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, 1999 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission File No. 333-60247 --------- COYNE INTERNATIONAL ENTERPRISES CORP. BLUE RIDGE TEXTILE MANUFACTURING, INC. OHIO GARMENT RENTAL, INC. MIDWAY-CTS BUFFALO, LTD. - -------------------------------------------------------------------------------- (Exact name of Registrants as specified in their respective charters) New York 16-6040758 Georgia 58-2018333 Ohio 34-1261376 New York 16-1469155 - --------------------------------------------- --------------------------------- (State or Other Jurisdiction of Incorporation (IRS Employer Identification No.) or Organization) 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. [X] 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..................... 11 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................................ 16 Item 8. Financial Statements and Supplementary Data.............................................. 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 16 PART III Item 10. Directors and Executive Officers of the Registrant....................................... 17 Item 11. Executive Compensation................................................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 19 Item 13. Certain Relationships and Related Transactions........................................... 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 22 Signatures 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, 1999, 1998 and 1997, as the case may be, rather than the actual fiscal year end. Investment Considerations 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. These and other factors are discussed in greater detail in the Company's Registration Statement on Form S-4, a copy of which may be obtained from Thomas E. Krebbeks, Vice President and Chief Financial Officer, Coyne International Enterprises Corp., 140 Cortland Avenue, Syracuse, New York, 13221 and telephone requests may be directed to Mr. Krebbeks at (315) 475-1626. The Company's Registration Statement on Form S-4 is also available on the SEC's Internet site (http://www.sec.gov). PART I Item 1. Business. -------- General Coyne International Enterprises Corp. ("CTS" or the "Company") provides textile rental products and laundering services from 42 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 and 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 contracts that range in duration from three to five years. The Company's products and services are distributed through its route-based distribution system comprised of 18 industrial laundry plants, 21 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 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. Further, the Company believes it is one of the first launderers to offer 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, Eckerd Drugs, Oneida, United Technologies and Xerox, 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 1998 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 1999, 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 44% of the Company's revenues in 1999. 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 6.2% in 1998 and 4.4% in 1997. 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. Growing markets for uniforms identified by the Company include building services, communications, food processing, HVAC, landscaping, pest control, pharmaceuticals, security and trucking. 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 and continue to be the catalyst for a shift toward the outsourcing of the laundering of heavy soil items. Additionally, government mandated safety regulations for reflective wear and flame retardant garments and the most recent report to Congress under The Workers Family Protection Act from the National Institute for Occupational Safety and Health (NIOSH), which states that home laundering is inadequate in decontaminating work clothes, are creating new opportunities for uniform service companies like CTS. The market for flame retardant clothing has been fueled by the 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. Based on information obtained from Cleary Gull Reiland & McDevitt, an investment firm that closely follows the uniform rental industry, there are currently over 700 uniform rental businesses in operation, the majority 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, floormats, dust-control mops and other textile products. Below is a chart displaying the approximate percentages of revenues, by product-type: Uniform & Hospital & Garment RAS & Shop Walk Off Dust Control Linen Period Rentals Towels Mats Products Direct Sales Products - ------------------------- ------- ---------- -------- ------------ ------------ ---------- Fiscal 1996.............. 45.3 29.0 12.4 2.9 6.7 3.7 Fiscal 1997.............. 45.6 29.4 12.1 2.9 6.7 3.3 Fiscal 1998.............. 44.7 29.6 11.7 3.1 7.3 3.6 Fiscal 1999.............. 44.3 30.7 11.4 2.9 7.1 3.6 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. In recent years, the Company has made a significant corporate investment in waste-water treatment in 10 of its 18 laundry plants. 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 minimizes a customer's future environmental liabilities. 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. CTS provides such services to approximately 75% of the printing accounts in the eastern United States. All CTS environmental matters are managed by the Company's environmental team that is directed by 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 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 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. Garments can be tracked by the use of bar code labels, which are permanently affixed to the garment and which can be read by route salespeople using hand-held laser scanners. 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. The Company believes that its tracking system improves inventory control and efficiency by reducing human error that results in missing uniforms and incomplete deliveries. 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 insure 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. In addition to water washing, a small number of specialty items such as leather gloves are dry cleaned. 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 manufacturing facility and are marketed under the Blue Ridge name. Approximately two-thirds 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 and pads. The Blue Ridge operations represented approximately 5.0% of the Company's revenues in fiscal 1999. In order to take advantage of the opportunities presented by the North American Free Trade Agreement, the Company manufactures work pants and shirts in Mexico under an 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, Garment Corporation of America, and Universal Overall. 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, Eckerd Drugs, Oneida, United Technologies and Xerox, 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 70 in 1999. 