laundry Terminal 24,000
Long Island, NY* Laundry Terminal 6,500
Nashville, TN* Laundry Terminal 7,500
New Bedford, MA** Laundry Plant/Laundry Terminal 85,000
Philadelphia, PA Laundry Plant 85,000
Pittsburgh, PA* Laundry Terminal 6,500
Raleigh, NC* Laundry Terminal 8,200
Richmond, VA Laundry Plant/Laundry Terminal 49,000
Schenectady, NY** Laundry Plant/Laundry Terminal 25,000
Seaford, DE* Laundry Terminal 6,200
Smithboro, NY Laundry Terminal 6,500
9
Approximate
Location Principal Use Square
Footage
---------------------- ----------------------------------- -----------------
Syracuse, NY Laundry Plant/CorporateHeadquarters 220,000
Toledo, OH Laundry Plant/Laundry Terminal 65,000
Virginia Beach, VA* Laundry Terminal 4,000
Waterbury, CT Laundry Plant/Laundry Terminal 108,000
Winchester, VA* Laundry Terminal 9,200
Woodbridge, NJ* Corporate Service Office 900
Worcester, MA Laundry Plant/Laundry Terminal 75,000
York, PA** Laundry Plant/Laundry Terminal 34,000
* Indicates leased facility
** Company owns laundry plant but leases garage.
*** Financed by industrial revenue bonds.
Item 3. Legal Proceedings.
-----------------
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on its financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
----------------------------------------------------------------
Matters.
-------
There is no established trading market for the Company's equity securities.
The Company's common and preferred stock are not publicly traded. As of
October 31, 2000, the Company's Class A Common Stock was held by two holders of
record, the Company's Class B Common Stock was held by two holders of record,
the Company's Class A Preferred Stock was held by two holders of record and the
Company's Class B Preferred Stock was held by two holders of record.
10
Item 6. Selected Financial Data.
-----------------------
The selected historical financial information presented below at the end
of and for each of the fiscal years ended October 31, 1996, 1997, 1998, 1999 and
2000 have been derived from the audited consolidated financial statements of
Coyne International Enterprises Corp. The following selected financial
information should be read in conjunction with Coyne International Enterprises
Corp. Consolidated Financial Statements and accompanying Notes as of October 31,
1999 and 2000 and for the fiscal years ended October 31, 1998, 1999 and 2000 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Years Ended October 31,
----------------------------------------------------------
1996 1997 1998 1999 2000 (4)
-------- -------- --------- -------- ---------
(dollars in thousands)
Statement of Operations Data:
Net revenue................................ $119,085 $122,935 $ 138,737 $146,212 $150,290
Income from operations..................... 8,179 10,792 10,239 9,835 11,656
Interest expense (1)....................... 6,786 6,715 25,402 10,842 11,208
Income (loss) before income taxes and
extraordinary item...................... 1,393 4,077 (15,163) (1,006) 448
Income tax expense (benefit)............... 847 2,025 640 (55) 630
Income (loss) before extraordinary item.... 546 2,052 (15,804) (951) (182)
Extraordinary item, net of tax (2)......... ---- ---- (939) ---- ----
Net income (loss).......................... $ 546 $ 2,052 $ (16,743) $ (951) $ (182)
Other Data:
Capital expenditures....................... $ 9,820 $ 2,584 $ 6,619 $ 7,713 $ 2,943
Depreciation and amortization.............. 4,779 5,289 5,301 5,806 6,470
Balance Sheet Data (at period end):
Working capital............................ $ 6,608 $ 6,769 $ 17,066 $ 20,126 $ 28,986
Total assets............................... 97,432 102,621 117,367 121,846 131,283
Total debt................................. 58,051 58,557 88,538 97,547 106,197
Warrants (3)............................... 1,743 1,743 ---- ---- ----
Shareholders equity (deficit).............. 7,845 9,897 (7,077) (8,432) (8,689)
(1) Interest expense for 1998 includes a $17,257 charge for the cost to redeem
common stock warrants in excess of their book carrying value.
(2) Represents the extraordinary charge attributable to the write-off of
unamortized financing charges and original issue discount of $1,304, net of
taxes of $365. These deferred charges originated in 1994 in connection with
subordinated notes and other debt obligations redeemed in 1998.
(3) Common stock warrants were issued in 1994 in connection with the issuance
of subordinated notes. Such common stock warrants and subordinated notes
were redeemed in 1998.
(4) In 2000 the Company extended the amortization period, on a prospective
basis, for certain rental merchandise in service, to a period which is more
consistent with the useful lives of the merchandise. The impact on net
income was an increase of approximately $420, net of taxes of $280. In
the fourth quarter of fiscal 2000, the Company recognized the effect of
certain adjustments, which resulted in an increase to net income. These
adjustments, on a pre-tax basis, relate to the receipt of life insurance
death benefits of $165 and reversal of accruals for deferred compensation
arrangements and discretionary contributions to a benefit plan no longer
required of $1,055. In aggregate the impact of these adjustments is an
increase to net income of $732, net of taxes of $488.
11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
-----------------------------------------------------------
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto contained herein.
Results of Operations
The following table presents certain statements of historical operations
data as a percentage of total revenue for the periods indicated and should be
read in conjunction with the other financial information of CTS contained
elsewhere in this Annual Report.
Year Ended October 31,
--------------------------------
2000 1999 1998
------- -------- --------
Total revenue .......................... 100.0% 100.0% 100.0%
Cost of rental operations .............. 68.2 67.6 67.4
Cost of direct sales ................... 4.7 5.1 3.9
Selling and administrative expenses .... 15.8 17.0 16.3
Depreciation and amortization .......... 4.3 4.0 3.8
Income from operations.................. 7.8 6.7 7.4
Fiscal Year 2000 Compared to Fiscal Year 1999
Total Revenue. Total revenues were $150.3 million in fiscal 2000,
representing an increase of $4.1 million or 2.8% as compared to $146.2 million
for fiscal 1999. The growth can be attributed to the new rental business written
by the Company's professional sales force, increases in service to existing
accounts and increases in revenue from ancillary charges.
Cost of Rental Operations. Cost of rental operations of $102.5 million for
fiscal 2000 was 68.2% of total revenue for the period. This represents an
increase of 3.8% as compared to fiscal 1999 and can be attributed to increased
spending to improve customer service and increased natural gas and fuel costs.
In 2000 the Company extended the amortization period, on a prospective basis,
for certain rental merchandise in service, to a period which is more consistent
with the useful lives of the merchandise. The impact on net income was an
increase of approximately $0.4 million, net of taxes of $0.3 million.
Cost of Direct Sales. Cost of direct sales of $5.9 million for fiscal 2000
was 3.9% of total revenue. Cost of direct sales was approximately 59.1% and
66.2% of direct sale revenue for fiscal 2000 and 1999, respectively. The
improved margin is attributable to a favorable change in product mix and
successful pricing initiatives in connection with certain products.
Selling and Administrative Expense. Selling and administrative expense was
$23.7 million for fiscal 2000, representing a decrease of approximately $1.1
million or 4.5% versus fiscal 2000. Approximately half of this reduction can be
attributed to improved cost control and elimination of non-productive sales
positions.
12
Additionally, in the fourth quarter of fiscal 2000, the Company recognized the
effect of certain adjustments, which resulted in an increase to net income.
These adjustments, on a pre-tax basis, relate to the receipt of life insurance
death benefits of $0.2 million and reversal of accruals for deferred
compensation arrangements and discretionary contributions to a benefit plan no
longer required of $1.1 million. In aggregate the impact of these adjustments is
an increase to net income of $0.7 million, net of taxes of $0.5 million.
Depreciation and Amortization. Depreciation and amortization was $6.5
million for fiscal 2000, representing an increase of approximately $0.7 million
or 11.4% over fiscal 1999. This increase is attributable to substantial
investments made in facilities and equipment, and information management systems
during 1998 and 1999.
