(Photos of Machinery & Staff Appear on Cover)
(Speizman logo) SPEIZMAN
INDUSTRIES, INC.
1997 ANNUAL REPORT
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STOCKHOLDERS' LETTER
To Our Stockholders:
Speizman Industries is a world leader in the sales and distribution of
specialized machinery and equipment. For years we have been the largest
distributor of new sock knitting machines in the world. During the past year we
acquired Wink Davis Equipment Company, the largest distributor of commercial
laundry equipment in the U.S.A. It is our intent to continue to look for other
dominant distributors as possible acquisitions, as well as growing each company
we own.
Soon after we had our secondary offering in 1993, FORBES ranked us among the
top 200 small cap stocks in America. This was based in part on the growth of our
net revenues by 48.8% and the growth of net income by 255.5% from 1992 to 1993.
Although 1995-96 was a down year for the sock knitting industry worldwide, our
'96-97 fiscal year sales were $79 million, with net profit after tax of $2.7
million, or $0.80 per share. We want to tell you more about our Company so that
you can share our confidence in its future.
We attribute the success of Speizman Industries to doing our best in four
critical areas:
(Bullet) Product
(Bullet) People
(Bullet) Philosophy
(Bullet) Planning
Let's look at each of these areas in more detail.
(BULLET) PRODUCT
We distribute Lonati, known for the best sock knitting machines made. Lonati
is the largest manufacturer of sock and hosiery machinery in the world, five
times larger than their closest competition. We distribute all of Lonati's
equipment in the United States, Canada and Mexico, except pantyhose equipment in
the U.S.
Lonati's athletic sock machines can produce one sock in a minute or less.
These computer-programmed machines allow the sock maker to change styles in a
matter of seconds rather than in a matter of hours or days. Thus one Lonati
machine can do the work of several different machines year round. Lonati is the
preferred machine in the market with an 85% market share because it is better
made, more reliable and Speizman offers the best after-sales service and
training for our customers.
Current hosiery trends suggest that sock production will increase in the years
to come. Businesses throughout the United States have begun to implement "casual
days" that are increasing the demand for dress/casual socks. The 1996 Hosiery
Statistics gathered by the National Association of Hosiery Manufacturers (NAHM)
show that total sock production for 1996 was up 12.5%. Sock shipment was up
10.4%. The big movers in the industry were boys' casual/dress socks which
experienced a 56.7% increase in production and women's sport/athletic socks up
34%.
The retail dollar volume for socks nearly doubled from $2.44 billion in 1987
to $4.26 billion in 1996, according to the NAHM. Retail unit volume for socks is
up 7.2% over 1995 and retail dollar volume is up 10.2% over 1995. Total per
capita consumption of socks from 1991 to 1996 increased 31.8%.
The majority of socks in 1996 were sold by major retailers like Wal-Mart and
Kmart. These chains require more value for the same price. They demand that
suppliers hold inventory and fill large orders very quickly. By selling more
Lonati sock knitting machines, we can help our customers meet these increasing
demands.
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(BULLET) PEOPLE
At Speizman, every person in our organization values our customers. We impress
upon every employee that we are a team. Our market is relatively small so each
customer is precious. We offer our customers in-house trials and demonstrations,
comprehensive training and instruction, and prompt, expert service. Our
salespeople establish lasting relationships with our customers and are genuinely
concerned about their needs. We do whatever is necessary to ensure that our
customers receive a fair price and unparalleled service. We also take trade-ins
on outdated equipment, something rarely seen in the industry. This reduces the
capital required to purchase our new equipment, frees up customers' floor space
and supplies us with used equipment to sell to South American and Third World
countries.
(BULLET) PHILOSOPHY
Speizman has 85% of the market for athletic sock knitting machines, 75-80% of
the market for dress/casual sock knitting machines and 80% of the market for
sock toe closing machines. In addition, we are the largest dealer of used sock
machinery in the world.
We believe that we have been able to achieve such domination because of our
superior product, our great attention to the customer and our concentration on
the sale. At Speizman, we treat our customers fairly and ethically, adhering to
the golden rule. We also apply high ethical standards while we work hard to
dominate our competition.
Part of our philosophy is what we call the "wave theory." A wave, like a
competitor, will appear on the horizon as a small ripple. But as the wave
reaches the shore, or as the competition begins to find success in your
territory, the wave becomes larger and it can wash you away. Therefore, we are
ever mindful of the wave and work hard to protect our market share. In fact, we
try whenever possible to be the wave, overwhelming our competition. We believe
in asking for all the orders and getting every sale. When we do not accomplish
that, we take it very seriously and search for the underlying causes.
(BULLET) PLANNING
Speizman has seen its share of success over the years and has plans to
accomplish even more. We are constantly seeking ways to improve our business and
better serve our customers.
We are looking for opportunities to diversify by joining with other companies
who share our business philosophy and dominate their markets. We maintain
profitability standards for our divisions. We will consider discontinuing any
division that is not viable.
We strive to protect and enhance our balance sheet. Our goal is to maximize
profitability and return on assets. Speizman currently employs approximately 85
people and tries to keep a ratio of $1 million in sales per employee. Our Wink
Davis subsidiary utilizes more people per dollar of sales to maintain their
market position.
We use capital to reinforce our market strength by maintaining ample spare
parts, taking trade-ins and buying popular new machines to provide quick
delivery. We hope to continue growing both sales and profits utilizing our
market-dominating strategies and hard work.
Through our acquisition of Wink Davis Equipment Company this year, Speizman
Industries became the largest distributor of laundry equipment in the U.S.,
distributing equipment made by the world's largest manufacturer of laundry
machines. This acquisition will continue to operate under the Wink Davis name.
This marks a substantial step in Speizman's efforts to diversify our operations
by joining with other market leaders that share our sales and business
philosophies.
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Speizman intends to continue being the wave in its markets. While we already
control major portions of some markets, there are still more customers to obtain
and satisfy. We believe that Lonati of Italy will continue to be on the cutting
edge of new technology in the sock knitting machine industry. As their largest
distributor, we can help usher in their new products and increase our markets in
North America.
Major innovations in the sock knitting and laundry equipment markets will help
to change the way these markets operate.
Technological breakthroughs by manufacturers of sock knitting equipment will
allow machines to close the toe as well as produce the sock. This should result
in significantly lower sock production costs and make our market even more
capital intensive. In addition, this innovation will produce a better quality
product and is expected to drive greater demand among Speizman's customers to
purchase our equipment.
In the laundry equipment arena, one of Wink Davis's major equipment suppliers
is working on new laundry machinery that utilizes CO2. As water resources become
scarcer in many parts of the world, carbon dioxide may one day replace the water
used in some laundries and in the bleaching of garments.
To help prepare our Company for these exciting innovations and growth,
Speizman has currently in place a team of leaders that includes highly
experienced veterans and a new generation of young and energetic managers. These
younger leaders already have the experience to understand the business plus the
intelligence to take us to the next level.
