10-Q 1 d10q.txt COYNE INTERNATIONAL FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended July 31, 2002 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission File No. 333-60247 --------- COYNE INTERNATIONAL ENTERPRISES CORP. BLUE RIDGE TEXTILE MANUFACTURING, INC. OHIO GARMENT RENTAL, INC. -------------------------------------------------------------------------------- (Exact name of Registrants as specified in their respective charters) New York 16-6040758 Georgia 58-2018333 Ohio 34-1261376 -------------------------------------- ---------------------------------------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 140 Cortland Avenue, Syracuse, New York 13221 -------------------------------------- ---------------------------------------- (Address of Principal Executive (Zip Code) Offices) 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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO TABLE OF CONTENTS

2 PART I. Financial Information Item 1. Financial Statements Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidated Balance Sheet --------------------------------------------------------------------------------

See notes to unaudited consolidated financial statements 3 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidated Balance Sheet --------------------------------------------------------------------------------

See notes to unaudited consolidated financial statements 4 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidated Statement of Operations --------------------------------------------------------------------------------

See notes to unaudited consolidated financial statements 5 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidated Statement of Cash Flows --------------------------------------------------------------------------------

See notes to unaudited consolidated financial statements 6 Coyne International Enterprises Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- 1. Basis of Presentation The accompanying condensed consolidated financial statements of Coyne International Enterprises Corp. and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended October 31, 2001. The balance sheet as of October 31, 2001 has been derived from the audited balance sheet included in the Company's annual report filed on Form 10-K. The Company uses a fifty-two/fifty-three week fiscal year ending on the last Saturday of October, with quarterly interim periods of thirteen weeks. For convenience, the dating of the accompanying financial statements and notes have been labeled as of and for the periods ending July 31, 2002, October 31, 2001 and July 31, 2001 rather than the actual period-end dates. Operating results for the nine month period ended July 31, 2002 are not necessarily indicative of the results that may be expected for the year ending October 31, 2002. 2. Comprehensive Income The components of comprehensive income (loss) were as follows:

7 Coyne International Enterprises Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- 3. Change in Accounting Estimate During the third quarter of the fiscal year ending October 31, 2002, the Company shortened the useful lives that were being used to amortize certain garments that were included in rental merchandise in service. Based on historical patterns of usage the Company determined that useful lives used to amortize these garments should be reduced from 60 months to 36 months. The effect of this change in accounting estimate was to reduce income before income taxes and extraordinary items for the three and nine-month periods ended July 31, 2002 by $607,806, net of income tax effect of $404,192. 4. Change in Accounting Principles During the third quarter of the fiscal year ending October 31, 2002, the Company changed its method of capitalizing certain costs related to rental merchandise in service and its method for recognizing the cost of merchandise replaced due to loss and abuse. In prior years, the Company included in the cost of rental merchandise in service certain centralized costs, including an allocation of overhead costs, that were related to activities necessary to prepare garments for distribution to customers. The Company has decentralized these preparation activities so as to reduce the amount of cost and activity needed to prepare garments for distribution. Therefore, the Company has determined that certain costs that were previously capitalized and amortized over the lives of the respective garments should now be expensed as incurred. The cumulative effect