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. 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. 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 6 approximately 25% of revenues from the industrial segment. The remainder of the industry is made up of over 600 smaller businesses, many of which serve one or a limited number of markets or geographic service areas and generate annual revenues of less than $1.0 million. 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, 1999, 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 2002. The Company had one work stoppage 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 and currently has three active cases. In two of those cases, the Company has been named as a potentially responsible party. The Company has settled its liability with regard to one of these cases. With respect to the other cases, the Company could be held liable for some or all of the cost to remediate the contamination, the extent of 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 has not completed its evaluation of these 7 questions, nor on the question of possible defenses to liability, to determine the extent of liability, if any, on such potential claim. 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, 1999, the Company provided textile rental services from 42 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 February 2000 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. The following table summarizes certain information concerning the Company's facilities. 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 Cinnaminson, NJ* Laundry Terminal 10,000 Chicago, IL* Laundry Terminal 7,500 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 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 Syracuse, NY Laundry Plant/Corporate Headquarters 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 Sales 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. 9 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. 10 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. As of October 31, 1999, the Company's Class A Common Stock was held by three 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. Item 6. Selected Financial Data. ----------------------- The selected financial data set forth below for the Company as of October 31, 1999, 1998, 1997, 1996 and 1995 and for each of the years in the five-year period ended October 31, 1999 are derived from the audited Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements and related notes, and other financial information included herein. Years Ended October 31, ----------------------------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- --------- (dollars in thousands) Statement of Operations Data: Net revenue.................................. $117,768 $119,085 $122,935 $138,737 $146,212 Income from operations....................... 7,595 8,179 10,792 10,239 9,835 Interest expense (1)......................... 6,254 6,786 6,715 25,402 10,842 Income (loss) before provision for income taxes and extraordinary item............... 1,341 1,393 4,077 (15,163) (1,006) Provision for income taxes................... 890 847 2,025 640 (55) Income (loss) before extraordinary item...... 451 546 2,052 (15,804) (951) Extraordinary item, net of tax (2)........... ---- ---- ---- (939) ---- Net income (loss)............................ $ 451 $ 546 $ 2,052 $(16,743) $ (951) Other Data: Capital expenditures......................... $ 8,731 $ 9,820 $ 2,584 $ 6,619 $ 7,713 Depreciation and amortization................ 4,416 4,779 5,289 5,814 6,161 Balance Sheet Data (at period end): Working capital.............................. $ 11,255 $ 6,608 $ 6,769 $ 17,066 $ 20,127 Total assets................................. 93,170 97,432 102,621 117,367 121,846 Total debt................................... 56,680 58,051 58,557 88,538 97,547 Warrants (3)................................. 1,743 1,743 1,743 ---- ---- Shareholders equity (deficit)................ 7,373 7,845 9,897 (7,077) (8,432) (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. 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 sales for the periods indicated and should be read in conjunction with the other financial information of CTS contained elsewhere in this Prospectus. Year Ended October 31, ---------------------------- 1997 1998 1999 ------ ------ ------ Net revenue................................ 100.0% 100.0% 100.0% Cost of rental operations.................. 70.8 70.7 71.0 Cost of direct sales....................... 4.7 5.1 4.7 Selling, general and administrative........ 15.7 16.9 17.6 Income from operations..................... 8.8 7.4 6.7 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. 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, 12 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. Fiscal Year 1998 Compared to Fiscal Year 1997 Net Revenue. Net revenues were $138.7 million in fiscal 1998, representing an increase of $15.8 million or 12.9% as compared to $122.9 million for fiscal 1997. The increase can be attributed to growth from existing operations of approximately $8.0 million due substantially to new sales generated by the Company's expanded sales organization. In addition, fiscal 1998 had 53 weeks of operations as compared to 52 weeks of operations in fiscal 1997. The acquisition of several small routes in the second half of fiscal 1997 have also contributed approximately $5.3 million to the revenue growth. Cost of Rental Operations. Cost of rental operations of $98.0 million for fiscal 1998 was 70.7% of total revenue for the period. This represents a decrease of 0.1% as compared to fiscal 1997. Despite start up costs associated with new rental contracts the cost of rental operations was consistent with the prior year. Cost of Direct Sales. Cost of direct sales of $7.1 million for fiscal 1998 was 5.1% of total revenue. Direct sales and related costs grew approximately 22% during the year due to increased focus by the Company's sales organization on this segment of the business. Cost of direct sales was approximately 70.3% and 70.2% of direct sale revenue for fiscal 1998 and 1997, respectively. Selling, General and Administrative Expense. Selling general and administrative expense was $23.4 million for fiscal 1998 representing an increase of approximately $4.0 million or 21% over fiscal 1997. The increase was due primarily to selling expense, which increased $2.5 million. This increase can be attributed to the significant expansion of the Company's sales organization including increases in the number of personnel, training costs and related sales and marketing costs. 