Income from Operations. Income from operations was $11.7 million for fiscal
2000 as compared to $9.8 million for fiscal 1999. This increase resulted
primarily from increased sales volumes, ancillary revenue and improved cost
control.
Interest Expense. Interest expense was $11.2 million for fiscal 2000 and
$10.8 million for fiscal 1999, representing an increase of $0.4 million, or
3.4%. This increase is due to an increase in borrowings under the Company's
credit facilities to fund purchases of inventory for certain large contracts.
Income Taxes. The Company's provision for income taxes of $0.6 million for
fiscal 2000 was $0.7 million higher than the tax expense for the prior year. The
effective tax rate is not comparable due to the influence of certain non-
deductible expenses such as the amortization of intangible assets and certain
meal and entertainment expenses.
Net Income (Loss). Net loss of $0.2 million for fiscal 2000 compares with a
net loss of $1.0 million for fiscal 1999. This improvement was due to a
combination of revenue growth and tighter cost controls.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net Revenue. Net revenues were $146.2 million in fiscal 1999, representing
an increase of $7.5 million or 5.4% as compared to $138.7 million for fiscal
1998. However 1998 was a 53-week year versus the 52 weeks in 1999. After
removing the effect of the extra week in 1998, adjusted growth is actually 7.6%.
The growth can be attributed to the new rental business written by the Company's
expanded professional sales force, increases in service to existing accounts and
increases in revenue from ancillary charges.
Cost of Rental Operations. Cost of rental operations of $103.8 million for
fiscal 1999 was 71.0% of total revenue for the period. This represents an
increase of 0.3% as compared to fiscal 1998. The increase can be attributed to
additional personnel in the customer service area, particularly District
Managers (DM). The Company has reduced the number of average routes per DM in an
effort to improve customer retention.
Cost of Direct Sales. Cost of direct sales of $6.9 million for fiscal 1999
was 4.7% of total revenue. Cost of direct sales was approximately 66.2% and
70.3% of direct sale revenue for fiscal 1999 and 1998, respectively.
13
Selling, General and Administrative Expense. Selling general and
administrative expense was $25.7 million for fiscal 1999 representing an
increase of approximately $2.3 million or 9.8% over fiscal 1998. The increase is
comprised of a $1.7 million increase in administrative expenses and a $0.6
million increase in the cost of selling and marketing
The increase in administrative expenses is attributable to the Company's
investment in key management personnel, particularly at the Vice President and
General Manager level. The Company believes this investment will enable it to
achieve significant profit improvements in 2000 and beyond. In addition,
administrative expenses in 1999 include approximately $0.5 million of
noncapitalizable expenses associated with the implementation of the company's
new billing and accounting computer systems.
Income from Operations. Income from operations was $9.8 million for fiscal
1999 as compared to $10.2 million for fiscal 1998. This decrease resulted from
an increase in costs associated with the sales organization, senior management
personnel changes and implementation of the company's new computer systems.
Interest Expense. Interest expense was $10.8 million for fiscal 1999 and
$25.4 million for fiscal 1998. Fiscal 1998 interest expense includes $17.3
million for the excess of the redemption cost over the book value of common
stock warrants. In addition, interest expense exceeded 1998 levels due to the
higher outstanding borrowings resulting from the warrant redemption and 1999
expenditures for capital assets and route acquisitions.
Income Taxes. The Company's provision for recoverable taxes of $.06 million
for fiscal 1999 was $0.7 million lower than the tax expense for the prior year.
The effective tax rate between the periods is not comparable due to the
influences of non-deductible expenses, including the 1998 redemption of common
stock warrants and the amortization of certain intangible assets.
Net Income (Loss). Net loss of $1.0 million for fiscal 1999 compares with a
net loss of $16.7 million for fiscal 1998. This improvement was due primarily to
the 1998 charge of $17.3 million associated with the common stock warrant
redemption agreement, offset in part by higher interest costs in 1999.
Seasonality
The Company's operating results historically have been seasonally lower
during the third fiscal quarter (May, June and July) primarily because the
Company's floormat business is lower during this period than during the other
quarters of the fiscal year. Certain customers of CTS arrange to have the
floormats removed from their accounts during the late spring and early summer
months. In addition, schools and commercial customers reduce their business
during these months as a result of vacations and shutdowns.
14
Liquidity and Capital Resources
Sources and Uses of Working Capital
The Company's primary sources of liquidity have been cash flow from
operations and borrowings under the revolving credit facilities described below.
The net loss of $0.2 million in fiscal 2000 represents an improvement of
$0.8 million as compared to a net loss of $1.0 million in fiscal 1999. Cash used
in operating activities was $3.9 million for fiscal 2000 and $0.2 million for
fiscal 1999, an increase of $3.7 million. This increase was the result of
increased purchases of rental merchandise to meet the requirements of certain
new contracts. Cash used in investing activities was $3.9 million in fiscal
2000, which represents a $5.3 decrease from fiscal 1999. During fiscal 1999, the
Company had made significant one-time investments in improved computer systems
and equipment, which account for a large portion of this decrease.
On June 26, 1998, the Company raised $75.0 million through the offer and
sale of senior subordinated notes. Such notes bear interest at 11 1/4 % per
annum from June 26, 1998, payable semi-annually on June 1 and December 1 of each
year, commencing on December 1, 1998. The proceeds of the offer and sale of such
notes were used mainly to retire the majority of the Company's long-term debt
and to redeem outstanding common stock warrants. After giving consideration to
an amendment dated January 25, 2001, the facility provides for (i) a $30.0
million revolving credit facility subject to collateral availability, (ii) a
$15.0 million capital expenditure facility and (iii) a $10.0 million acquisition
facility. As of October 31, 2000, after giving consideration to an amendment of
its credit agreement, the Company had available borrowing capacity of
approximately $3.2 million on the revolving credit facility, $10.2 million on
the capital expenditure facility, and $8.2 million on the acquisition facility.
The Company's working capital was $29.0 million at October 31, 2000
compared to $20.1 million at October 31, 1999. The $8.9 million increase
primarily represents investments in inventories, due to delays in installation
at certain customer locations, and rental merchandise in service, financed
through the long-term revolver.
Anticipated Shareholder Redemptions
In fiscal 2000, the principal shareholder of the Company, J. Stanley Coyne,
passed away. As a result, the estate of the shareholder will be required to pay
certain estate tax liabilities over an estimated fifteen-year period. Although
the Company has no legal obligation or agreement to purchase or redeem any of
the preferred or common stock of the Company held by the estate, it is
anticipated that the Company will redeem or purchase certain shares of stock
held by the estate in order for the estate to meet its tax obligations as they
become due. The Company, under the indenture for its senior subordinated notes,
is permitted to redeem equity interests of the Company in order to satisfy
estate obligations of the principal shareholder. However, the annual redemptions
are not permitted to exceed $1.0 million in each of the second, third, fourth,
fifth and sixth calendar years and $2.25 million in each of the seventh, eighth,
15
ninth and tenth calendar years following the death of the shareholder, plus an
additional $2.0 million in calendar year 2003, subject to certain provisions.
Pending Internal Revenue Service Audit
The Internal Revenue Service (the "Service") is currently examining the
consolidated federal income tax returns of the Company for the years ended
October 31, 1997 and 1998. During the course of this examination, the Service
has proposed certain adjustments to these returns. The proposed adjustments
relate primarily to the timing of deductions taken for certain in-service
inventory items. The Company intends to vigorously contest the Service's
proposed adjustments and believes that the outcome of this will not have a
material adverse effect on its equity, results of operations, liquidity and
capital resources. However, there can be no assurances that the Company will
successfully defend its positions.
Liquidity
The Company is highly leveraged, with total indebtedness of approximately
$106 million and a shareholder deficit of $8.7 million. Accordingly, the
Company's primary source of liquidity has been cash flows from operations and
borrowing under its existing credit facilities. In fiscal 2000, as a result of
new business opportunities, the Company experienced increases in its inventory
and uniforms in service. These increases directly accounted for the increase in
the Company's revolving credit facility. As of October 31, 2000, after giving
consideration to an amendment which increased the Company's line of credit, the
Company had available borrowing capacity of approximately $3.2 million.