on net income of this change in accounting principle as of November 1, 2001 is a decrease of $718,901 net of income tax effect of $478,070. In addition, the Company has changed its method of recognizing the cost of merchandise replaced due to loss and abuse. In prior years the Company recognized these costs over the remainder of the original lives of the replaced merchandise. In order to better match the cost of merchandise replaced due to loss and abuse with the associated revenue, effective November 1, 2001, the Company began recording these costs in full when the loss or abuse revenue is billed. The cumulative effect on net income of this change in accounting principle as of November 1, 2001 is a decrease of $2,312,408 net of income tax effect of $1,537,755. 8 Coyne International Enterprises Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- 4. Change in Accounting Principles (continued) The effect of the above changes in accounting principles on income before income taxes and extraordinary items and on net income for the three- and nine-month periods ended July 31, 2002, is as follows: 3 months ended 9 months ended July 31, 2002 July 31, 2002 -------------- -------------- Income before income taxes and extraordinary items Capitalized costs $ 101,507 $ 170,610 Loss and abuse cost 179,639 116,633 Net income Capitalized costs $ 60,965 $ 102,468 Loss and abuse cost 107,890 70,050 The effect of these changes in accounting principles on (decrease) in income before income taxes and extraordinary items and on net income for previously reported periods, is as follows: 3 months ended 3 months ended 6 months ended January 31, 2002 April 30, 2002 April 30, 2002 ---------------- -------------- -------------- Income (loss) before income taxes and extraordinary items Capitalized costs $ 8,187 $ 60,916 $ 69,103 Loss and abuse cost 65,553 (128,557) 63,004) Net income (loss) Capitalized costs $ 4,917 $ 36,586 $ 41,503 Loss and abuse cost 39,371 (77,211) (37,840) The following information presents the pro forma results of operations for the three- and nine-month periods ended July 31, 2001 as though these changes in accounting principles were effective November 1, 2000. 3 months ended 9 months ended July 31, 2001 July 31, 2001 -------------- -------------- Loss before income taxes and extraordinary items ($760,110) ($3,846,033) Net loss (469,587) (2,433,225) 9 Coyne International Enterprises Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- 5. Extraordinary Items In conjunction with the July 2, 2002 repurchase of $20,095,000 principal amount of 11-1/4% Series B Senior Subordinated Notes due 2008 (the "Notes") at a cost of $10,758,381 plus accrued and unpaid interest, the Company recorded a gain of $5,607,573, net of tax expense of $3,729,046. The gain was recorded as an extraordinary item. In conjunction with the July 2, 2002 refinancing of its senior credit facilities and the repurchase of the Notes, the Company charged to results of operations $329,114, net of tax benefit of $218,862, representing the deferred financing fees and expenses pertaining to the refinanced facility and the repurchased Notes. The charge was recorded as an extraordinary item. 6. Reclassification Certain amounts have been reclassified to conform to the fiscal 2002 presentation. 7. Internal Revenue Service Audit On May 23, 2002 the Internal Revenue Service (the "IRS") issued a final settlement based upon its examination of the consolidated federal income tax returns of the Company for the fiscal years ended October 31, 1997 and October 31, 1998. The total amount due to the IRS is $1,557,621, which includes $462,621 of interest. The effect of this settlement was a reduction of deferred income tax liabilities of approximately $6.7 million. 8. Condensed Consolidating Financial Statements On June 26, 1998, the Company sold $75,000,000 of the Notes. Subordinated Notes due 2008 (the "Notes"). The Notes are jointly and severally guaranteed by the following wholly owned subsidiaries of the Company (the "Subsidiary Guarantors"): Blue Ridge Textile Manufacturing, Inc. and Ohio Garment Rental, Inc. The following consolidating financial statements for the Company segregate the financial information of Coyne International Enterprises Corp. (the "Parent Company") and the Subsidiary Guarantors. On July 2, 2002, the Company repurchased $20,095,000 principal of the Notes. 10 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Balance Sheet --------------------------------------------------------------------------------