Speizman Industries has done its best to focus its attention in four critical
areas: product, people, philosophy and planning. With continued diligence in
these areas, we expect to continue creating greater value for our customers and
shareholders.
Sincerely yours,
/s/ ROBERT S. SPEIZMAN
Robert S. Speizman, President and CEO
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SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
<CAPTION>
JUNE 28, JUNE 29, JULY 1, JULY 2, JULY 3,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
<CAPTION>
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues $79,103 $46,280 $61,597 $69,526 $39,552
Cost of sales 65,935 40,547 53,986 60,004 32,635
Gross profit 13,168 5,733 7,611 9,522 6,917
Selling, general and
administrative expenses 8,855 6,577 5,478 4,350 3,651
Operating income (loss) 4,313 (844 ) 2,133 5,172 3,266
Interest (income) expense, net (18 ) (43 ) (15) 6 186
Income (loss) before taxes
on income 4,331 (801 ) 2,148 5,166 3,080
Taxes (benefit) on income 1,645 (228 ) 854 1,869 661
Net income (loss) 2,686 (573 ) 1,294 3,297 2,419
Preferred stock dividends -- -- -- 41 --
Net income (loss) applicable to common
stock $ 2,686 $ (573 ) $ 1,294 $ 3,256 $ 2,419
PER SHARE DATA:
Net income (loss) $ .80 $ (.17 ) $ .40 $ 1.12 $ 1.03
Weighted average number of shares 3,354 3,284 3,271 2,905 2,360
BALANCE SHEET DATA:
Working capital $18,741 $16,313 $17,613 $16,579 $ 4,553
Total assets 43,174 36,149 35,704 30,160 18,145
Short-term debt -- -- -- -- 175
Long-term debt, including current
maturity 112 148 147 293 1,060
Stockholders' equity 20,938 18,203 18,782 17,483 5,137
</TABLE>
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BUSINESS OVERVIEW
GENERAL
Speizman Industries, Inc. (the "Company") is the leading distributor of new sock
knitting machines in the United States. It distributes technologically advanced
sock knitting machines manufactured by Lonati, S.p.A., Brescia, Italy
("Lonati"), which the Company believes is the world's largest manufacturer of
hosiery knitting equipment. It also distributes Lonati sock and sheer hosiery
knitting machines in Canada and in Mexico. In addition, through sales
arrangements with other European textile machinery manufacturers, the Company
distributes other sock knitting machines, knitting machines for underwear and
other knitted fabrics and other equipment related to the manufacture of socks,
sheer hosiery and other textile products, principally in the United States and
Canada. The Company also sells dyeing and finishing equipment for the textile
industry. The Company sells textile machine parts and used textile equipment in
the United States and in a number of foreign countries.
ALL REFERENCES HEREIN ARE TO THE COMPANY'S 52-OR-53 WEEK FISCAL YEAR ENDING ON
THE SATURDAY CLOSEST TO JUNE 30. FISCAL 1997, 1996, 1995, AND 1994, EACH
CONTAINED 52 WEEKS AND ENDED ON JUNE 28, 1997, JUNE 29, 1996, JULY, 1, 1995 AND
JULY 2, 1994. FISCAL 1993 CONTAINED 53 WEEKS AND ENDED ON JULY 3, 1993. UNLESS
THE CONTEXT OTHERWISE REQUIRES, THE TERM THE "COMPANY" AS USED HEREIN INCLUDES
SPEIZMAN INDUSTRIES, INC.
The Company and Lonati entered into their present agreement for the sale of
Lonati machines in the United States in January 1992 (the "Lonati Agreement").
The Company and Lonati also entered into a similar agreement relating to the
Company's distribution of Lonati sock and sheer hosiery knitting machines in
Canada in January 1992 and in Mexico in January 1997. The Company has
distributed Lonati double cylinder machines in the United States continuously
since 1982. The Company began distributing Lonati single cylinder machines in
1989.
Pursuant to the Lonati Agreement, Lonati has appointed the Company as Lonati's
exclusive agent in the United States for the sale of its range of single and
double cylinder sock knitting machines and related spare parts as of the date of
the Lonati Agreement. Under the Lonati Agreement, the Company also serves as the
distributor of such equipment in the United States. Although the Lonati
Agreement does not establish the Company as the exclusive distributor of Lonati
sock machines in the United States, the Company in fact has exclusively
distributed Lonati double cylinder sock machines continuously since 1982 and
Lonati single cylinder sock knitting machines since 1989. The Lonati Agreement
extended to December 31, 1995 and continues from year to year thereafter,
although it may be terminated on 90 days written notice at any year end or
without notice in the event of a breach. The Company and Lonati also entered
into a similar agreement relating to the Company's distribution of Lonati sock
and sheer hosiery knitting machines in Canada in January 1992 and in Mexico in
January 1997.
The Lonati Agreement contains certain covenants and conditions relating to the
Company's sale of Lonati machines, including, among others, requirements that
the Company, at its own expense, promote the sale of Lonati machines and assist
Lonati in maintaining its competitive position, maintain an efficient sales
staff, provide for the proper installation and servicing of the machines,
maintain an adequate inventory of parts and pay for all costs of advertising the
machines. The Company is prohibited during the term of the Lonati Agreement from
distributing any machines or parts that compete with Lonati machines and parts.
The Company believes that it is and will remain in compliance in all material
respects with such covenants. The cost to the Company of Lonati machines, as
well as the delivery schedule of these machines, are totally at the discretion
of Lonati. The Lonati Agreement allows Lonati to sell machines directly to the
sock manufacturer with any resulting commission paid to the Company determined
on a case by case basis.
The Lonati single cylinder machines distributed by the Company are for the
knitting of athletic socks. The Lonati double cylinder machines are for the
knitting of dress and casual socks. The Lonati machines are electronic, high-
speed, and have computerized controls. Lonati single cylinder machines are
capable of knitting pouch heel and toe, reciprocated heel and toe and tube
socks. These and other features allow the rapid change of sock design, style and
size, result in increased production volume and efficiency and simplify the
servicing of the machines. The Company distributes these sock knitting machines
as well as Lonati sheer hosiery knitting machines in Canada and in Mexico. In
addition, the Company distributes the knitting machines, described below,
manufactured by Santoni, S.r.l., Brescia, Italy ("Santoni"), one of Lonati's
subsidiaries, in the United States, Canada and Mexico. Sales by the Company in
the United States, Canada and Mexico of machines manufactured by Lonati,
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S.p.A., generated the following percentages of the Company's net revenues: 60.1%
in fiscal 1997, 46.2% in fiscal 1996 and 44.4% in fiscal 1995. In addition,
sales of Santoni machines in the United States, Canada and Mexico generated
7.0%, 4.8% and 9.3% of the Company's net revenues in fiscal 1997, 1996 and 1995,
respectively.