13 Income from Operations. Income from operations was $10.2 million for fiscal 1998 as compared to $10.8 million for fiscal 1997. This nominal decrease resulted from an increase in one-time costs associated with the significant investment in the sales organization. Interest Expense. Interest expense was $25.4 million for fiscal 1998 and $6.7 million for fiscal 1997. Fiscal 1998 interest expense includes the excess of redemption payments over the book value of common stock warrants of $17.3 million. In addition, interest expense exceeded 1997 levels due to the higher outstanding borrowings associated with the subordinated notes issued in June 1998. Income Taxes. The Company's tax provision of $0.6 million for fiscal 1998 was $1.4 million less than the tax expense for the corresponding prior year period. The effective tax rate between the periods is not comparable due to the non-deductibility of certain of the expenses associated with the redemption of the common stock warrants and the impact of certain nondeductible expenses such as the amortization of certain intangible assets. Extraordinary Item. The extraordinary charge of $.9 million in fiscal 1998 result from the write-off of $1.3 million of deferred financing costs associated with retired debt obligations, reduced by the associated tax benefit of $.4 million. Net Income (Loss). Net loss was ($16.7) million for fiscal 1998 compared with net income of $2.1 million for fiscal 1997. This decrease was due primarily to the one-time charge of $17.3 million associated with the common stock warrant redemption agreement and other costs associated with debt retired with the proceeds of the 1998 senior subordinated note offering. 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. Liquidity and Capital Resources 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 $1.0 million in fiscal 1999 represents an improvement of $15.7 million as compared to a net loss of $16.7 million in fiscal 1998. This fluctuation was mainly due to the 1998 redemption of common stock warrants and the extraordinary loss on debt retirement. Cash used in operating activities was $0.2 million for fiscal 1999 and $15.3 million for fiscal 1998, a decrease of $15.1 million. The decrease was due primarily to the redemption of common stock warrants with proceeds from the Company's $75 million subordinated note offering completed in June 1998. 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- 14 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. Contemporaneously with the completion of the offer and sale of such notes, the Company amended its bank credit facility to provide for (i) a $25.0 million revolving credit facility subject to collateral availability, (ii) a $20.0 million capital expenditure facility and (iii) a $10.0 million acquisition facility. At October 31, 1999, the Company had approximately $13.9 million available under its revolving credit line and $24.3 million available under the other bank credit facilities. The Company's working capital was $20.1 million at October 31, 1999 compared to $17.1 million at October 31, 1998. The $3.0 million increase in working capital reflects the increased accounts receivable, higher inventory levels and reduced accounts payable, financed through the long-term revolver. At October 31, 1999, the Company was not in compliance with certain financial covenants under its bank credit facilities. Subsequent to October 31, the Company obtained waivers of such noncompliance. In addition, the Company amended certain covenants of its loan agreement and believes it will be in compliance with such covenants during fiscal 2000. Capital expenditures were $7.7 million during fiscal 1999. This represents a $1.1 million increase over the comparable period last year. These expenditures consist of $2.5 million for laundry and manufacturing equipment, $1.7 million for truck fleet related equipment, $2.6 million for computer equipment and $0.9 million for building and property improvements. Management believes that its operations and the Credit Facility will provide sufficient cash to meet the requirements for operations, acquisitions and capital expenditures for the next twelve months. Information Systems; Year 2000 In order to enhance the Company's information management capabilities and achieve Year 2000 compliance (Y2K), the Company has implemented new software for Billing, Route Accounting, Purchasing, Accounts Payable and Financial Reporting. The Company's new systems are Y2K compliant and the Company believes it has achieved the information objectives of the new system projects. The Company has used third party application software that is Y2K compliant to replace or upgrade its remaining management information systems including payroll. The Company contacted suppliers and customers regarding their state of readiness. All critical suppliers and customers assured the Company that their systems were Y2K compliant or that they were in the process of repairing or replacing their systems to make them Y2K compliant. As of the date of this filing, the Company has experienced no disruption of daily operations resulting from Y2K computer issues. The Company estimates the total capital cost of its Y2K project and related systems upgrades will be approximately $4.4 million. As of October 31, 1999 the Company had spent approximately $4.1 million. The majority of these costs represent capital expenditures for replacement software and hardware. 15 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. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- Not applicable. 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. 16 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 61 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) 62 Director William D. Matthews (1)(2) 65 Director Wallace J. McDonald (1)(2) 59 Director David P. O'Hara 52 Director, Assistant Secretary David S. Evans (1)(2) 61 Director Raymond T. Ryan 72 Director, Assistant Treasurer Thomas E. Krebbeks 45 Vice President of Finance, CFO and Treasurer Alexander Pobedinsky 38 Vice President, General Counsel and Secretary John G. Harshall 51 Vice President of Plant Support Services Anthony F. O'Connor 49 Vice President of Sales & Marketing Timothy O. Taylor 45 Vice President of Manufacturing & Procurement (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. 17 William D. Matthews has been a Director of the Company since January 1997. Mr. Matthews was the Chief Executive Officer of Oneida, Ltd. in Oneida, New York from 1986 until his retirement in 1998 but still remains Chairman of the Board. Oneida, Ltd. is listed on The New York Stock Exchange. Mr. Matthews has been a director of CONMED Corporation since 1997. 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 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. John G. Harshall joined the Company in October 1986 as General Manager of the York, Pennsylvania laundry operation. In February 1995, Mr. Harshall was promoted to Vice President of Operations and in 1999 became Vice President of Plant Support Services. From 1984 to 1986, Mr. Harshall was a consultant to the grocery industry. From 1979 to 1983, he was the Senior Vice President of Store Operations for Fisher Foods, Inc. Anthony F. O'Connor joined the Company in October 1992 as General Manager of the Belleville, New Jersey laundry operation. In February 1995, Mr. O'Connor was promoted to Vice President of Operations. In July 1996, Mr. O'Connor was promoted to his current position of Vice President of Sales & Marketing. From 1983 to 1992, Mr. O'Connor was a General Manager with ARAMARK Corporation. Timothy O. Taylor joined the Company in October 1992 as General Manager of Blue Ridge Textile Manufacturing, Inc. In 1995, he was promoted to Vice President of Blue Ridge Textile Manufacturing, Inc. In September 1999, Mr. Taylor was promoted to his current position of Vice President of Manufacturing & Procurement. 