Over the next twelve months the company is focusing on utilization of
existing inventories and strategically increasing its revenue base through
further penetration of new and existing markets. . The continuation of tight
capital expenditure control, improved operating profits, and the renewed focus
on inventory control is expected to enhance the Company's liquidity position.
Based on the fiscal 2001 operating budget, the Company expects that it will be
able to meet its obligations as they become due, but there can be no assurances.
The Company's current bank credit facilities extend until 2003. However,
management is presently evaluating its overall financial obligations to ensure
adequate financing is available to fund it business operations and the
anticipated cash flow requirements of the estate of the principal shareholder of
the Company.
Effects of Inflation
Inflation has had the effect of increasing the reported amounts of the
Company's revenues and costs. However, the Company believes that it has been
able to recover increases in costs attributable to inflation through increases
in its prices and improvements in its productivity.
16
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Company manages interest rate risk by using a combination of
variable and fixed rate debt, as well as interest rate swap agreements. The
Company's earnings are affected by changes in short-term interest rates due to
the use of variable rate notes and revolving credit facilities amounting to
approximately $31.2 million. This exposure is limited by the use of interest
rate swap agreements as a hedge against the variability in short-term rates. At
October 31, 2000, approximately $3.1 million of the Company's variable-rate debt
was covered under interest rate swap agreements. The interest rate swap
agreements are entered into for periods consistent with related underlying
exposures and do not constitute positions independent of those exposures. The
Company does not enter into contracts for speculative purposes, nor is it a
party to any leveraged instrument. If short-term rates increase by one-half
percent, (50 basis-points), the Company's interest expense would increase, and
income before taxes would decrease, by approximately $0.1 million. Conversely,
if short-term rates decrease by one-half percent, (50 basis-points), the
Company's interest expense would decrease, and income before taxes would
increase, by approximately $0.1 million.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The financial statements, financial statements schedules and related
documents that are filed with this Report are listed in Item 14(a) of this
Report on Form 10-K and begin on page F-1.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
---------------------------------------------
None.
17
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The following table sets forth certain information regarding the Company's
directors and certain key executive officers:
Name Age Position
- ------------------------------------- ----- -------------------------------------------------------------------
Thomas M. Coyne 62 Chairman of the Board, President and Chief Executive Officer
Thomas C. Crowley 53 Director, Executive Vice President and Chief Operating Officer
J. Patrick Barrett (1)(2) 63 Director
William D. Matthews (1)(2) 66 Director
Wallace J. McDonald (1)(2) 60 Director
David P. O'Hara 53 Director, Assistant Secretary
David S. Evans (1)(2) 62 Director
Raymond T. Ryan 73 Director, Assistant Treasurer
Thomas E. Krebbeks 46 Vice President of Finance, CFO and Treasurer
Alexander Pobedinsky 39 Vice President, General Counsel and Secretary
(1) Member of the Audit and Finance Committee.
(2) Member of the Human Resource and Compensation Committee.
Thomas M. Coyne is Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Coyne joined the Company in 1977 after spending 17
years with an engineering and construction company. He has served in various
positions responsible for plant operations and sales before his promotion to
President in 1982. Mr. Coyne currently serves on the Board of the Textile Rental
Services Association.
Thomas C. Crowley has been a Director of the Company since 1993. Mr.
Crowley was Executive Vice President of Evergreen Bancorp, Inc. in Glens Falls,
New York from 1994 to 1999. Mr. Crowley joined the Company as Executive Vice
President and Chief Operating Officer in June 1999.
J. Patrick Barrett has been a director since July, 1998. He has been
President of Telergy, Inc., a telecommunication company, since April, 1998;
Chairman of Carpat Investments, a private investment firm, since 1987; was
Chairman and CEO of Avis Inc. from 1981 to 1987 and has been a director of
Lincoln National Corp. since 1990.
William D. Matthews has been a Director of the Company since January 1997.
Mr. Matthews served as Chairman of the Board of Oneida, Ltd. in Oneida, New York
until his retirement in May 2000. He also served as Chief Executive Officer of
Oneida, Ltd. from 1986 until his retirement in 1998. Oneida, Ltd. is listed on
The New York Stock Exchange. Mr. Matthews has been a director of CONMED
Corporation since 1997.
18
Wallace J. McDonald has been a Director of the Company since 1987. Mr.
McDonald has been a partner with the law firm of Bond, Schoeneck & King, LLP
based in Syracuse, New York since 1967.
David P. O'Hara has been a Director of the Company since 1982. Mr. O'Hara
was General Counsel and Secretary of the Company from 1981 to 1997. He currently
is Assistant Secretary of the Company and a partner with the law firm of O'Hara
& Hanlon, based in Cazenovia, New York.
David S. Evans has been a Director of the Company since 1998 and from 1994
to 1996. Mr. Evans has been a Director of Confluence Systems, Inc. of High
Point, NC since 1995. He was Director, President and Chief Executive Officer of
CBP Resources, Inc. of Greensboro, NC from 1988 to 1998; and was Director,
President and Chief Executive Officer of Delta Protein, Inc. of Memphis, TN from
1976 to 1988.
Raymond T. Ryan has been a Director of the Company since 1991. From March
1991 through July 1995 he served as Chief Financial Officer of the Company. He
is currently Assistant Treasurer of the Company. Mr. Ryan has been an employee
of the Outaouais Group, Inc. since 1991. Mr. Ryan is a C.P.A. and a retired
partner of PricewaterhouseCoopers, LLP.
Thomas E. Krebbeks joined the Company in 1991 as Corporate Controller. In
September 1999, Mr. Krebbeks was promoted to his current position of Treasurer,
Vice President of Finance, and Chief Financial Officer. Mr. Krebbeks began his
career with Ernst & Young and is a certified public accountant.
Alexander Pobedinsky has been the General Counsel and Secretary of the
Company since 1997. Mr. Pobedinsky was associated with the law firm of O'Hara,
Hanlon, Knych and Pobedinsky, LLP based in Syracuse, New York from 1991 through
1999. Mr. Pobedinsky joined the Company in January 2000, as Corporation General
Counsel and Vice President.
19
Item 11. Executive Compensation.
----------------------
The following table sets forth the compensation during the last three
fiscal years earned by the Company's President and each of the other four most
highly compensated executive officers during the fiscal year ended October
31,2000 (the "Named Officers"):
Annual Compensation
Fiscal ----------------------- All Other
Name and Principal Position Year Salary Bonus Compensation (1)
- ----------------------------------------------- --------- --------- ---------- -----------------
Thomas M. Coyne 2000 $520,000 $ 3,765
Chairman of the Board, President and Chief 1999 $487,647
Executive Officer 1998 $290,526 $ 13,024
$ 14,115
Thomas C. Crowley 2000 $200,000 $25,000 $ 5,884
Director, Executive Vice President and Chief 1999 $107,092
Operating Officer 1998
Alexander Pobedinsky 2000 $133,654 $ 7,109
Corporate Secretary, Vice President, and General 1999 $ 55,000 $ 3,600
Counsel 1998 $ 50,000 $ 3,600
Dennis J. Bossi 2000 $116,150 $ 6,618
Vice President of Operations 1999 $117,745 $ 10,621
1998 $116,109 $ 6,266
Anthony F. O'Connor 2000 $107,000 $ 6,480
Vice President of Sales and Marketing 1999 $109,115 $ 10,249
1998 $100,000 $ 4,500
(1) Consists of Company matching contributions under the 401(k) Plan of $3,765,
$1,084, $2,309, $1,818 and $1,680 and car allowance of $0, $4,800, $4800,
$4,800 and $4,800 in fiscal 2000 for the benefit of Messrs. Coyne, Crowley,
Pobedinsky, Bossi, and O'Connor, respectively.
20
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
All of the Company's equity securities are owned of record by the Coyne
family or trusts established by them.