In addition to the Lonati machines, the Company distributes new knitting and
other machines and equipment under written agreements and other arrangements
with the manufacturers. The following table sets forth certain information
concerning certain of these additional distribution arrangements:
<TABLE>
<CAPTION>
MANUFACTURER MACHINE TERRITORY
<S> <C> <C>
Santoni, S.r.l., Circular knitting machines for United States, Canada and Mexico
Brescia, Italy underwear, men's socks and women's
sheer hosiery and surgical support
hose
Conti Complett, S.p.A., Sock toe closing machines and sock United States and Canada
Milan, Italy turning devices
Sperotto Rimar, S.p.A., Fabric processing and finishing United States
Malo, Italy machines
Corino Macchine, S.r.l., Fabric handling equipment United States and Canada
Alba, Italy
Fimatex, Turning devices for sock machines United States
Scandicci, Italy
Orizio Paolo, S.p.A., Fabric knitting machines United States
Brescia, Italy
Tonello, S.r.l., Garment wet processing equipment United States, Canada and Mexico
Sarcedo, Italy
</TABLE>
There can be no assurance that the Company will not encounter significant
difficulties in any attempt to enforce any provision of the Lonati Agreement (or
any other agreement with a foreign manufacturer), or any agreement that may
arise in connection with the placement and confirmation of orders for the
machines manufactured by Lonati (or any other foreign manufacturer) or obtain an
adequate remedy for a breach of any such provision, due principally to the fact
that Lonati (or any other foreign manufacturer) is a foreign company.
The Company sells used machinery and parts to the textile industry. The Company
carries significant amounts of machinery and parts inventories to meet
customers' requirements and to assure itself of an adequate supply of used
machinery. The Company acts as a liquidator of textile mills and as a broker in
the purchase and sale of such mills.
MARKETING AND SALES
The Company markets and sells knitting machines and related equipment primarily
by maintaining frequent contacts with customers and understanding of its
customers' individual business needs. Salespersons will set up competitive
trials in a customer's plant and allow the customer to use the Company's machine
in its own work environment alongside competing machines for two weeks to three
months. The Company also offers customers the opportunity to send their
employees to the Company for training courses on the operation and service of
the machines and, depending on the number of machines purchased and the number
of employees to train, may offer such training courses at the customer's
facility. In addition, the Company exhibits its equipment at trade shows and
uses its private showroom to demonstrate new machines. These marketing
strategies are complemented by the Company's commitment to service and
continuing education. The Company also produces, at its own expense, training
videos for its major lines of equipment. At September 8, 1997, the Company
employed approximately 11 salespersons and 30 technical representatives. In
addition to its sales staff, the Company uses over 40 commission sales agents in
a number of foreign countries in connection with its sales of used machines.
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BACKLOG
The Company's backlog of unfilled orders for new and used machines was $16.8
million at June 28, 1997 as compared to $19.3 million at June 29, 1996 and $4.1
million at July 1, 1995. Management believes that all the Company's unfilled
orders at June 28, 1997 will be filled by the end of fiscal 1998. The period of
time required to fill orders varies depending on the machine ordered.
ACQUISITION OF WINK DAVIS EQUIPMENT COMPANY, INC.
On August 1, 1997, the Company acquired all of the outstanding common stock of
Wink Davis Equipment Company, Inc. ("Wink Davis"), pursuant to a Stock Purchase
Agreement dated July 31, 1997. The Company paid $9.5 million in cash with
additional conditional payments of up to an aggregate of $1.5 million in cash to
certain former shareholders over a five-year period based on certain pre-tax
earnings calculations. The purchase was financed with a new credit facility with
NationsBank entered into August 1, 1997. This facility replaces a former loan
agreement originally due to expire October 31, 1999. This facility provides up
to $37.0 million comprised of (a) a $7.0 million term loan with quarterly
principal payments of $250,000 beginning December 31, 1997, the balance due July
31, 2000; and (b) up to $30.0 million for letters of credit, including up to
$8.5 million in revolving funds. Amounts outstanding under the line of credit
bear interest at the greater of prime plus 1% or the Federal Funds Effective
Rate plus 1.5% for base rate loans and the 30, 60 or 90 day LIBOR rate plus 2%
for LIBOR loans. In connection with this line of credit, the Company granted a
security interest in accounts receivable and inventory.
Wink Davis is based in Atlanta, Georgia and distributes laundry equipment and
parts, principally in the southeastern United States and in the Chicago,
Illinois area. Wink Davis has exclusive distributorships for certain territories
with the following suppliers: Pellerin Milnor for washer extractor equipment and
Chicago Dryer for commercial dryers. Wink Davis also sells laundry machine parts
and offers various equipment repair services. In addition, Wink Davis has
distributorships with other suppliers of laundry-related equipment. Both of
these distributorships are renewed on an annual basis; however, Wink Davis has
in fact maintained relationships with both suppliers for over 25 years.
The primary customers include, but are not limited to, hotels, hospitals,
prisons and other institutional laundry service providers. Net revenues of Wink
Davis for the twelve months ended June 30, 1997 are approximately $32.6 million.
Since the acquisition occurred August 1, 1997, the results of operations of Wink
Davis have not been included in the Company's consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are generated primarily from its distribution of textile
equipment, principally knitting machines and dyeing and finishing equipment, to
manufacturers of textile products and, to a lesser extent, from the sale of
parts used in such equipment and the sale of used textile equipment.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 28, 1997 COMPARED TO YEAR ENDED JUNE 29, 1996
NET REVENUES. Net revenues in fiscal 1997 were $79.1 million as compared to
$46.3 million in fiscal 1996, an increase of $32.8 million or 70.9%. This
increase is due to a combination of price and volume increases. This increase
reflects a $32.2 million increase in sales of hosiery equipment, a $0.7 million
increase in sales of dyeing and finishing equipment, a $0.6 million increase in
sales of garment wet processing equipment, a $1.2 million increase in parts and
other sales activities partially offset by a $1.9 million decrease in sales of
sweater manufacturing and related equipment. The market for hosiery equipment is
influenced by the retail sector, changes in technology and general economic
conditions affecting the Company's customers.
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COST OF SALES. In fiscal 1997, cost of sales was $65.9 million as compared to
$40.5 million in fiscal 1996, an increase of $25.4 million or 62.6%. Cost of
sales as a percent of revenue decreased to 83.4% in fiscal 1997 from 87.6% in
fiscal 1996. This decrease results from increased demand for hosiery equipment
resulting in increased sales prices and increased field service efficiency
arising from increased volume. Management cannot predict whether these increased
gross profit margins will continue in the future as they are dependent on the
market for hosiery equipment.
SELLING EXPENSES. Selling expenses increased to $5.8 million in fiscal 1997 from
$4.7 million in fiscal 1996, an increase of 23.6%. The increase results from
overall increased selling activity, including salaries, sales commissions,
exhibition expenses and letter of credit expenses. These increases are partially
offset by elimination of expenses of the CopyGuard division, which was disposed
in fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
fiscal 1997 totaled $3.0 million, an increase of $1.1 million from $1.9 million
in fiscal 1996. The increase results primarily from additional salaries and
management bonuses.