18 Item 11. Executive Compensation. ---------------------- The following table sets forth the compensation during the last two fiscal years earned by the Company's President and each other executive officer who made in excess of $100,000 during the fiscal year ended October 31,1999 (the "Named Officers"): Fiscal Annual Compensation All Other ----------------------- Name and Principal Position Year Salary Bonus Compensation (1) - --------------------------------------- -------- --------- -------- ------------------- Thomas M. Coyne 1999 $487,647 $13,024 Chairman of the Board, President and 1998 $290,526 $14,115 Chief Executive Officer 1997 $206,507 $50,000 $ 3,381 Thomas C. Crowley 1999 $107,092 $ 2,400 Director, Executive Vice President and 1998 Chief Operating Officer 1997 Dennis J. Bossi 1999 $117,745 $10,621 Vice President of Operations 1998 $116,109 $ 6,266 1997 $115,000 $20,000 $ 2,785 Anthony F. O'Connor 1999 $109,115 $10,249 Vice President of Sales and Marketing 1998 $100,000 $ 4,500 1997 $ 85,231 $15,000 $ 1,518 John G. Harshall 1999 $100,731 $10,025 Vice President of Plant Support Services 1998 $100,000 $ 4,500 1997 $ 84,327 $20,000 $ 1,590 (1) Consists of premiums for disability policies paid by the Company of $2,120, 0, $908, $790, and $790 and the Company matching contributions under the 401(k) Plan of $10,904, $0, $4,913, $4,659, and $4,435, and car allowance of $0, $2,400, $4800, $4,800 and $4,800 in fiscal 1999 for the benefit of Messrs. Coyne, Crowley, Bossi, O'Connor and Harshall, respectively. 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) --------------- ------------------- -------------------- Number of Number of Number of Shares Shares Shares Beneficially Percentage Beneficially Percentage Beneficially Percentage 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% J. Stanley Coyne Inter Vivos Irrevocable Trust/(2)(4)/........ 1,020 34.9% -- -- -- -- Thomas M. Coyne Blue Ridge Trust /(2)(5)/................... 1,903 65.1% -- -- -- -- J. Stanley Coyne /(2)/.................. 1,020(6) 34.9% 74,030(7) 100% 23,107(8) 100% Class B (Non-Voting) -------------------- Number of Shares Beneficially Percentage Owned (1) of Class --------- --------- J. Stanley Coyne Revocable Trust /(2)(3)/.............. 2,272 80.0% J. Stanley Coyne Inter Vivos Irrevocable Trust/(2)(4)/....... -- -- Thomas M. Coyne Blue Ridge Trust /(2)(5)/.................. -- -- J. Stanley Coyne /(2)/................. 2,991 (9) 100% 19 (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) 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. (6) Represents 1,020 shares owned by the J. Stanley Coyne Inter Vivos Irrevocable Trust, of which J. Stanley Coyne is a co-trustee. (7) Includes 63,305 shares owned by the J. Stanley Coyne Revocable Trust, of which J. Stanley Coyne is a co-trustee. (8) Includes 19,745 shares owned by the J. Stanley Coyne Revocable Trust, of which J. Stanley Coyne is a co-trustee. (9) Includes 2,272 shares owned by the J. Stanley Coyne Revocable Trust, of which J. Stanley Coyne is a co-trustee. 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 $93,300 during fiscal 1999. 20 The Company has an outstanding note receivable from J. Stanley Coyne in the amount of $1,256,250. This note bears interest at the applicable federal rate as determined by the Internal Revenue Service (6.3% at October 31, 1999). This note will become payable, with accrued interest, upon the death of J. Stanley Coyne. The Company has guaranteed certain promissory note obligations of J. Stanley Coyne due in 2003 in the amount of $1.9 million, including accrued interest. The Company makes advancements of $2,500 per month to Susan Whitney, the daughter of J. Stanley Coyne. The total accumulated of such advancements, as of October 31, 1999, was $65,000. 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 is also making advancements of $2,231 per month to Gerald Coyne, a son of J. Stanley Coyne, to be used as mortgage payments on his home. The total amount of such advancements as of October 31, 1999 was $113,000. These advancements will continue for thirty years or until the death of Gerald Coyne and his wife. All advancements to Susan Whitney and Gerald Coyne will be repaid, with interest at 9.5%, to the Company from such person's share of The J. Stanley Coyne Inter Vivos Irrevocable Trust. The Company acquired certain residential property in central New York in 1995 at a cost of $320,000 for use by Thomas M. Coyne, Chairman of the Board, President of the Company and Chief Executive Officer. Mr. Coyne paid the down payment of $75,000 and the Company assumed a mortgage of $245,000 payable at $2,900 per month for ten years. The mortgage bears interest at 7.5%. The Company made mortgage payments of $34,898 during fiscal 1999. The balance of the mortgage at October 31, 1999 was $170,045. Thomas M. Coyne has an option to acquire this property any time for the unpaid balance of the mortgage, but in no event less than $100,000. 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 $111,000 at October 31, 1999. These advancements bear interest at 9.5% and are payable at $2,000 per month. 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 $59,283 to The Outaouais Group, Inc. for various services during fiscal 1999. David P. O'Hara, a director and Assistant Secretary of the Company and Alexander Pobedinsky, General Counsel and Secretary of the Company, were partners with the law firm of O'Hara, Hanlon, Knych & Pobedinsky, LLP, which provided legal services for the Company. The Company paid fees of $508,005 to O'Hara, Hanlon, Knych & Pobedinsky, LLP for various services during fiscal 1999. Mr. Pobedinsky was a principal in the law firm of Alexander Pobedinsky, LLC. The Company paid fees of $117,860 to Pobedinsky, LLC for various services during fiscal 1999. Thomas C. Crowley, Director, Executive Vice President and Chief Operating Officer of the Company performed consulting services in 1999 prior to becoming an employee of the Company. The Company paid fees of $16,650 for such services. 21 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., 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, 1999 and 1998 Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended October 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended October 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 2. List of Financial Statement Schedules. Not applicable. 