COMMON STOCK PREFERRED STOCK
------------ ---------------
Class A (Voting) Class B (Non-Voting) Class A (Non-Voting) Class B (Non-Voting)
---------------- -------------------- -------------------- --------------------
Number of Number of Number of Number of
Shares Shares Shares Shares
Beneficially Percentage Beneficially Percentage Beneficially Percentage Beneficial Percentage
Owned(1) of Class Owned (1) of Class Owned (1) of Class Owned (1) of Class
---------- --------- ---------- --------- ---------- --------- ---------- --------
J. Stanley Coyne
Revocable Trust (2)(3)..... -- 63,305 85.5% 19,745 85.5% 2,272 80.0%
J. Stanley Coyne Inter
Vivos Irrevocable 1,020 34.9% -- -- -- -- -- --
Trust(2)(4)...................
Thomas M. Coyne Blue
Ridge Trust (2)(5)......... 1,903 65.1% 10,725 14.5% 3,362 14.5% 719 20.0%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") and includes voting or
investment power with respect to the securities. Accordingly they may
include securities owned by or for, among others, the spouse and/or minor
children or the individual and any other relative who has the same home as
such individual, as well as other securities as to which the individual has
or shares voting or investment power or has the right to acquire under
outstanding stock option within 60 days after the date of this table.
(2) During fiscal 2000, the principal shareholder, J. Stanley Coyne, passed
away. It is anticipated that after settlement of the estate of J. Stanley
Coyne, all voting shares of the Company will be held in trusts for the
benefit of Thomas M. Coyne. The address of such beneficial owner is c/o
Coyne International Enterprises Corp., 140 Cortland Avenue, P.O. Box 4854,
Syracuse, New York 13221.
(3) The trustees of this trust are J. Stanley Coyne, David P. O'Hara, Thomas M.
Coyne, Raymond T. Ryan and Wallace J. McDonald, who share voting and
investment power with respect to the shares held by this trust and who may
be deemed to be the beneficial owner of all such shares. Such trustees
disclaim beneficial ownership of these shares.
(4) The trustees of this trust are J. Stanley Coyne, David P. O'Hara, Thomas M.
Coyne, Raymond T. Ryan and Wallace J. McDonald, who share voting and
investment power with respect to the shares held by this trust and who may
be deemed to be the beneficial owner of all such shares. Such trustees
disclaim beneficial ownership of these shares.
(5) The trustees of this trust are Raymond T. Ryan and David P. O'Hara, who
share voting and investment power with respect to the shares held by this
trust and who may be deemed to be the beneficial owner of all such shares.
Such trustees disclaim beneficial ownership of these shares.
21
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Human Resources and Compensation Committee consists of
Messrs. Barrett, Evans, Matthews, and McDonald.
No officer of the Company serves as a member of the Human Resources and
Compensation Committee. Transactions with certain of the members of such
committee are discussed below under "Professional Services."
Certain Transactions with Members of the Coyne Family
At the Company's discretion, the Company has made salary continuation
payments of $100,000 per year to each of J. Stanley Coyne, a principal
shareholder of the Company, and Gerald Coyne, a son of J. Stanley Coyne,
including payments of such amounts in each of the last three fiscal years. Both
J. Stanley Coyne and Gerald Coyne are former officers and executive employees of
the Company. The salary continuation payments are discretionary compensation
payments made by the Company. In addition, at the Company's discretion it has
paid certain medical and personal expenses of J. Stanley Coyne aggregating
approximately $150,000, $93,000, and $112,000 during the fiscal years ended
October 31, 2000, 1999, and 1998, respectively. The salary continuation and
medical expense payments ceased during fiscal 2000 upon the death of J. Stanley
Coyne.
The Company has an outstanding note receivable from the estate of J.
Stanley Coyne in the amount of $1,264,355. This note bears interest at the
applicable federal rate as determined by the Internal Revenue Service (6.3% at
October 31, 2000). It is anticipated that this receivable will be settled
through the redemption of either common or preferred stock held by the estate of
J. Stanley Coyne.
The Company makes advancements of $2,500 per month to Susan Whitney, the
daughter of J. Stanley Coyne. Such advances total $92,500 as of October 31,
2000. These advancements are made by the Company at its discretion, upon request
of Susan Whitney, and can be stopped by the Company at any time. The Company, at
its discretion, is also making advancements of approximately $2,300 per month to
Gerald Coyne, a son of J. Stanley Coyne, to be used as mortgage payments on his
home. The total accumulated amount of such advancements as of October 31, 2000
was $142,135. The Company has made cumulative advancements to other family
members totaling $22,321. Subject to the provisions of the subordinated debt
indenture, it is anticipated that all of these advancements will be repaid
through redemption of stock held by the estate of J. Stanley Coyne.
During fiscal 2000, the Company made premium payments of $356,000 pursuant
to a split-dollar life insurance agreement, (the "agreement"), between the
Company and Thomas M. Coyne. The agreement relates to insurance policies on the
life of Thomas M. Coyne and provides for a collateral assignment of such
policies to the Company entitling it to recover the aggregate amount of premiums
paid under the agreement. Furthermore, the Company is permitted to terminate the
agreement at any time. As of October 31, 2000, the Company has paid aggregate
premiums of $356,000 under this agreement. However, this recoverable amount is
not reflected on the Company's balance sheet.
The Company has an uncollateralized outstanding note receivable from Thomas
M. Coyne in the amount of $325,000. The note bears interest at 10% and matures
in 2007. In addition the Company has advancements to Thomas M. Coyne of
approximately $120,000 at October 31, 2000. These advancements bear interest at
9.5%.
22
Professional Services
Raymond T. Ryan, a director of the Company, is an employee of The Outaouais
Group, Inc., a consulting firm, which provides various tax and financial
services to the Company. The Company paid fees of $57,504 to The Outaouais
Group, Inc. for various services during fiscal 2000.
David P. O'Hara, a director and Assistant Secretary of the Company, is a
partner with the law firm of O'Hara &Hanlon, LLP, which provided legal services
for the Company. The Company paid fees of $27,469 to O'Hara & Hanlon, LLP for
various services during fiscal 2000.
J. Patrick Barrett, a director of the Company, is owner of Exec Air
Services. The Company paid fees of $39,180 to Exec Air Services for airplane
maintenance services during fiscal 2000.
23
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.
------------------------------------------------------
(a) Documents filed as part of this report:
1. List of Consolidated Financial Statements. The following
consolidated financial statements and the notes thereto of Coyne International
Enterprises Corp. and Subsidiaries, which are attached hereto beginning on page
F-1, have been incorporated by reference into Item 8 of this Report on Form
10-K:
Report of PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of October 31, 2000 and
1999
Consolidated Statements of Operations and Retained
Earnings
(Deficit) for the years ended October 31, 2000, 1999
and 1998
Consolidated Statements of Cash Flows for the years ended
October 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts and
Reserves
3. List of Exhibits filed pursuant to Item 601 of Regulation
S-K. The following exhibits are incorporated by reference in, or filed with,
this Report on Form 10-K:
Exhibit No. Description
- ---------------- ------------------------------------------
(a) Exhibits
27.1 Financial Data Schedule
24
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COYNE INTERNATIONAL ENTERPRISES CORP.