INTEREST INCOME. Interest income is expressed net of interest expense. In fiscal
1997, interest income exceeded interest expense by $18,000. Net interest income
was $43,000 in fiscal 1996.
TAXES (BENEFIT) ON INCOME (LOSS). The provision for income taxes in fiscal 1997
is $1,645,000 or 38.0% of income before taxes. In fiscal 1996 the provision for
income taxes is a tax benefit of $228,000 or 28.5% of loss before taxes. The
higher effective tax rate in fiscal 1997 results from the combined effects of
non-deductible entertainment and life insurance expenses and U.S. profits taxed
at rates higher than foreign tax rates.
NET INCOME (LOSS). Net income for fiscal 1997 increased to $2.7 million compared
to a net loss of $0.6 million for fiscal 1996. Net income per share increased to
$0.80 per share in fiscal 1997 compared to a net loss per share of $0.17 for
fiscal 1996.
YEAR ENDED JUNE 29, 1996 COMPARED TO YEAR ENDED JULY 1, 1995
NET REVENUES. Net revenues in fiscal 1996 were $46.3 million as compared to
$61.6 million in fiscal 1995, a decrease of $15.3 million, or 24.9%. This
decrease reflects a $11.3 million decline in sales of hosiery equipment, a $7.3
million decline in sales of sweater manufacturing and related equipment, a $0.5
million decline in parts and other sales activities partially offset by a $3.8
million increase in sales of knitted fabric machines. The Company's backlog of
unfilled orders for new and used machines at June 29, 1996, was $19.3 million as
compared to $4.1 million at July 1, 1995. The improved level of backlog in 1996
results from substantially increased demand for sock knitting machines.
COST OF SALES. In fiscal 1996, cost of sales was $40.5 million as compared to
$54.0 million in fiscal 1995, a decrease of $13.5 million, or 24.9%, matching
the relative decline in revenues. Cost of sales as a percent of revenues was
87.6% in fiscal 1996, unchanged from fiscal 1995.
SELLING EXPENSES. Selling expenses increased to $4.7 million in fiscal 1996 from
$3.6 million in fiscal 1995, an increase of 31.2%. A significant element of the
increase was disposal of the CopyGuard sales division. During the third quarter
of fiscal 1996, management decided to dispose of the Company's CopyGuard
division. CopyGuard was developing a computer-generated matrix to invisibly mark
garments to prevent counterfeiting. However, its continuing cash requirements
were diverting funds from the Company's core business while prospects of
bringing the system to market, successfully, were diminishing. Although the
system developed by CopyGuard functioned successfully from a technical point of
view, the system had not proven to be commercially feasible for the prospective
users. Other elements in the increase were salespersons' salaries and
commissions, warehouse and office space costs, travel, insurance,
telecommunications, and insurance, partially offset by a decrease in letter of
credit expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
$1,878,000, down by $17,000 from $1,895,000 in fiscal 1995. This small decrease
resulted from declines in salaries and bonuses and bad debt provisions,
partially offset by increases in professional fees and in life insurance
expenses.
INTEREST INCOME. Interest income is expressed net of interest expense. In fiscal
1996, interest income exceeded interest expense by $43,000. Net interest income
was $15,000 in fiscal 1995.
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TAXES (BENEFIT) ON INCOME (LOSS). The provision for income taxes in fiscal 1996
is a tax benefit of $228,000 on the $801,000 loss from operations, or 28.5% of
the loss. In the prior year, the tax provision was 39.8% of income before taxes.
The current year effective rate reflects the combined effects of non-deductible
entertainment and life insurance expenses.
NET INCOME (LOSS). Net income applicable to common stock declined from $1.3
million in fiscal 1995 to a loss of $0.6 million. Net loss per share in fiscal
1996 was $0.17. This compares to $0.40 per share net income in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Note regarding Private Securities Litigation Reform Act: Statements made by the
Company which are not historical facts are forward looking statements that
involve risks and uncertainties. Actual results could differ materially from
those expressed or implied in forward looking statements. All such forward
looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Important factors that could cause
financial performance to differ materially from past results and from those
expressed and implied in this document include, without limitation, the risks of
acqusition of businesses (including limited knowledge of the businesses acquired
and misrepresentations by sellers) availability of financing, competition,
management's ability to manage growth, loss of customers, and a variety of other
factors.
The Company's operations require a substantial line of letters of credit to
cover its customers' orders. At June 28, 1997, the Company's credit facility
provides for an overall facility of $ 25.0 million for letters of credit,
including up to $4.0 million in revolving funds. This facility, originally due
to expire on October 31, 1999, has been refinanced in conjunction with the
purchase of all of the outstanding common stock of Wink Davis Equipment Company.
The Company entered into a new credit facility on August 1, 1997. This facility
provides up to $37.0 million comprised of (a) a $7.0 million term loan with
quarterly principal payments of $250,000 beginning December 31, 1997, the
balance due July 31, 2000; and (b) up to $30.0 million for letters of credit,
including up to $8.5 million in revolving funds. Amounts outstanding under the
line of credit bear interest at the greater of prime plus 1% or the Federal
Funds Effective Rate plus 1.5% for base rate loans and the 30, 60 or 90 day
LIBOR rate plus 2% for LIBOR loans. In connection with this line of credit, the
Company granted a security interest in accounts receivable and inventory.
Working capital at June 28, 1997 was $18.7 million as compared to $ 16.3 million
at June 29, 1996, an increase of $2.4 million. Operating activities in fiscal
1997 used $3.4 million in funds. In fiscal 1996, such activities provided $6.4
million in funds. This decrease in cash flow from operations resulted primarily
from substantial increases in accounts receivable and inventory. In fiscal 1997,
investing activities used $820,000 as compared to usage of $812,000 in the prior
year. As a result cash and cash equivalents decreased by $4.2 million to total
$3.8 million at June 28, 1997 as compared to $8.0 million at June 29, 1996.
SEASONALITY AND OTHER FACTORS
There are certain seasonal factors that may affect the Company's business.
Traditionally, manufacturing businesses in Italy close for the month of August,
and the Company's customers close for one week in July. Consequently, no
shipments or deliveries, as the case may be, of machines distributed by the
Company that are manufactured in Italy are made during these periods which fall
in the Company's first quarter. In addition, manufacturing businesses in Italy
generally close for two weeks in December, during the Company's second quarter.
Fluctuations of customer orders or other factors may result in quarterly
variations in net revenues from year to year.
EFFECTS OF INFLATION AND CHANGING PRICES
Management believes that inflation has not had a material effect on the
Company's operations.