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 3.1 First Amendment to Amended and Restated Financing and Security Agreement 3.2 Second Amendment to Amended and Restated Financing and Security Agreement 27.1 Financial Data Schedule 22 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 28, 2000 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 28, 2000 - ------------------------ and Chief Executive Officer Thomas M. Coyne (Principal Executive Officer) /s/ Thomas C. Crowley Director, Executive Vice President and January 28, 2000 - ------------------------ Chief Operating Officer Thomas C. Crowley /s/ Thomas E. Krebbeks Vice President, Chief Financial January 28, 2000 - ------------------------ Officer and Treasurer (Principal Thomas E. Krebbeks Financial and Accounting Officer) /s/ Alexander Robedinsky Vice President, Secretary and January 28, 2000 - ------------------------ General Counsel Alexander Robedinsky /s/ William D. Matthews Director January 28, 2000 - ------------------------- William D. Matthews /s/ Wallace J. McDonald Director January 28, 2000 - ------------------------- Wallace J. McDonald /s/ David P. O'Hara Director and Assistant Secretary January 28, 2000 - ------------------------- David P. O'Hara /s/ Raymond T. Ryan Director and Assistant Treasurer January 28, 2000 - ------------------------- Raymond T. Ryan /s/ J. Patrick Barrett Director January 28, 2000 - ------------------------- J. Patrick Barrett /s/ David S. Evans Director January 28, 2000 - ------------------------- David S. Evans Coyne International Enterprises Corp. and Subsidiaries Consolidated Financial Statements October 31, 1999 and 1998 Page Opinion of Independent Certified Public Accountants..................... F-2 Financial Statements: Consolidated Balance Sheets, October 31, 1999 and 1998........................................ F-3-F-4 Consolidated Statements of Operations and Retained Earnings (Deficit), For the Years Ended October 31, 1999, 1998 and 1997......................................................... F-5 Consolidated Statements of Cash Flows, For the Years Ended October 31, 1999, 1998, and 1997............. F-6 Notes to Consolidated Financial Statements..........................F-7-F-17 F-1 Independent Auditors' Report The Board of Directors Coyne International Enterprises Corp. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and retained earnings (deficit) and of cash flows present fairly, in all material respects, the financial position of Coyne International Enterprises Corp. and its subsidiaries ("Company") at October 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. December 17, 1999, except as to certain information contained in Note 5 as to which the date is January 27, 2000 F-2 Coyne International Enterprises Corp. and Subsidiaries Consolidated Balance Sheet October 31, 1999 and 1998 - -------------------------------------------------------------------------------- Assets 1999 1998 Current assets: Cash and cash equivalents $ 213,407 $ 1,073,496 Receivables, principally trade 16,768,958 14,213,035 Inventories 7,371,395 6,846,393 Uniforms and other rental items in service, net 27,838,084 28,337,302 Prepaid expense and other assets 796,094 931,978 ------------ ------------ Total current assets 52,987,938 51,402,204 Property, plant and equipment, net 46,553,709 43,934,590 Purchased routes and acquisition intangibles, net 17,062,547 16,306,920 Deferred financing cost, net 2,606,593 2,871,172 Deferred income taxes 2,190,000 2,435,000 Other assets 444,795 417,553 ------------ ------------ $121,845,582 $117,367,439 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. (Continued) F-3 Coyne International Enterprises Corp. and Subsidiaries Consolidated Balance Sheet (Continued) October 31, 1999 and 1998 - -------------------------------------------------------------------------------- Liabilities and Shareholders' Equity (Deficit) 1999 1998 Current liabilities: Current maturities of capital lease and other loan obligations $ 3,214,908 $ 2,380,406 Accounts payable 5,378,142 7,005,212 Accrued expenses: Salaries and employee benefits 5,297,557 5,195,374 Other 8,970,850 9,385,038 Deferred income taxes 10,000,000 10,370,000 ------------ ------------ Total current liabilities 32,861,457 34,336,030 Long-term obligations: Capital lease and other loan obligations, net of current maturities 19,332,429 11,157,247 Senior subordinated notes 75,000,000 75,000,000 Other liabilities 3,083,508 3,951,145 ------------ ------------ Total liabilities 130,277,394 124,444,422 ------------ ------------ Shareholders' equity (deficit): Preferred stock - 5% non-cumulative, non-voting, callable at par: Class A - $100 par value; authorized 30,000; issued and outstanding 23,107 in 1999 and 1998 2,310,700 2,310,700 Class B - $500 par value; authorized 5,000; issued 4,991 and outstanding 2,991 in 1999 and 1998 2,495,500 2,495,500 Common stock - $.01 par value: Class A - voting; authorized 100,000; issued and outstanding 2,923 in 1999 and 1998 29 29 Class B - non-voting, authorized 99,000; issued and outstanding 74,030 in 1999 and 1998 740 740 Additional paid-in capital 849,512 849,512 Retained earnings (deficit) (12,030,088) (11,078,823) ------------ ------------ (6,373,607) (5,422,342) Less: Cost of 2,000 shares of Class B preferred stock held in treasury (166,667) (166,667) Shareholder receivables (1,891,538) (1,487,974) ------------ ------------ Total shareholders' equity (deficit) (8,431,812) (7,076,983) ------------ ------------ Commitments and contingencies $121,845,582 $117,367,439 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-4 Coyne International Enterprises Corp. and Subsidiaries Consolidated Statements of Operations and Retained Earnings (Deficit) For the Years Ended October 31, 1999 and 1998 - -------------------------------------------------------------------------------- 1999 1998 1997 Revenue: Rental operations $ 135,771,890 $ 128,666,244 $114,671,684 Direct sales 10,439,832 10,070,299 8,263,079 ------------- ------------- ------------ 146,211,722 138,736,543 122,934,763 ------------- ------------- ------------ Operating expenses: Cost of rental operations 103,769,568 98,018,735 86,985,898 Cost of direct sales 6,907,257 7,079,717 5,801,679 Selling, general and administrative 25,699,629 23,399,517 19,355,384 ------------- ------------- ------------ 136,376,454 128,497,969 112,142,961 ------------- ------------- ------------ Income from operations 9,835,268 10,238,574 10,791,802 Interest expense, including redemption of common stock warrants of $17,257,000 in 1998 10,841,533 25,401,922 6,715,224 ------------- ------------- ------------ Income (loss) before income taxes and extraordinary item (1,006,265) (15,163,348) 4,076,578 Income tax expense (benefit) (55,000) 640,188 2,025,000 ------------- ------------- ------------ Income (loss) before extraordinary item (951,265) (15,803,536) 2,051,578 Extraordinary loss on debt retirement, net of tax benefit of $365,000 - 939,055 - ------------- ------------- ------------ Net Income (Loss) (951,265) (16,742,591) 2,051,578 Retained earnings (deficit), beginning of year (11,078,823) 5,663,768 3,612,190 ------------- ------------- ------------ Retained Earnings (Deficit), End of Year $ (12,030,088) $ (11,078,823) $ 5,663,768 ============= ============= ============ The accompanying notes are an integral part of the consolidated financial statements. F-5 Coyne International Enterprises Corp. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended October 31, 1999 and 1998 and 1997 - -------------------------------------------------------------------------------- 1999 1998 1997 Cash flows from operating activities: Net income (loss) $ (951,265) $ (16,742,591) $ 2,051,578 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization of plant and equipment 5,104,274 4,559,183 4,147,655 Amortization expense 701,425 741,618 816,903 Amortization of deferred financing 355,249 513,571 324,091 Extraordinary loss on retirement of debt, net - 939,055 - Provision for deferred income taxes (125,000) (180,000) 1,595,000 Changes in operating assets and operating liabilities: Accounts receivable (2,555,923) (2,463,969) (271,471) Inventories (525,002) (1,714,532) (252,128) Uniforms in service 499,218 (4,727,551) (2,808,304) Prepaid expenses and other assets 108,642 (245,407) 778,894 Accounts payable and other liabilities (2,806,713) 4,004,526 (107,932) ------------- -------------- ------------- Net cash (used in) provided by operating activities (195,095) (15,316,097) 6,274,286 ------------- -------------- ------------- Cash flows from investing activities: Purchase of property, plant and equipment (7,713,393) (6,618,835) (1,086,633) Acquisition of businesses, net of cash acquired (1,467,052) (238,844) (1,122,101) ------------- -------------- ------------- Net cash used in investing activities (9,180,445) (6,857,679) (2,208,734) ------------- -------------- ------------- Cash flows from financing activities: Proceeds from long-term borrowings 50,558,770 172,310,156 121,565,225 Payments under long-term borrowings (41,549,085) (143,890,527) (126,287,871) (Decrease) increase in bank overdrafts - (1,700,982) 1,700,982 Redemption of common stock warrants - (1,743,086) - Increase in shareholder receivables (403,564) - - Deferred financing costs incurred (90,670) (3,000,481) (119,830) ------------- -------------- ------------- Net cash provided by (used in) financing activities 8,515,451 21,975,080 (3,141,494) ------------- -------------- ------------- Net (decrease) increase in cash (860,089) (198,696) 924,058 Cash and cash equivalents: Beginning of year 1,073,496 1,272,192 348,134 ------------- -------------- ------------- End of Year $ 213,407 $ 1,073,496 $ 1,272,192 ============= ============== ============= Supplemental disclosure of cash flow information: Interest paid, including in 1998 the redemption of redeemable common stock warrants $ 9,758,977 $ 20,917,150 $ 6,204,883 Income taxes paid 74,959 201,922 514,144 Assets acquired under capital lease obligations - - 1,497,313 Seller financed debt - 407,984 3,469,893 The accompanying notes are an integral part of the consolidated financial statements. F-6 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies Business Description The Company provides a highly specialized service to businesses of all types - from small service companies to major corporations that employ thousands of people. The Company designs and implements corporate identity uniform programs for its customers in connection with renting or selling its uniform services and other accessories to customers throughout the eastern United States. In addition, the Company manufactures shop towels which are sold throughout the United States. Principles of Consolidation and Revenue Recognition The consolidated financial statements include the accounts of Coyne International Enterprises Corp. and its wholly-owned Subsidiaries (the Company). All intercompany accounts have been eliminated. The Company recognizes rental revenues when the services are performed and direct sales are recognized when products are shipped to customers. Fiscal Year The Company uses a fifty-two/fifty-three week fiscal year ending on the last Saturday in October. Accordingly, the financial statements are for the 52 weeks ended October 30, 1999 and the 53 weeks ended October 31, 1998 and the 52 weeks ended October 25, 1997. For convenience, the dating of the accompanying financial statements, and notes herein, have been labeled as of and for the years ended October 31, 1999, 1998 and 1997 rather than the actual fiscal year end dates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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 Inventories primarily represent new garments which are valued at the lower of average cost or market. Uniforms and Other Rental Items 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. F-7 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies (Continued) Property, Plant and Equipment Property, plant and equipment items are recorded at cost with provision for depreciation by charges to operations on a straight-line basis over their estimated useful lives which range from fifteen to forty years for buildings and improvements, three to ten years for machinery and equipment and three to eight years for vehicles. Maintenance and repairs are charged to expense when incurred. Construction in process consists primarily of capital expenditures for plant renovations and vehicle re-builds. The Company capitalizes interest during the period of major construction projects. 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, is amortized on a straight-line basis over forty 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 (i.e., plant closure) indicate that the carrying amount of an asset may not be fully recoverable. Routes acquired before October 31, 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 and approximated $355,000, $513,000, and $324,000 for the years ended October 31, 1999, 1998 and 1997, respectively. 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. 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, 1999 was approximately $67,500,000. The fair value of the Company's other long-term obligations approximated their carrying value at October 31, 1999. F-8 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies (Continued) 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. Reclassification Certain amounts have been reclassified to conform with 1999 presentation. 2. Acquisitions During 1999, the Company acquired certain assets of industrial laundries in transactions accounted for as purchase transactions. The aggregate cash purchase price of $1,588,000 was allocated to rental garments ($132,000), covenants not to compete ($517,000) and purchased routes ($939,000). During 1998, the Company acquired certain assets of an industrial laundry company in a transaction accounted for as a purchase. The aggregate purchase price of $581,000 was allocated to accounts receivable ($23,000), rental garments ($50,000), equipment ($75,000), covenants not to compete ($250,000), and purchased routes ($183,000). 