11 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Balance Sheet --------------------------------------------------------------------------------

12 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Statement of Operations --------------------------------------------------------------------------------

13 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Statement of Operations --------------------------------------------------------------------------------

14 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Statement of Operations --------------------------------------------------------------------------------

15 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Statement of Operations --------------------------------------------------------------------------------

16 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Statement of Cash Flows --------------------------------------------------------------------------------

17 Coyne International Enterprises Corp. and Subsidiaries Condensed Consolidating Statement of Cash Flows --------------------------------------------------------------------------------

18 ITEM 2. Management's Discussion and Analysis of the Financial Condition and Results of Operations Coyne International Enterprises Corp. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q. 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 Companys 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,(viii) 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, (xiii) the Company's ability to attract and retain qualified employees, and a prolonged work stoppage or strike by the Company's unionized work force, and (xiv) the availability of sufficient funds to meet shareholder redemption requests. Results of Operations Total revenues decreased $3.2 million (8.6%), for the three months ended July 31, 2002 versus the three months ended July 31, 2001. Weekly rental revenue has declined by 5.2% during the nine months ended July 31, 2002. This decline is comprised of a 12.8% reduction due to cancelled accounts and decreases in service to continuing accounts, partially offset by 7.6% in new business written during this period. Cost of operations decreased $1.9 million (6.5%) for the three months ended July 31, 2002 versus the three months ended July 31, 2001. $1.0 million of this decrease is due to a change in an accounting estimate where by the Company shortened the useful lives that were used to amortize certain garments that were included in rental merchandise in service. In addition, $0.9 million was due to lower labor, commission and other production costs directly associated with revenue generation and lower merchandise spending resulting from tighter controls implemented in 2001. 19 Selling and administrative expenses decreased $0.3 million (4.3%) for the three months ended July 31, 2002 versus the three months ended July 31, 2001. This decrease is primarily the result of a decrease in corporate wages and benefits. Interest expense for the three months ending July 31, 2002 included a $0.5 million charge from a recent Internal Revenue Service audit. Without this charge, interest expense for the three months ended July 31, 2002 would be $0.5 million lower versus the three months ended July 31, 2001, primarily as a result of a decline in outstanding debt, from $105.1 million at July 31, 2001 to $91.4 million at July 31, 2002. Internal Revenue Service Audit On May 23, 2002 the Internal Revenue Service (the "IRS") issued a final settlement based upon its examination of the consolidated federal income tax returns of the Company for the fiscal years ended October 31, 1997 and October 31, 1998. The total amount due to the IRS is $1.6 million which includes $0.5 million of interest. The effect of this settlement, including a reduction in deferred tax liabilities, was a reduction of deferred income tax liabilities of approximately $6.7 million. Liquidity and Financial Resources The Company is highly leveraged, with total indebtedness of $91.4 million and a shareholder deficit of $4.7 million at July 31, 2002. In addition, the Company has incurred net losses for each of the last four fiscal years, is required to maintain certain financial covenants as part of its existing senior credit facility (the "Facility") and is dependent on operations for a major portion of its liquidity and working capital needs. For the nine months ended July 31, 2002, the Company has experienced a net increase in cash and cash equivalents of $3.2 million. The Company generated $7.2 million in cash and cash equivalents from operating activities for the nine months ended July 31, 2002, with interest payments of $9.7 million and liquidation of $8.1 million of excess levels of inventory and rental merchandise in service which resulted from prior year over-purchases. In July 2002, the Company completed a refinancing of its senior credit facilities. All amounts outstanding at that date under its revolving credit, capital expenditure and acquisition facilities, totaling $19.2 million, were repaid with proceeds from the Facility arranged by GECC Capital Markets Group, Inc. The breakdown of the Facility is as follows: a) Revolving Credit Facility with a commitment amount of $18.0 million, subject to collateral availability, at an interest rate of prime plus 1.25% or LIBOR plus 2.75%. At July 31, 2002, there was approximately $12.3 million available under this Revolving Credit Facility. There were no amounts outstanding as of July 31, 2002. b) Term A Loan with a commitment of $7.0 million at an interest rate of prime plus 1.75% or LIBOR plus 3.25%. The amount outstanding at July 31, 2002 was $7.0 million. c) Term B-1 Loan with a commitment of $10.0 million at an interest rate of prime plus 10.25%. The amount outstanding at July 31, 2002 was $10.0 million. d) Term B-2 Loan with a commitment of $20.0 million at an interest rate of 15%. The amount outstanding at July 31, 2002 was $16.0 million. 20 On July 2, 2002 the Company repurchased $20.1 million principal amount of the 11 1/4% Series B Senior Subordinated Notes due 2008 at a cost of $10.8 million plus accrued and unpaid interest. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company manages interest rate risk by using a combination of variable and fixed rate debt, as well as interest rate swap agreements. The Company's earnings are effected by changes in short-term interest rates due to the use of variable rate notes and revolving credit facilities amounting to approximately $20.4 million. This exposure is limited by the use of interest rate swap agreements as a hedge against the variability in short-term rates. At July 31, 2002, approximately $3.4 million of the Company's variable-rate debt was covered under interest rate swap agreements. The interest rate swap agreements are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes, nor is it a party to any leverage instrument. If short-term rates increase by one-half percent, (50 basis-points), the Company's interest expense would increase, and income before taxes would decrease, by approximately $0.1 million. Conversely, if short-term rates decrease by one-half percent, (50 basis-points), the Company's interest expense would decrease, and income before taxes would increase, by approximately $0.1 million. PART II. Other Information Item 1. Legal Proceedings The Company is involved in certain claims and litigation arising in the ordinary course of business, which are not considered material to the financial operations or cash flow of the Company. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit No. Description ----------- ----------- 18 Letter: Change in accounting principles related to the capitalization of overhead costs. 19 Letter: Change in accounting principle related to the Company changing its method of recognizing the cost of merchandise replaced due to loss and abuse. b) The Company filed the following reports on Form 8-K during the fiscal third quarter of 2002 and through the date hereof. 1) September 9, 2002 under item 7 containing the credit agreement, dated as of July 2, 2002, between the Company, Blue Ridge Textile Manufacturing, Inc. and General Electric Capital Corporation. 2) September 9, 2002 under item 5, containing the announcement of July 1, 2002 interest payment on the Notes and the July 2, 2002 refinancing of its senior credit facilities. 21 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: September 10, 2002 By: /s/ Thomas M. Coyne ---------------------------------------- Thomas M. Coyne Chief Executive Officer By: /s/ Stephen M. Owen ---------------------------------------- Stephen M. Owen VP of Finance and Chief Financial Officer 22

COYNE INTERNATIONAL ENTERPRISES CORP 10-Q