A substantial portion of the Company's machine and spare part purchases are
denominated and payable in Italian lira. Currency fluctuations of the lira could
result in substantial price level changes and therefore impede or promote
import/export sales and substantially impact profits. However, to reduce
exposure to adverse foreign currency fluctuations during the period from
customer orders to payment for goods sold, the Company enters
10
<PAGE>
into forward exchange contracts. The Company is not able to assess the
quantitative effect that such currency fluctuations could have upon the
Company's operations. There can be no assurance that fluctuations in foreign
currency exchange rates will not have a significant adverse effect on future
operations.
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
A significant number of the Company's purchases of machinery for resale is
denominated in Italian Lira. In the ordinary course of business, the Company
enters into foreign exchange forward contracts to mitigate the effect of foreign
currency movements between the Italian Lira and the US dollar from the time of
placing the Company's purchase order until final payment for the purchase is
made. The contracts have maturity dates that do not exceed 12 months.
Substantially all of the increase or decrease of the Lira denominated purchased
price is offset by the gains and losses of the foreign exchange contract. The
unrealized gains and losses on these contracts are deferred and recognized in
the results of operations in the period in which the hedged transaction is
consummated.
At June 28, 1997, the Company had contracts maturing through April 1998 to
purchase approximately 27.4 billion Lira for approximately $16.2 million, which
approximates the spot rate on that date.
11
<PAGE>
MARKET AND DIVIDEND INFORMATION
The Company's Common Stock has been included for quotation on the NASDAQ
National Market System under the NASDAQ symbol "SPZN" since October 1993. The
following table sets forth, for the periods indicated, the high and low sale
prices as reported by the NASDAQ National Market System.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL 1996
First Quarter (ended September 30, 1995) $5.12 $3.50
Second Quarter (ended December 30, 1995) 3.88 2.62
Third Quarter (ended March 30, 1996) 4.50 2.50
Fourth Quarter (ended June 29, 1996) 5.62 3.50
FISCAL 1997
First Quarter (ended September 28, 1996) 5.75 3.75
Second Quarter (ended December 28, 1996) 6.88 4.38
Third Quarter (ended March 29, 1997) 7.13 4.50
Fourth Quarter (ended June 28, 1997) 6.25 3.88
</TABLE>
As of June 28, 1997, there were approximately 271 stockholders of record of the
Common Stock.
The Company has never declared or paid any dividends on its Common Stock.
Future cash dividends, if any, will be at the discretion of the Company's Board
of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, surplus, restrictive covenants in agreements
to which the Company may be subject, general business conditions and such other
factors as the Board of Directors may deem relevant. The Company's present
credit facility contains certain financial and other covenants that could limit
the Company's ability to pay cash dividends on its capital stock.
12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Speizman Industries, Inc.
We have audited the accompanying consolidated balance sheets of Speizman
Industries, Inc. and subsidiaries as of June 28, 1997 and June 29, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 28, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Speizman Industries,
Inc. and subsidiaries at June 28, 1997 and June 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 28, 1997, in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Charlotte, North Carolina
September 9, 1997
13
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
<S> <C> <C> <C>
NET REVENUES (Note 1) $79,103,225 $46,279,969 $61,596,833
COSTS AND EXPENSES:
Cost of sales 65,934,696 40,546,962 53,986,242
Selling expenses 5,810,360 4,699,280 3,582,719
General and administrative expenses 3,045,269 1,878,193 1,894,915
Total costs and expenses 74,790,325 47,124,435 59,463,876
4,312,900 (844,466) 2,132,957
INTEREST (INCOME) EXPENSE, net of
interest income of $113,137, $126,522
and $101,562 (17,651) (43,400) (14,858)
NET INCOME (LOSS) BEFORE TAXES 4,330,551 (801,066) 2,147,815
TAXES (BENEFIT) ON INCOME (Note 5) 1,645,000 (228,000) 854,000
NET INCOME (LOSS) $ 2,685,551 $ (573,066) $ 1,293,815
NET INCOME (LOSS) PER SHARE $ 0.80 $ (0.17) $ 0.40
Weighted average number of common and equivalent shares 3,353,786 3,283,828 3,271,464
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
14
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 28, JUNE 29,
1997 1996
ASSETS
CURRENT:
Cash and cash equivalents $ 3,832,534 $ 7,981,723
Accounts receivable (Notes 2 and 6) 21,075,138 12,160,449
Inventories (Notes 3 and 6) 12,970,134 11,639,552
Prepaid expenses and other current assets 2,988,786 2,340,111
TOTAL CURRENT ASSETS 40,866,592 34,121,835
PROPERTY AND EQUIPMENT: (Notes 4 and 7)
Leasehold improvements 750,140 550,684
Machinery and equipment 1,770,886 1,208,508
Furniture, fixtures and transportation equipment 1,078,429 1,218,570
3,599,455 2,977,762
Less accumulated depreciation and amortization (1,811,183) (1,525,058)
NET PROPERTY AND EQUIPMENT 1,788,272 1,452,704
OTHER 518,957 574,685
$43,173,821 $36,149,224
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $19,075,766 $14,864,567
Customers' deposits 1,380,621 2,723,466
Accrued expenses 1,667,621 209,881
Current maturities of long-term debt (Note 7) 1,769 11,051
TOTAL CURRENT LIABILITIES 22,125,777 17,808,965
LONG-TERM DEBT (Note 7) 110,344 137,334
TOTAL LIABILITIES 22,236,121 17,946,299
COMMITMENTS AND CONTINGENCIES (Notes 4, 9, 10, 11 and 12)
STOCKHOLDERS' EQUITY (Notes 8 and 9):
Common Stock -- par value $.10; authorized 20,000,000 shares, issued
3,262,866, outstanding 3,235,266; and authorized
6,000,000 shares, issued 3,236,199, outstanding 3,208,599 326,287 323,620
Additional paid-in capital 12,512,299 12,459,965
Retained earnings 8,209,911 5,524,360
Foreign currency translation adjustment (11,000) (5,223)
Total 21,037,497 18,302,722
Treasury stock, at cost, 27,600 common shares (99,797) (99,797)
TOTAL STOCKHOLDERS' EQUITY 20,937,700 18,202,925
$43,173,821 $36,149,224
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
15
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FOREIGN
ADDITIONAL CURRENCY
COMMON COMMON PAID-IN RETAINED TRANSLATION TREASURY STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS ADJUSTMENT STOCK EQUITY
BALANCE, JULY 2, 1994 3,234,949 $323,495 $12,455,590 $4,803,611 $ -- $(99,797) $17,482,899
Net income -- -- -- 1,293,815 -- -- 1,293,815
Exercise of stock options 1,250 125 4,375 -- -- -- 4,500
Foreign currency translation
adjustment -- -- -- -- 731 -- 731
BALANCE, JULY 1, 1995 3,236,199 323,620 12,459,965 6,097,426 731 (99,797 ) 18,781,945
Net Loss -- -- -- (573,066) -- -- (573,066)
Foreign currency translation
adjustment -- -- -- -- (5,954) -- (5,954)
BALANCE, JUNE 29, 1996 3,236,199 323,620 12,459,965 5,524,360 (5,223) (99,797 ) 18,202,925
Net income -- -- -- 2,685,551 -- -- 2,685,551
Exercise of stock options 26,667 2,667 52,334 -- -- -- 55,001
Foreign currency translation
adjustment -- -- -- -- (5,777) -- (5,777)
BALANCE, JUNE 28, 1997 3,262,866 $326,287 $12,512,299 $8,209,911 $ (11,000) $(99,797) $20,937,700
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
16
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,685,551 $ (573,066) $ 1,293,815
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 484,152 173,336 166,965
Provision for losses on accounts receivable 214,521 113,500 171,477
Provision for inventory obsolescence 154,133 139,436 200,000
Provision for deferred income taxes (121,000) (58,000) (75,000)
Provision for deferred compensation (25,220) 6,782 (6)
Foreign currency translation adjustment (5,777) (5,954) 731
(Increase) decrease in:
Accounts receivable (9,129,210) 3,804,734 (1,079,970)
Inventories (1,484,715) 1,649,026 (6,331,178)