3. Property, Plant and Equipment Property, plant and equipment includes: 1999 1998 Land $ 2,467,218 $ 2,468,218 Buildings and improvements 39,953,310 39,260,467 Machinery and equipment 39,878,736 35,837,929 Vehicles 10,419,800 8,551,646 Construction in process 3,133,970 2,114,421 ------------ ------------ 95,853,034 88,232,681 Less: Accumulated depreciation and amortization (49,299,325) (44,298,091) ------------ ------------ $ 46,553,709 $ 43,934,590 ============ ============ Assets under capital leases consist primarily of machinery and equipment and have an aggregate historical cost and accumulated depreciation of approximately $7,944,000 and $3,101,000 at October 31, 1999 and $7,944,000 and $2,028,000 at October 31, 1998, respectively. Amortization expense on capital leases was approximately $1,073,400, $1,504,000 and $1,469,000 in 1999, 1998 and 1997, respectively. F-9 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. Purchased Routes and Acquisition Intangibles The following summarizes the individual components of purchased routes and acquisition intangibles at October 31: 1999 1998 Goodwill $ 764,310 $ 764,310 Purchased routes 21,140,792 20,201,662 Covenants not to compete 1,953,844 1,436,854 ----------- ----------- 23,858,946 22,402,826 Less: Accumulated amortization (6,796,399) (6,095,906) ----------- ----------- $17,062,547 $16,306,920 ----------- ----------- Amortization expense for purchased routes and acquisition intangibles aggregated $701,000, $742,000 and $816,000 for the years ended October 31, 1999, 1998 and 1997, respectively. 5. Long-Term Obligations As of October 31, long-term obligations consist of the following: 1999 1998 (a) Bank of America revolver, interest payable monthly at variable interest rates, ranging from prime plus $ 7,139,412 $ 1,481,000 .375% to LIBOR plus 2.25%, in 1999 and 1998 Bank of America capital expenditure facility, interest payable monthly at variable interest rates, ranging from prime plus .625% to LIBOR plus 2.5%, in 1999 3,877,571 - Bank of America acquisition facility, interest payable monthly at variable interest rates, ranging from 1,801,670 - prime plus .625% to LIBOR plus 2.5%, in 1999 Capital lease obligations payable in monthly instalments with interest at rates ranging from 6.7% to 9.5%, payable through 2003 4,504,919 5,750,655 Industrial Development Revenue Bonds payable in instalments with interest variable (10% at monthly October 31, 1999) through 2005 2,488,188 2,742,469 Other debt obligations payable in monthly instalments with interest, at rates ranging from 6% to 10.3%, payable through 2005 2,735,577 3,563,529 --------------- ---------------- 22,547,337 13,537,653 Less: Current maturities (3,214,908) (2,380,406) =============== ================ $ 19,332,429 $ 11,157,247 =============== ================ (b) 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 =============== ================ F-10 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 5. Long-Term Obligations (Continued) The prime rate at October 31, 1999 and 1998 was 8.25% and 8.0%, respectively. LIBOR was 6.375% at October 31, 1999. Accrued expense, in the accompanying balance sheets, includes accrued interest of approximately $3,903,000 and $3,175,000 at October 31, 1999 and 1998, respectively. (a) The Company's existing credit facility (the "Agreement") led by Bank of America was amended in connection with the Senior Subordinated Debt offering in June 1998. Under this agreement a revolving credit facility is available to the Company through November 1, 2003, extending automatically for successive periods of one year each, at the discretion of the Bank, but in no event later than November 1, 2008. Advances under the revolver bear interest, at the Company's option at either, (i) the Bank of America's prime rate plus .375% or (ii) the London Interbank Offered Rate ("Rate") plus 2.25%. Collateral pledged under the agreement includes all inventory, uniforms in service and accounts receivable. Maximum available credit is computed based on eligible accounts receivable, inventory, and uniforms in service, as defined, and may not to exceed $25,000,000. The Company is required to maintain a minimum available balance under the revolving credit facility of $1,000,000. As of October 31, 1999, the Company has approximately $13,973,000 available under its credit facility. 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. The Company was not in compliance with certain of these covenants as of October 31, 1999 for which the Company has received a waiver. In addition, the Company obtained an amendment of certain covenants for its loan agreement and believes it will be in compliance with such covenants at other fiscal 2000 measurement dates. In addition, the Agreement includes a material adverse change clause which permits the financial institution 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, of which $1,801,670 is outstanding at October 31, 1999. No borrowings were outstanding at October 31, 1998. Interest is payable on the acquisition facility during the first year of an advance; thereafter principal will be payable in 12 quarterly payments. In the event of termination of the revolving credit facility all unpaid balances will become due. The Agreement also provides for a capital expenditure facility of up to $20,000,000, of which $3,877,571 is outstanding at October 31, 1999. No borrowings were outstanding at October 31, 1998. Interest is payable on the capital expenditure facility through July 2000. Thereafter, principal will be payable in 20 quarterly payments; provided that all advances will come due upon termination of the revolving credit facility. F-11 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 5. Long-Term Obligations (Continued) Advances under the acquisition and capital expenditure facility bear interest, at the Company's option at either, (i) the Bank of America prime rate plus .625% or (ii) LIBOR plus 2.5%. In addition, under the terms of the Agreement the Company shall be required to make annual mandatory prepayments in an amount equal to the lesser of (i) $2,000,000 or (ii) 35% of the Company's excess cash flow to be applied to reduce the acquisition and capital expenditure loans. A mandatory prepayment is not required in fiscal 2000 based upon financial results for the year ended October 31, 1999. (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 ("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 bear interest at a rate of 11.25%, payable semi-annually, and 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 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 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. (c) The Company's corporate headquarters, its Buffalo, New York plant and its Blue Ridge, Georgia plant were financed under separate long- term lease arrangements with the Industrial Development Agencies of the local counties. The leases have been accounted for as capital leases. Accordingly, the related assets are included in the consolidated balance sheet of the Company. Similarly, an amount equivalent to the principal amount of the Agency's revenue bonds outstanding related to those properties is included as a liability. While the bonds are not a debt of the Company, the long-term lease obligates the Company to payments equal to interest and amortization of such bonds and provides for the ultimate reversion of the properties