Date: January 26, , 2001 By: /s/ Thomas M. Coyne
----------------- ------------------------------
Thomas M. Coyne
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Signature Capacity Date
- ------------------------------ --------------------------------------- ------------------
/s/ Thomas M. Coyne Chairman of the Board, President January 26, 2001
- ------------------------------ and Chief Executive Officer
Thomas M. Coyne (Principal Executive Officer)
/s/ Thomas C. Crowley Director, Executive Vice President and January 26, 2001
- ------------------------------ Chief Operating Officer
Thomas C. Crowley
/s/ Thomas E. Krebbeks Vice President, Chief Financial January 26, 2001
- ------------------------------ Officer and Treasurer (Principal
Thomas E. Krebbeks Financial and Accounting Officer)
/s/ Alexander Pobedinsky Vice President, Secretary and January 26, 2001
- ------------------------------ General Counsel
Alexander Pobedinsky
/s/ William D. Matthews Director January 26, 2001
- ------------------------------
William D. Matthews
/s/ Wallace J. McDonald Director January 26, 2001
- ------------------------------
Wallace J. McDonald
/s/ David P. O'Hara Director and Assistant Secretary January 26, 2001
- ------------------------------
David P. O'Hara
/s/ Raymond T. Ryan Director and Assistant Treasurer January 26, 2001
- ------------------------------
Raymond T. Ryan
/s/ J. Patrick Barrett Director January 26, 2001
- ------------------------------
J. Patrick Barrett
/s/ David S. Evans Director January 26, 2001
- ------------------------------
David S. Evans
25
- ----------------------------------------------------------------------------------------------------------------
Coyne International Enterprises Corp. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------
Schedule II - Valuation and Qualifying Accounts and Reserves
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Description Balance at Charged to Charges for Which Balance at End
Beginning of Year Costs and Reserves were of Year
Expenses Created
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
- ----------------------------------------------------------------------------------------------------------------
October 31, 1998 10,785 314,684 (302,171) 23,298
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
October 31, 1999 23,298 374,605 (329,220) 68,683
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
October 31, 2000 68,683 989,547 (716,887) 341,343
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Reserve for Obsolete Inventory
- ----------------------------------------------------------------------------------------------------------------
October 31, 1998 - 62,282 - 62,282
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
October 31, 1999 62,282 76,735 - 139,017
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
October 31, 2000 139,017 24,310 - 163,327
- ----------------------------------------------------------------------------------------------------------------
Coyne International Enterprises Corp. and Subsidiaries
Consolidated Financial Statements
October 31, 2000 and 1999
Report of Independent Accountants
The Board of Directors
Coyne International Enterprises Corp.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(i) on page 24 present fairly, in all materials
respects, the financial position of Coyne International Enterprises Corp. and
Subsidiaries at October 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 24 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Syracuse, New York
January 25, 2001
1
Coyne International Enterprises Corp. and Subsidiaries
Consolidated Balance Sheets
October 31, 2000, and 1999
- --------------------------------------------------------------------------------
Assets 2000 1999
Current assets:
Cash and cash equivalents $ 909,340 $ 213,407
Accounts receivable, less allowance
for doubtful accounts of approximately $341,000 in 2000 16,929,975 16,768,958
Inventories 12,725,141 7,371,395
Rental merchandise in service 32,712,967 27,838,084
Prepaid expenses and other assets 698,768 796,094
-------------- -------------
Total current assets 63,976,191 52,987,938
-------------- -------------
Property, plant and equipment, at cost:
Land 2,432,180 2,467,218
Buildings and improvements 39,829,930 39,953,310
Machinery and equipment 42,729,434 39,878,736
Vehicles 11,420,295 10,419,800
Construction in process 1,505,965 3,133,970
-------------- -------------
97,917,804 95,853,034
Less: Accumulated depreciation (54,100,700) (49,299,325)
-------------- -------------
Total property, plant and equipment 43,817,104 46,553,709
-------------- -------------
Other assets:
Purchased routes and acquisition intangibles, net 17,239,942 17,062,547
Deferred financing costs, net 2,322,568 2,606,593
Deferred income taxes 3,724,623 2,190,000
Other 202,521 444,795
-------------- -------------
Total other assets 23,489,654 22,303,935
-------------- -------------
Total Assets $ 131,282,949 $ 121,845,582
-------------- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
(continued)
2
Coyne International Enterprises Corp. and Subsidiaries
Consolidated Balance Sheets (Continued)
October 31, 2000 and 1999
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficit) 2000 1999
Current liabilities:
Current maturities of long-term obligations $ 3,385,619 $ 3,214,908
Accounts payable 8,934,685 7,667,885
Accrued expenses:
Salaries and employee benefits 4,714,396 5,297,557
Accrued interest 3,655,175 3,903,155
Other 2,268,201 2,777,952
Deferred income taxes 12,032,060 10,000,000
-------------- --------------
Total current liabilities 34,990,136 32,861,457
Long-term obligations, net of current maturities 102,811,292 94,332,429
Other liabilities 2,170,095 3,083,508
-------------- --------------
Total liabilities 139,971,523 130,277,394
-------------- --------------
Shareholders' equity (deficit):
Preferred stock - 5% non-cumulative, non-voting, callable at par:
Class A - $100 par value; 30,000 shares authorized,
23,107 shares issued and outstanding in 2000 and 1999 2,310,700 2,310,700
Class B - $500 par value; 5,000 shares authorized,
4,991 shares issued, 2,991 shares outstanding
in 2000 and 1999 2,495,500 2,495,500
Common stock - $.01 par value:
Class A - voting; 100,000 shares authorized, 2,923 shares
issued and outstanding in 2000 and 1999 29 29
Class B - non-voting, 99,000 shares authorized,
74,030 shares issued and outstanding in 2000 and 1999 740 740
Additional paid-in capital 849,512 849,512
Retained earnings (deficit) (12,212,139) (12,030,088)
-------------- --------------
(6,555,658) (6,373,607)
Less:
Treasury stock; 2,000 shares of
Class B preferred stock at cost (166,667) (166,667)
Shareholder receivables (1,966,249) (1,891,538)
-------------- --------------
Total shareholders' equity (deficit) (8,688,574) (8,431,812)
-------------- --------------
Commitments and contingent liabilities (Note 8)
Total Liabilities and Shareholders' Equity (Deficit) $ 131,282,949 $ 121,845,582
-------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
3
Coyne International Enterprises Corp. and Subsidiaries
Consolidated Balance Sheets (Continued)
October 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999 1998
Revenue:
Rental operations $140,318,365 $135,771,890 $128,666,244
Direct sales 9,972,107 10,439,832 10,070,299
---------------- ----------------- ----------------
150,290,472 146,211,722 138,736,543
---------------- ----------------- ----------------
Operating expenses:
Cost of rental operations 102,531,967 98,812,269 93,520,245
Cost of direct sales 5,888,754 6,907,257 7,079,717
Selling and administrative expenses 23,743,858 24,851,229 22,597,206
Depreciation and amortization 6,469,505 5,805,699 5,300,801
---------------- ----------------- ----------------
138,634,084 136,376,454 128,497,969
---------------- ----------------- ----------------
Income from operations 11,656,388 9,835,268 10,238,574
Interest expense, including redemption of
common stock warrants of $17,257,000 in 1998 11,208,439 10,841,533 25,401,922
---------------- ----------------- ----------------
Income (loss) before income
taxes and extraordinary item 447,949 (1,006,265) (15,163,348)
Income tax expense (benefit) 630,000 (55,000) 640,188
---------------- ----------------- ----------------
Loss before extraordinary item (182,051) (951,265) (15,803,536)
Extraordinary loss on debt retirement,
net of tax benefit of $365,000 - - 939,055
---------------- ----------------- ----------------
Net Loss (182,051) (951,265) (16,742,591)
Retained earnings (deficit), beginning of year (12,030,088) (11,078,823) 5,663,768
---------------- ----------------- ----------------
Retained Earnings (Deficit), End of Year $(12,212,139) $(12,030,088) $(11,078,823)
---------------- ----------------- ----------------
The accompanying notes are an integral part of the
consolidated financial statements.