Prepaid expenses (701,675) 159,244 (1,176,461)
Other assets 229,728 (69,076) 43,662
Increase (decrease) in:
Accounts payable 4,211,199 (192,360) 5,015,062
Accrued expenses and customers' deposits 114,895 1,214,580 (623,547)
Net cash provided by (used in) operating activities (3,373,418) 6,362,182 (2,394,450)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (846,845) (1,159,659) (520,274)
Proceeds from property and equipment disposals 27,125 347,557 59,377
Net cash used in investing activities (819,720) (812,102) (460,897)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long term debt (11,052) (5,216) (145,958)
Issuance of common stock upon exercise of stock options 55,001 -- 4,500
Net cash provided by (used in) financing activities 43,949 (5,216) (141,458)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,149,189) 5,544,864 (2,996,805)
CASH AND CASH EQUIVALENTS, at beginning of year 7,981,723 2,436,859 5,433,664
CASH AND CASH EQUIVALENTS, at end of year $ 3,832,534 $ 7,981,723 $ 2,436,859
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
17
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Speizman Industries, Inc. (the
"Company") include all of its subsidiaries, all of which are majority owned. All
material intercompany transactions (domestic and foreign) have been eliminated.
The financial statements of the Company's United Kingdom subsidiary are
translated from pounds sterling to U.S. dollars in accordance with generally
accepted accounting principles.
REVENUE RECOGNITION
The major portion of the Company's revenues consists of sales and commissions on
sales of machinery and equipment. The profit derived therefrom is recognized in
full at the time of shipment.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents. The carrying amount of cash and cash equivalents approximates
fair value because of the short-term maturity of these instruments.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is computed, in the
case of machines, on an identified cost basis and, in the case of other
inventories, on an average cost basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign currency contracts to reduce the foreign
currency exchange risks. Foreign currency hedging contracts obligate the Company
to buy a specified amount of a foreign currency at a fixed price in specific
future periods. Realized and unrealized gains and losses are recognized in net
income in the period of the underlying transaction. As of June 28, 1997, the
Company had contracts maturing through April 1998 to purchase approximately 27.4
billion Lira for approximately $16.2 million, which approximates the spot rate
on that date.
TAXES ON INCOME
The Company has adopted the FAS Statement No. 109, "Accounting for Income
Taxes". Accordingly, deferred tax liabilities or assets at the end of each
period are determined using the tax rate expected to be in effect when taxes are
actually paid or recovered. Income tax expense will increase or decrease in the
same period in which a change in tax rates is enacted.
INCOME PER SHARE
Income per share is computed on the weighted average number of common and
equivalent shares outstanding during the period. Common equivalent shares
include those common shares, which would be issued upon the exercise of the
stock options, when dilutive, net of shares assumed to have been repurchased
with the proceeds.
FISCAL YEAR
The Company maintains its accounting records on a 52-53 week fiscal year. The
fiscal year ends on the Saturday closest to June 30. Years ending June 28, 1997,
June 29, 1996 and July 1, 1995 included 52 weeks.
18
<PAGE>
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
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.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued FAS No. 128,
"Earnings per Share", which established new standards for computations of
earnings per share. Statement No. 128 will be effective for periods ending after
December 15, 1997 and will require presentation of: (1) "Basic Earnings per
Share", computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period and (2)
"Diluted Earnings per Share", which gives effect to all dilutive potential
common shares that were outstanding during the period, by increasing the
denominator to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. Had
FAS 128 been effective for the years ended June 28, 1997 and June 29, 1996,
basic and diluted earnings per share would have been as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Basic earnings per share $ 0.83 $(0.17)
Diluted earnings per share $ 0.82 $(0.17)
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementations of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about SEGMENTS OF AN ENTERPRISE and RELATED INFORMATION, (SFAS 131)
which supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. SFAS 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of this standard.
19
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND CREDIT RISK CONCENTRATION
The Company is engaged in the distribution of machinery for the textile
industry. With operations in the United States, Canada and the United Kingdom,
the Company primarily sells to customers located within the United States.
Export sales from the United States were approximately $12,433,000, $7,196,000
and $8,547,000 during fiscal 1997, 1996 and 1995, respectively. There were no
export sales by the Canadian operations. Sales of the Company's United Kingdom
subsidiary amounted to approximately $1,901,000 in 1997, essentially all of
which were to customers in the United Kingdom. This operation was closed during
fiscal 1997 with no significant current or on-going impact to the Company's
operations.
Financial instruments which potentially subject the Company to credit risk
consist principally of temporary cash investments and trade receivables. The
Company places its temporary cash investments with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution.
The Company reviews a customer's credit history before extending credit. An
allowance for doubtful accounts is established based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
To reduce credit risk the Company generally requires a down payment on large
equipment orders.
A substantial amount of the Company's revenues are generated from the sale of
sock knitting and other machines manufactured by Lonati, S.p.A. and one of its
wholly owned subsidiaries (Santoni). Sales by the Company in the United States
and Canada of machines manufactured by Lonati, S.p.A., generated the following
percentages of the Company's net revenues: 60.1% in 1997, 46.2% in 1996 and
44.4% in 1995. In addition, sales of Santoni machines in the United States and
Canada generated 7.0%, 4.8% and 9.3% of the Company's net revenues in fiscal
1997, 1996 and 1995, respectively. In 1997, approximately 11% and 10% of
revenues consisted of sales to the Company's two largest customers. In 1996,
approximately 9% and 6% of revenues consisted of sales to the Company's two
largest customers. In 1995, approximately 7% and 5% of revenues consisted of
sales to the Company's two largest customers. Generally, the customers
contributing the most to the Company's net revenues vary from year to year.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Trade $21,549,615 $12,420,405
Less allowance for doubtful accounts (474,477) (259,956)
Net accounts receivable $21,075,138 $12,160,449
</TABLE>
NOTE 3 -- INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Machines
New $ 3,961,362 $ 1,645,825
Used 4,807,479 6,565,310
Parts and supplies 4,201,293 3,428,310
Total $12,970,134 $11,639,552
</TABLE>
20
<PAGE>
NOTE 4 -- LEASES
The Company conducts its operations from leased facilities which include both
offices and warehouses. Its primary operating facility is leased from a
partnership in which Mr. Robert S. Speizman, the Company's president, has a 50%
interest. The lease extends through March 1998. Lease payments to the
partnership approximated $356,000, $323,000, and $204,000 in fiscal years 1997,
1996 and 1995, respectively.