to the Company at the end of the bond agreement. F-12 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 5. Long-Term Obligations (Continued) At October 31, 1999, 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 2000 $ 1,878,955 $1,335,953 $ 3,214,908 2001 2,222,438 1,164,959 3,387,397 2002 2,032,011 1,174,085 3,206,096 2003 8,200,221 829,922 9,030,143 2004 1,087,311 - 1,087,311 2005 and thereafter 77,621,482 - 77,621,482 ----------- ---------- ----------- $93,042,418 $4,504,919 $97,547,337 =========== ========== =========== 6. Income Taxes The components of income tax expense (benefit) for the years ended October 31, were as follows: 1999 1998 1997 Current: Federal $ - $ 265,000 $ 245,000 State 70,000 190,000 185,000 --------- --------- ----------- 70,000 455,000 430,000 Deferred (125,000) 185,188 1,595,000 --------- --------- ----------- Income tax expense (benefit) $ (55,000) $ 640,188 $ 2,025,000 ========= ========= =========== The Company has a net operating loss and alternative minimum tax (AMT) credit carryforwards for income tax purposes of approximately $8,225,000 and $1,860,000, respectively. The net operating loss carryforward expires in 2019 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. F-13 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. Income Taxes (Continued) A reconciliation of the federal statutory income tax rate and the Company's effective income tax rate is as follows: 1999 1998 1997 Statutory tax rate (recoverable) (34.0)% (34.0)% 34.0% State taxes, net of federal benefit 3.8 .6 7.3 Non-deductible items 29.5 36.0 6.2 Other (4.8) 1.6 2.2 ------ ------ ----- (5.5)% 4.2 % 49.7% ------ ------ ----- Non-deductible items include nondeductible amortization of certain purchased routes and other intangibles, and meals and entertainment expenses. The tax effects of temporary differences that give rise to deferred tax assets (liabilities) at October 31, were as follows: 1999 1998 Current: Rental garments in service $ (10,786,000) $ (10,892,000) Inventory 28,000 28,000 Accrued expenses 758,000 494,000 ------------- ------------- Current deferred tax liability (10,000,000) (10,370,000) ------------- ------------- Non-current: Fixed assets (4,074,477) (3,017,000) Other liabilities 1,118,728 1,232,000 Alternative minimum tax credit carryforward 1,860,000 1,825,000 Net operating loss carryforward 3,285,749 2,395,000 ------------- ------------- Non-current deferred tax asset 2,190,000 2,435,000 ------------- ------------- Net deferred tax liability $ (7,810,000) $ (7,935,000) ============= ============= 7. Commitments and Contingencies 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 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. F-14 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. Operating Leases The Company has noncancellable operating lease commitments for certain operating facilities, transportation, manufacturing and office equipment, which expire at various dates. Rent expense under operating leases approximated $1,969,000, $2,476,000 and $2,649,000 during 1998, 1997 and 1996, respectively. Minimum annual rental commitments at October 31, 1999 are as follows: 2000 $1,215,096 2001 871,912 2002 189,390 2003 133,054 2004 35,318 Thereafter 4,829 ---------- Total minimum lease payments $2,449,599 ---------- 9. 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 contributes a base contribution of 3% to 4% of eligible participant compensation. The Company contributions under the 401(k) plan, which vest over a seven-year employment period, were approximately $719,000, $637,000 and $680,000 in 1999, 1998 and 1997, respectively. Certain employees of the Company are covered by union sponsored, collectively bargained, multi-employer pension plans (Union Plans). The Company charged to expense $1,430,000, $1,176,000 and $1,150,000 in 1999, 1998 and 1997, 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 $563,000 and plan assets with a fair market value of approximately $1,037,000. F-15 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 10. Related Party Transactions The Company has guaranteed an obligation of J. Stanley Coyne, a principal shareholder of the Company, under a promissory note payable in 2002. At October 31, 1999, the outstanding guaranteed obligation, including interest, approximates $1,988,000. At the Company's discretion, the Company has made salary 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 $93,000, $112,000 and $93,000 during the fiscal years ended October 31, 1999, 1998 and 1997, respectively. Included in shareholder receivables is an outstanding note receivable from its principal shareholder in the amount of $1,256,250. This note bears interest at the Applicable Federal Rate as defined by the Internal Revenue Service, 6.3% at October 31, 1999. Interest income on the note was not recognized in fiscal 1999 and 1998. The total amount due as of October 31, 1999 approximates $1,497,000. Included in shareholder receivables at October 31, 1999 and 1998 are a note receivable and outstanding advancements, of approximately $434,000 and $111,000, 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. As of October 31, 1999 and 1998 there is approximately $193,000 and $120,000 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 1999 and 1998. The advances are unsecured and bear interest at 9.5% per annum. The advances have no defined repayment terms, but they will be repaid to the Company from the family members' share of the J. Stanley Coyne estate. The Company acquired certain residential property in central New York in 1995 at a cost of $320,000. Thomas M. Coyne, President of the Company, paid the down payment of $75,000 and the Company assumed a mortgage of $245,000 payable at $2,900 per month for ten years. The mortgage bears interest at 7.5%. Thomas M. Coyne has an option to acquire this property any time for the unpaid balance of the mortgage, but in no event less than $100,000. F-16 Coyne International Enterprises Corp. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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., Ohio Garment Rental, Inc. and Midway-CTS Buffalo, Ltd. on a combined basis at October 31, or for the year then ended: October 31, ---------------------------- 1999 1998 Balance sheets: Current assets $6,376,826 $5,934,000 Noncurrent assets 3,815,243 3,317,000 Current liabilities 3,419,888 2,702,000 Noncurrent liabilities 175,000 182,000 Year Ended October 31, ------------------------------------------------- 1999 1998 1997 Statement of operations: Revenues $16,654,447 $17,080,000 $15,300,000 Operating expenses 15,330,667 15,482,000 14,021,000 Operating income 1,323,780 1,598,000 1,279,000 Income (loss) before extraordinary loss and cumulative effect of accounting changes 329,993 (1,365,000) 347,000 Net income (loss) 329,993 (1,365,000) 347,000 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. F-17 EXHIBIT INDEX 3.1 First Amendment to Amended and Restated Financing and Security Agreement 3.2 Second Amendment to Amended and Restated Financing and Security Agreement 27.1 Financial Data Schedule