4
Coyne International Enterprises Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended October 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities:
Net loss $ (182,051) $ (951,265) $ (16,742,591)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property, plant and equipment 4,605,811 4,030,873 3,055,183
Amortization of capitalized leases 1,073,401 1,073,401 1,504,000
Amortization of acquisition intangibles 790,293 701,425 741,618
Amortization of deferred financing costs 334,025 355,249 513,571
Extraordinary loss on retirement of debt, net 939,055
Provision for deferred income taxes 497,437 (125,000) (180,000)
Changes in operating assets
and operating liabilities:
Accounts receivable (161,017) (2,555,923) (2,463,969)
Inventories (5,208,076) (525,002) (1,714,532)
Rental merchandise in service (4,874,883) 499,218 (4,727,551)
Prepaid expenses and other assets 339,600 108,642 (245,407)
Accounts payable, accrued expenses,
and other liabilities (987,505) (2,806,713) 4,004,526
------------ ------------ --------------
Net cash used in operating activities (3,772,965) (195,095) (15,316,097)
------------ ------------ --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,940,808) (7,713,393) (6,618,835)
Acquisition of business, net of cash acquired (1,115,157) (1,467,052) (238,844)
------------ ------------ --------------
Net cash used in investing activities (4,055,965) (9,180,445) (6,857,679)
------------ ------------ --------------
Cash flows from financing activities:
Proceeds from long-term borrowings 50,637,540 50,558,770 172,310,156
Payments under long-term borrowings (41,987,966) (41,549,085) (143,890,527)
Decrease in bank overdrafts (1,700,982)
Redemption of common stock warrants
Increase in shareholder receivables, net (74,711) (403,564) (1,743,086)
Deferred financing costs incurred (50,000) (90,670) (3,000,481)
------------ ------------ --------------
Net cash provided by financing activities 8,524,863 8,515,451 21,975,080
------------ ------------ --------------
Net increase (decrease) in cash 695,933 (860,089) (198,696)
Cash and cash equivalents:
Beginning of year 213,407 1,073,496 1,272,192
------------ ------------ --------------
End of Year $ 909,340 $ 213,407 $ 1,073,496
============ ============ ==============
Supplemental disclosure of cash flow information:
Interest paid, including in 1998 the redemption
of redeemable common stock warrants $ 11,117,560 $ 9,758,977 $ 20,917,150
Income taxes paid 55,372 74,959 201,922
Seller financed debt 407,984
The accompanying notes are an integral part of the consolidated financial
statements.
5
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Business Description
Coyne International Enterprises Corp., (the Company), is a full-service
provider of work garments, shop towels, floor mats, dust mops, and other
accessories. The Company manufactures, rents, cleans, and sells these items
throughout the eastern United States.
Principles of Consolidation and Revenue Recognition
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All intercompany
accounts have been eliminated.
The Company recognizes rental revenues when the services are performed.
Direct sales are recognized when products are shipped to customers.
Fiscal Year
The Company's fiscal year ends on the last Saturday in October. Fiscal
years 2000, 1999, and 1998 were 52, 52, and 53 weeks long, respectively.
For convenience, the dating of the accompanying financial statements, and
notes herein, have been labeled as of and for the years ended October 31,
2000, 1999, and 1998, rather than the actual fiscal year end dates.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Ultimate
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less, at date of purchase, to be cash
equivalents.
Inventories
The Company accounts for its inventory on the lower of first-in, first-out
(FIFO) cost or market.
Rental Merchandise in Service
Rental garments, mats and towels in service are carried at cost and
amortized on a straight-line basis over their estimated income-producing
lives, ranging principally from 10 to 60 months. Effective November 1,
1999, the Company changed the related amortization periods, on a
prospective basis, for certain rental merchandise in service, from 12
months to 18 months, which is more consistent with their respective useful
lives. The impact on net income for the year ended October 31, 2000 was an
increase of approximately $420,000, net of taxes of $380,000.
6
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment
The Company provides for depreciation on the straight-line method based on
the following estimated useful lives, in years:
Building improvements 15-40
Machinery and equipment 3-10
Vehicles 3-8
Construction in process consists primarily of capital expenditures for
plant renovations and vehicle re-builds. Maintenance and repairs are
charged to expense when incurred.
Purchased Routes and Acquisition Intangibles
The Company's acquisitions of rental operations and routes have generally
been accounted for by using the purchase method. The purchase method
allocates the amounts paid to the net assets acquired based on their
respective fair values. The amounts paid in excess of fair value of the
acquired net assets and goodwill acquired after October 31, 1970, are
amortized on a straight-line basis over 15-40 years. The Company assesses
the recoverability of purchased routes and acquisition intangibles by
determining whether the amortization of such assets over the remaining life
can be recovered through undiscounted future operating cash flows and
reviews for impairment whenever events or changes in circumstances, (e.g.,
plant closure), indicate that the carrying amount of an asset may not be
fully recoverable.
Routes acquired prior to November 1, 1970 are carried at a cost of
$764,310. These intangibles are also regularly evaluated, and, in the
opinion of management, have not diminished in value, and accordingly, have
not been amortized.
The Company has certain contracts with non-compete arrangements which are
charged to operations on a straight-line basis over the periods of the
respective agreements, which range from 5 to 10 years.
Deferred Financing Costs
Deferred financing costs incurred in obtaining long-term debt are stated at
cost less accumulated amortization. Amortization of deferred financing
costs is provided using the effective interest write-off method over the
term of the obligation.
Other Liabilities
The Company, under certain insurance programs, retains portions of expected
losses primarily relating to workers' compensation and employees' medical
insurance. A provision for claims under the self-insured program is
recorded based upon the Company's estimate, after consultation with
insurance advisors, of the aggregate liability for claims incurred.
7
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable and trade accounts payable
approximates fair value because of the short maturity of these instruments.
The fair value of the Company's senior subordinated notes as of October 31,
2000 was approximately $60,000,000. The fair value of the Company's other
long-term obligations approximated their carrying value at October 31,
2000.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return, and, where required, state tax returns. Provisions for deferred
taxes are recognized based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. SAB No. 101 outlines
basic criteria that must be met to recognize revenue and provides guidance
for disclosure related to revenue recognition policies. The Company will be
required to implement SAB No. 101 no later that the fourth quarter of its
fiscal year ending October 31, 2001. The provisions of SAB No. 101 are not
expected to have a material impact on the Company's consolidated financial
statements.
Recently Issued Accounting Statements: In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities for fiscal years beginning after June 15, 2000. The FASB
required all derivatives be measured at fair value and recorded on a
company's balance sheet as an asset or liability, depending upon the
company's underlying rights or obligations associated with the derivative
instrument. The Company will be required to implement SFAS No. 133 in the
first quarter of the fiscal year ending October 31, 2001. The impact of the
adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial position or results of operations, although it may
result in additional disclosure in the future.
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
2. Liquidity
The Company is highly leveraged with total indebtedness of approximately
$106,000,000 and a shareholder deficit of approximately $8,700,000.
Accordingly, the Company's primary source of liquidity has been cash flows
from operations and borrowing under its existing credit facilities. In
fiscal 2000, as a result of new business opportunities, the Company
experienced increases in its inventory and uniforms in service. These
increases directly accounted for the increase in the Company's revolving
credit facility. As of October 31, 2000, after giving consideration to an
amendment which increased the Company's line of credit, the Company had
available borrowing capacity of approximately $3,200,000.
8
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Liquidity (Continued)
Over the next twelve months the Company is focusing on utilization of
existing inventories and strategically increasing its revenue base through
further penetration of new and existing markets. The continuation of tight
capital expenditure control, improved operating profits, and the renewed
focus on inventory control is expected to enhance the Company's liquidity
position. Based on the fiscal 2001 operating budget, the Company expects
that it will be able to meets its obligations as they become due, however,
there can be no assurance.
The Company's current credit facilities extend until 2003. However,
management is presently evaluating its overall financial obligations to
ensure adequate financing is available to fund its business operations, the
anticipated cash flow requirements of the estate of the principal
shareholder of the Company (Note 9), and any potential negative cash flow
impact pertaining to the pending Internal Revenue Service examination (Note
7).