The Company leases furniture and fixtures under noncancelable capital lease
agreements which expire at various dates through 1998.
Capitalized leases included in property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Furniture, fixtures and transportation equipment $ 6,568 $105,264
Less accumulated amortization (2,069 ) (89,037)
Net leased property $ 4,499 $ 16,227
</TABLE>
As of June 28, 1997, future net minimum lease payments under capital leases and
future minimum rental payments required under operating leases that have initial
or remaining noncancelable terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1998 $2,180 $605,193
1999 -- 181,102
2000 -- 69,719
2001 -- 4,936
2002 -- 4,936
Beyond -- 9,873
Total minimum lease payments $2,180 $875,759
Less amount representing interest (411 )
Present value of net minimum lease payments $1,769
</TABLE>
Total rent expense for operating leases approximated $1,021,600, $791,400 and
$515,800 for fiscal years 1997, 1996 and 1995, respectively.
21
<PAGE>
NOTE 5 -- TAXES ON INCOME
Provisions for federal and state income taxes in the consolidated statements of
operations are made up of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $1,482,000 $ (70,000) $673,000
Foreign 2,000 (85,000) 74,000
State 282,000 (15,000) 182,000
1,766,000 (170,000) 929,000
Deferred:
Federal (87,000) (50,000) $(54,000)
State (34,000) (8,000) (21,000)
(121,000) (58,000) (75,000)
Total taxes (benefit) on income $1,645,000 $(228,000) $854,000
</TABLE>
Deferred tax benefits and liabilities are provided for the temporary differences
between the book and tax bases of assets and liabilities. Deferred tax assets
(liabilities) are reflected in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Net current assets $383,000 $436,000
Net noncurrent assets (liabilities) 152,000 (22,000)
$535,000 $414,000
</TABLE>
Principal items making up the deferred income tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Inventory valuation reserves $ 162,000 $191,000
Depreciation (107,000) (78,000)
Deferred charges 107,000 69,000
Capitalized leases -- 4,000
Inventory capitalization 191,000 130,000
Accounts receivable reserves 182,000 97,000
Other -- 1,000
Net deferred tax asset $ 535,000 $414,000
</TABLE>
22
<PAGE>
The Company's effective income tax rates were different than the U.S. Federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit 4.3 3.6 3.5
Non-deductible expenses 1.5 (5.3) 1.7
Foreign tax rates (0.8) (4.9) 1.2
Net tax effect of prior year adjustments -- 2.5 --
Other (1.0) (1.4) (0.6)
Effective tax rate 38.0% 28.5% 39.8%
</TABLE>
NOTE 6 -- LINE OF CREDIT
The Company has a credit facility with NationsBank, expiring October 31, 1999.
This facility provides $25.0 million including up to a maximum of $4.0 million
for direct borrowings, with the balance available for the issuance of
documentary letters of credit. Amounts outstanding under the line of credit bear
interest at the greater of prime plus 1% or the Federal Funds Effective Rate
plus 1.5% for base rate loans and the 30, 60 or 90 day LIBOR rate plus 2.0% for
LIBOR loans. In connection with this line of credit, the Company granted a
security interest in accounts receivable and inventory, as defined in the loan
agreement. (See Note 12)
This credit facility contains certain covenants that require, among other
things, the Company to maintain levels of current assets to current liabilities,
total liabilities to net worth, working capital, tangible net worth,
restrictions on dividends and certain fixed charge coverage. As of June 28,
1997, the Company was in compliance with such covenants.
This credit facility was refinanced on August 1, 1997 in conjunction with the
purchase of Wink Davis Equipment Company. (See Note 13)
NOTE 7 -- LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 28, 1997 JUNE 29, 1996
TOTAL CURRENT TOTAL CURRENT
<S> <C> <C> <C> <C>
Capital lease obligations (Note 4) $ 1,769 $1,769 $ 12,821 $11,051
Other 110,344 -- 135,564 --
Total 112,113 $1,769 148,385 $11,051
Current maturities (1,769) (11,051)
$110,344 $137,334
</TABLE>
Annual maturities of long-term debt are 1998, $1,769; 1999, $0; 2000, $0; 2001,
$0; 2002, $0; thereafter, $110,344.
NOTE 8 -- STOCK OPTIONS
The Company has reserved 125,000, 250,000, 145,000 and 145,000 shares of Common
Stock under four employee stock plans, adopted in 1981, 1991, 1995 and 1996,
respectively. As of June 28, 1997, options to purchase 11,522, 165,403, 145,000
and 145,000 were outstanding under the 1981, 1991, 1995 and 1996 Plans,
respectively. Each option granted under the 1981, 1991 and 1995 Plans becomes
exercisable in cumulative increments of 20%, 50%, 80% and 100% on the first,
second, third and fourth anniversaries of the date of grant respectively. Each
option granted under the 1996 Plan becomes exercisable in cumulative increments
of 50% and 100% on the first and second anniversaries of the date of grant
respectively. All options, subject to certain exceptions
23
<PAGE>
with regard to termination of employment and the percentage of outstanding
shares of common stock owned, must be exercised within ten (10) years from the
date of the grant. The option price under the 1981 and 1991 Plans, subject to
certain exceptions, may not be less than 100% of the fair market value per share
of Common Stock on the date of the grant of the option or 110% of such value for
persons who control 10% or more of the voting power of the Company's stock on
the date of the grant. The option price under the 1995 and 1996 Plans is not
limited and may be less than 100% of the fair market value on the date of the
grant. A summary of employee stock option transactions and other information for
1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
YEAR ENDED
WEIGHTED WEIGHTED WEIGHTED
JUNE 28, AVERAGE JUNE 29, AVERAGE JULY 1, AVERAGE
1997 PRICE/SH. 1996 PRICE/SH. 1995 PRICE/SH.
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning of 334,092 $ 3.13 150,429 $ 3.15 124,957 $ 2.71
year
Options granted 159,500 6.00 183,663 3.10 29,722 4.84
Options exercised (26,667) 2.06 -- -- (1,250) 1.88
Options expired -- -- -- -- (3,000) 1.88
Shares under option, end of year 466,925 $ 4.17 334,092 $ 3.13 150,429 $ 3.15
Options exercisable 141,668 117,086 78,521
Prices of options exercised $ 2.063 -- $ .75 to
-- $ 1.875
Prices of options outstanding, $ .75 to $ .75 to $ .75 to
end of year $ 6.00 $ 5.50 $ 5.50
</TABLE>
The Company has reserved 15,000 shares of Common Stock under a non-employee
directors stock option plan adopted in 1995. Each option granted under the Plan
becomes exercisable in cumulative increments of 50% and 100% on the first and
second anniversaries of the date of the grant, respectively, and subject to
certain exceptions must be exercised within ten (10) years from the date of the
grant. The option price equals the fair market value per share of Common Stock
on the date of the grant. Options to purchase 6,000 shares were granted and
outstanding at the end of the year at a price of $2.875 to $5.4375.