3. Acquisitions
During 2000 and 1999, the Company acquired certain assets of industrial
laundries in transactions accounted for as purchase transactions. The
aggregate cash purchase price of these assets was allocated as follows:
2000 1999
Purchased routes $ 956,000 $ 939,000
Covenants not to compete 12,000 517,000
Rental Garments 145,000 132,000
Equipment 2,000
----------- -----------
Aggregate cash purchase price $ 1,115,000 $ 1,588,000
=========== ===========
4. Purchased Routes and Intangibles
The components of purchased routes and acquisition intangibles are as
follows at October 31:
2000 1999
Goodwill $ 764,310 $ 764,310
Purchased routes 22,106,653 21,140,792
Covenants not to compete 1,945,288 1,953,844
----------- -----------
24,816,251 23,858,946
Less: Accumulated amortization (7,576,291) (6,796,399)
----------- -----------
$17,239,960 $17,062,547
=========== ===========
9
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Leases
Assets under capital leases, consisting primarily of machinery and
equipment, are as follows at October 31:
2000 1999
Cost $ 7,943,705 $ 7,943,705
Less: Accumulated amortization (4,174,348) (3,100,946)
----------- -----------
$ 3,769,357 $ 4,842,759
=========== ===========
The Company has noncancellable operating lease commitments for certain
operating facilities, equipment, and vehicles. Rent expense under operating
leases approximated $1,896,000, $1,969,000 and $2,476,000 during 2000,
1999, and 1998, respectively. Minimum annual rental commitments at October
31, 2000 are as follows:
2001 $1,469,024
2002 695,966
2003 608,714
2004 389,515
2005 198,619
Thereafter 103,975
----------
Total minimum lease payments $3,465,813
==========
10
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Long-Term Obligations
As of October 31, long-term obligations consist of the following:
2000 1999
Revolving credit facility borrowings, at variable rates
ranging from the Bank of America prime plus
.375% to LIBOR plus 2.25% $ 19,061,035 $ 7,139,412
Capital expenditure facility borrowings, at variable rates
ranging from the Bank of America prime plus
.625% to LIBOR plus 2.50%, payable in various
installments through 2003 4,347,629 3,877,571
Acquisition facility borrowings, at variable rates ranging from
the Bank of America prime plus .625% to LIBOR
plus 2.5%, payable in various installments through 2003 1,201,113 1,801,670
Capital lease obligations, at various rates ranging from
8.2% to 9.5%, payable through 2003 3,160,299 4,504,919
Industrial Development Revenue Bonds payable in
installments with interest variable, (10% at
October 31, 2000), through 2006 2,383,514 2,488,188
Other debt obligations, at various rates ranging from
6% to 10.3%, payable through 2003 1,043,321 2,735,577
Senior subordinated notes due June 1, 2008. Interest only
payable semi-annually June 1 and December 1 at 11.25% 75,000,000 75,000,000
----------------- -----------------
106,196,911 97,547,337
Less: Current maturities (3,385,619) (3,214,908)
----------------- -----------------
$102,811,292 $94,332,429
----------------- -----------------
The prime rate at October 31, 2000 and 1999 was 9.50% and 8.25%,
respectively. The LIBOR rate at October 31, 2000 and 1999 was 6.62% and
6.375%, respectively.
(a) Under the Company's existing credit facility, (the Agreement), a
revolving credit facility, (the Revolver), is available to the
Company through November 1, 2003, extending automatically for
successive periods of one year each, at the discretion of the
lender, but in no event later than November 1, 2008. Collateral
pledged under the Agreement includes all inventory, rental
merchandise in service and accounts receivable. Based upon the
January 25, 2001 amended credit facility, the maximum available
credit is computed based on eligible accounts receivable, inventory
and uniforms in service, as defined and may not exceed $30,000,000.
As of October 31, 2000, after giving consideration to the January
25, 2001 amendment, the Company has approximately $3,200,000
available under the Revolver.
The terms of the Agreement include various covenants, which provide,
among other things, for the maintenance of certain minimum levels of
cash flow and limitations on leverage and capital expenditures at
defined measurement dates. As of October 31, 2000, the Company was
in compliance with all debt covenants.
11
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Long-Term Obligations (Continued)
In addition, the Agreement includes a material adverse change clause
which permits the Bank to call its debt in the event of a material
adverse change in the business. Management does not anticipate any
such adverse changes in the next twelve months; however, there can
be no assurances.
The Agreement also provides for an acquisition facility of up to
$10,000,000 and a capital expenditure facility of up to $15,000,000
after the January 25, 2001 amendment. The Agreement calls for annual
mandatory prepayments of these facilities if sufficient excess cash
flow is generated. A mandatory prepayment is not required in fiscal
2000 based upon financial results for the year ended October 31,
2000. In the event of termination of the Revolver, all unpaid
balances under the acquisition and capital expenditure facilities
will become due.
(b) On June 26, 1998, pursuant to a purchase agreement dated June 23,
1998, the Company sold, at par, $75,000,000 of 11-1/4% Senior
Subordinated Notes due 2008, (the Notes). The proceeds of the Notes
were used primarily to retire certain existing debt obligations,
redeem outstanding redeemable common stock warrants, and for general
corporate purposes.
The Notes are redeemable at the option of the Company after May 31,
2003 at redemption prices beginning at 105.625% and declining to
100.0% in 2006. The Note agreement includes covenants which restrict
the ability of the Company to incur additional indebtedness, pay
dividends, issue preferred stock and make certain restricted
payments, as defined.
In May 1998, the Company entered into an agreement with its then
existing senior subordinated noteholders to redeem the outstanding
common stock warrants for $19,000,000 comprised of $6,000,000 for
the warrants, $11,000,000 for an early termination fee and
$2,000,000 for a management fee. The excess of this settlement over
the book value of the stock warrants has been reported as a charge
to interest expense of $17,257,000 in the accompanying financial
statements.
In connection with the retirement of debt obligations discussed
above, the Company recognized an extraordinary charge of $939,055,
net of a $365,000 income tax benefit, for the write-off of related
deferred financing and unamortized issue discounts.
At October 31, 2000, payments due on all debt obligations for each of the
next five years and thereafter are as follows:
Long-Term Capital Lease Total
Debt Obligations Obligations
2001 $ 2,224,039 $1,161,580 $ 3,385,619
2002 2,030,932 1,169,403 3,200,335
2003 21,616,016 829,316 22,445,332
2004 88,565 - 88,565
2005 97,839 - 97,839
2006 and thereafter 76,979,221 - 76,979,221
------------- ---------- -------------
$ 103,036,612 $3,160,299 $ 106,196,911
============= ========== =============
12
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes
Pending Internal Revenue Service Audit
The Internal Revenue Service (the "Service") is currently examining the
consolidated federal income tax returns of the Company for the years
ended October 31, 1997 and 1998. During the course of this examination,
the Service has proposed certain adjustments to these returns. The
proposed adjustments relate primarily to the timing of deductions taken
for certain in-service inventory items. The Company is in the process of
responding to these proposed adjustments and intends to vigorously
contest the Service's proposed adjustments. However, there can be no
assurances that the Company will successfully defend its position.
Other
The components of income tax expense (benefit) for the years ended
October 31, were as follows:
2000 1999 1998
Current:
Federal $ 76,310 $ - $ 265,000
State 56,253 70,000 190,000
---------- ---------- ----------
132,563 70,000 455,000
Deferred 497,437 (125,000) 185,188
---------- ---------- ----------
Income tax expense (benefit) $ 630,000 $ (55,000) $ 640,188
---------- ---------- ----------
For income tax purposes, the Company has net operating loss and
alternative minimum tax (AMT) credit carryforwards of approximately
$13,142,000 and $1,860,000, respectively. The net operating loss
carryforward expires through 2020 and the AMT credit is available
indefinitely. Realization of the deferred income tax assets relating to
these net operating losses is dependent on generating sufficient taxable
income prior to the expiration of the loss carryforwards. Based upon
results of operations or through the reversal of future taxable income,
management believes it is more likely than not that the Company will
generate sufficient future taxable income to fully realize the benefit of
the net operating loss carryforwards and existing temporary differences,
although there can be no assurance of this.
A reconciliation of the federal statutory income tax rate and the
Company's effective income tax rate is as follows:
2000 1999 1998
Statutory tax rate (recoverable) 34.0% (34.0)% (34.0)%
State taxes, net of federal benefit 24.9 3.8 .6
Non-deductible items 78.0 29.5 36.0
Other 3.7 (4.8) 1.6
------ ------- ------
140.6% (5.5)% 4.2%
------- ------- ------
Non-deductible items include amortization of certain purchased routes and
other intangibles, and a portion of meals and entertainment expenses.
13
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets (liabilities) at October 31, were as follows:
2000 1999
Current:
Rental garments in service $ (12,762,718) $ (10,786,000)
Inventory 50,302 28,000
Accrued expenses 680,356 758,000
----------------- -----------------
Current deferred tax liability (12,032,060) (10,000,000)
----------------- -----------------
Non-current:
Fixed assets (5,099,476) (4,074,477)
Other liabilities 1,715,059 1,118,728
Alternative minimum tax credit carryforward 1,860,000 1,860,000
Net operating loss carryforward 5,249,040 3,285,749
----------------- -----------------
Non-current deferred tax asset 3,724,623 2,190,000
----------------- -----------------
Net deferred tax liability $ (8,307,437) $ (7,810,000)
----------------- -----------------
8. Commitments and Contingent Liabilities
The Company and its operations are subject to various federal, state and
local regulations relating to environmental matters, including laws which
require the investigation and, in some cases, remediation of
environmental contamination. The Company's policy is to accrue and charge
to operations environmental investigation and remediation expenses on an
undiscounted basis when it is probable that a liability has been incurred
and an amount is reasonably estimable.
Certain claims have been filed or are pending against the Company arising
from the conduct of its business. In the opinion of management, all
matters are without merit and the Company intends to defend such claims
vigorously. Based on information currently available, management believes
that the outcome of any such claims will not have a material adverse
effect on its business, financial condition or results of operations.
9. Related Party Transactions
Shareholder Redemptions
In fiscal 2000, the principal shareholder of the Company passed away. As
a result, the estate of the shareholder will be required to pay certain
estate tax liabilities over an estimated fifteen-year period. Although
the Company has no legal obligation or agreement to purchase or redeem
any of the preferred or common stock of the Company held by the estate,
it is anticipated that the Company will redeem or purchase certain shares
of stock held by the estate in order for the estate to meet its tax
obligations as they become due.
14
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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9. Related Party Transactions (Continued)
Shareholder Redemptions (Continued)
The Company, under the indenture for its senior subordinated notes, is
permitted to redeem equity interests of the Company in order to satisfy
estate-planning obligations of the estate of the principal shareholder.
However under the provisions of the indenture, the annual redemptions are
not permitted to exceed $1.0 million in each of the second, third,
fourth, fifth and sixth calendar years and $2.25 million in each of the
seventh, eighth, ninth and tenth calendar years following the death of
the shareholder, plus an additional $2.0 million in calendar year 2003,
subject to certain provisions.
Other
At the Company's discretion, the Company had made salary continuation
payments totaling $100,000 per year to each of J. Stanley Coyne, a
principal shareholder of the Company, and Gerald Coyne, a son of J.
Stanley Coyne, including payments of such amounts in each of the last
three fiscal years. In addition, at the Company's discretion it has paid
certain medical and personal expenses of J. Stanley Coyne aggregating
approximately $150,000, $93,000, and $112,000 during the fiscal years
ended October 31, 2000, 1999, and 1998, respectively. The salary
continuation and medical expense payments ceased during fiscal 2000 upon
the death of J. Stanley Coyne.
Included in shareholder receivables is an outstanding note receivable
from the estate of J. Stanley Coyne in the amount of $1,264,355. This
note bears interest at the Applicable Federal Rate as defined by the
Internal Revenue Service, 6.30%, at October 31, 2000. Interest income on
the note was not recognized during the fiscal years ended October 31,
2000, 1999, and 1998. The total amount due as of October 31, 2000 is
approximately $1,591,000. It is anticipated that this receivable will be
settled through the redemption of either common or preferred stock held
by the estate.
Included in shareholder receivables at October 31, 2000 and 1999 are a
note receivable and outstanding advancements, of approximately $445,000
and $434,000, respectively. These monies are due from Thomas M. Coyne,
Chairman of the Board and President of the Company. The note receivable
and advances are uncollateralized. Interest on the note accrues at 10%
and is payable annually. The note matures August 31, 2007.
During fiscal 2000, the Company made premium payments of $356,000
pursuant to a split-dollar life insurance agreement, (the "agreement"),
between the Company and Thomas M. Coyne. The agreement relates to
insurance policies on the life of Thomas M. Coyne and provides for a
collateral assignment of such policies to the Company entitling it to
recover the aggregate amount of premiums paid under the agreement.
Furthermore, the Company is permitted to terminate the agreement at any
time. As of October 31, 2000, the Company has paid aggregate premiums of
$356,000 under this agreement. However, this recoverable amount is not
reflected on the Company's balance sheet.
As of October 31, 2000 and 1999 there are approximately $257,000 and
$193,000, respectively, of interest bearing loans receivable from certain
related family members as a result of monthly cash advances. Interest
income on these notes was not recognized in 2000 and 1999. The advances
are unsecured and bear interest at 9.5% per annum. The advances have no
defined repayment terms, however, it is anticipated that these advances
will be settled through redemptions of preferred and or common stock held
by the estate of J. Stanley Coyne.
15
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Pension Plans
All full-time nonunion and certain union employees are eligible to
participate in the Company's 401(k) plan after one year of service. The
Company matches a portion of the employees' salary reduction
contributions and can make additional contributions at its discretion.
The Company contributions under the 401(k) plan, which vest over a
five-year employment period, were approximately $421,000, $719,000, and
$637,000 in 2000, 1999, and 1998, respectively. The Company has elected
not to make a discretionary contribution in fiscal 2000. Certain
employees of the Company are covered by union sponsored, collectively
bargained, multi-employer pension plans (Union Plans). The Company
charged to expense $1,390,000, $1,430,000, and $1,176,000 in 2000, 1999,
and 1998, respectively, for such plans. These contributions are
determined in accordance with the provisions of negotiated labor
contracts and generally are based on the number of hours worked. The
Company may be liable for its share of unfunded vested benefits, if any,
related to the Union Plans. Information from the Union Plans'
administrators is not available to permit the Company to determine its
share, if any, of unfunded vested benefits.
The Company maintains a defined benefit plan for certain employees at one
of its plants. The most recent valuation stated an accumulated plan
benefit obligation of approximately $602,000 and plan assets with a fair
market value of approximately $1,323,000.
11. Summarized Financial Information of Certain Subsidiaries
The following table presents summarized financial information for the
following wholly-owned subsidiaries of Coyne International Enterprises
Corp.: Blue Ridge Textile Manufacturing, Inc., and Ohio Garment Rental,
Inc. on a combined basis at October 31, or for the year then ended:
2000 1999
Balance sheets:
Current assets $6,961,329 $6,376,826
Noncurrent assets 3,608,387 3,815,243
Current liabilities 3,598,813 3,419,888
Noncurrent liabilities 189,000 175,000
Year Ended October 31,
------------------------------------------------
2000 1999 1998
Statement of operations:
Revenues $ 14,813,000 $ 16,654,447 $ 17,080,000
Operating expenses 13,669,000 15,330,667 15,482,000
Operating income 1,144,000 1,323,780 1,598,000
Income (loss) before extraordinary loss 263,000 329,993 (1,365,000)
Net income (loss) 263,000 329,993 (1,365,000)
The Company has not provided separate financial statements and other
disclosures for its wholly-owned subsidiaries because management has
determined that such information is not material to investors.
16
Coyne International Enterprises Corp. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Fourth Quarter Adjustments
In the fourth quarter of fiscal 2000, the Company recognized the effect
of certain adjustments, which resulted in an increase to net income.
These adjustments, on a pre-tax basis, relate to the receipt of life
insurance death benefits of $165,000, reversal of accruals for deferred
compensation arrangements and discretionary contributions to a benefit
plan no longer required of $1,055,000. In aggregate the impact of these
adjustments is an increase to net income of $732,000 net of taxes of
$488,000.
17