24
<PAGE>
A summary of non-employee directors stock option and other information for 1997
and 1996 follows:
<TABLE>
<CAPTION>
YEAR ENDED
WEIGHTED WEIGHTED
JUNE 28, AVERAGE JUNE 29, AVERAGE
1997 PRICE/SH. 1996 PRICE/SH.
<S> <C> <C> <C> <C>
Shares under option, beginning of year 3,000 $ 2.88 -- $--
Options granted 3,000 5.44 3,000 2.88
Options exercised -- -- -- --
Options expired -- -- -- --
Shares under option, end of year 6,000 $ 4.16 3,000 $ 2.88
Options exercisable 1,500 --
Prices of options exercised -- --
Prices of options outstanding, end of year $2.875 to $2.875
$ 5.4375
</TABLE>
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants: expected lives of 9.2 years, expected volatility of
0.578, risk-free interest rate of 6.5% and dividend yield of 0.0%.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. Had compensation cost
for the Company's stock option plans been determined based on the fair value at
the grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 28, JUNE 29,
1997 1996
<S> <C> <C>
Pro forma net income $2,512,366 $(627,969)
Pro forma earnings per share $ 0.75 $ (0.19)
</TABLE>
The following table summarizes information about stock options outstanding at
June 28, 1997:
<TABLE>
<S> <C>
RANGE OF EXERCISE PRICES $0.75 to $6.00
Outstanding options
Number outstanding at June 28, 1997 472,925
Weighted average remaining contractual life (years) 7.8
Weighted average exercise price $ 4.17
Exercisable options
Number outstanding at June 28, 1997 143,168
Weighted average exercise price $ 3.06
</TABLE>
The weighted-average fair value of options granted during the year was $4.47.
NOTE 9 -- STOCK REDEMPTION AGREEMENT
The Company has an agreement with its principal holder whereby, upon his death,
the Company is obligated to redeem a portion of the stock in the Company held by
the estate. The redemption price for common stock is to be the fair market value
of common stock, less 5%, plus any accrued dividends. In no case will the
Company pay
25
<PAGE>
out more than the amount of life insurance proceeds received by the Company as a
result of the death of the stockholder.
At June 28, 1997, there were 635,649 common shares covered by the above
agreement. The face value of life insurance carried by the Company under this
agreement amounts to $1,150,000.
NOTE 10 -- DEFERRED COMPENSATION PLANS
The Company has deferred compensation agreements with two employees providing
for payments amounting to $2,056,680 upon retirement and from $1,546,740 to
$2,181,600 upon death prior to retirement. One agreement, as modified, has been
in effect since 1972 and the second agreement was effective October 1989. Both
agreements provide for monthly payments on retirement or death benefits over
fifteen year periods. Both agreements are funded under trust agreements whereby
the Company pays to the trust amounts necessary to pay premiums on life
insurance policies carried to meet the obligations under the deferred
compensation agreements.
Charges to operations applicable to those agreements were approximately $48,885,
$53,885 and $43,885 for the fiscal years 1997, 1996 and 1995, respectively.
NOTE 11 -- EMPLOYEES' RETIREMENT PLAN
The Company adopted a 401(k) retirement plan, effective October 1, 1989, for all
qualified employees of the Company to participate in the plan. Employees may
contribute a percentage of their pretax eligible compensation to the plan, and
the Company matches 50% (25% prior to September 13, 1996) of each employee's
contribution up to 4% of pretax eligible compensation. The Company's matching
contributions totaled approximately $47,000, $21,000 and $17,000 in fiscal years
1997, 1996 and 1995, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company had outstanding commitments backed by letters of credit of
approximately $16,631,000 and $13,244,000 at June 28, 1997 and June 29, 1996,
respectively, relating to the purchase of machine inventory for delivery to
customers.
The Company has not obtained product liability insurance to date due to the
prohibitive cost of such insurance. The nature and extent of distributor
liability for product defects is uncertain. The Company has not engaged in
manufacturing activities since 1990, and management presently believes that
there is no material risk of loss to the Company from product liability claims
against the Company as a distributor.
NOTE 13 -- SUBSEQUENT EVENT
On August 1, 1997, the Company purchased all of the outstanding common stock of
Wink Davis Equipment Company, Inc. ("Wink Davis"), pursuant to a Stock Purchase
Agreement dated July 31, 1997. The Company paid $9.5 million. There is an
additional conditional payment of up to $1.5 million in cash over a five-year
period based on certain pre-tax earnings calculations. Wink Davis is based in
Atlanta, Georgia and distributes laundry equipment and parts, principally in the
southeastern United States, as well as in the Chicago, Illinois area. The
acquisition has been accounted for by the purchase method at August 1, 1997.
Since the acquisition was accounted for at August 1, 1997, the results of
operations of Wink Davis have not been included in the Company's consolidated
financial statements. Net revenues of Wink Davis for the twelve months ended
June 30, 1997 were approximately $32.6 million.
NOTE 14 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED
<CAPTION>
JUNE 28, JUNE 29, JULY 1,
1997 1996 1995
<S> <C> <C> <C>
Cash paid during year for:
Interest $ 101,315 $ 81,578 $ 86,704
Income taxes 1,440,696 120,086 524,464
</TABLE>
26
<PAGE>
CORPORATE INFORMATION
OFFICERS
Robert S. Speizman
CHAIRMAN OF THE BOARD
AND PRESIDENT
Josef Sklut
VICE PRESIDENT-FINANCE,
TREASURER AND SECRETARY
James H. McCorkle, III
CONTROLLER AND
ASSISTANT SECRETARY
TRANSFER AGENT AND
REGISTRAR
First-Citizens Bank
& Trust Co.
Corporate Trust Dept.
P.O. Box 29522
Raleigh, N.C. 27626
DIRECTORS
Robert S. Speizman
CHAIRMAN OF THE BOARD
AND PRESIDENT
Steven P. Berkowitz
CHAIRMAN OF THE BOARD
OF MARWEN FOUNDATION
William Gorelick
PRIVATE INVESTOR
Scott C. Lea
CHAIRMAN OF THE BOARD,
LANCE, INC.
Josef Sklut
VICE PRESIDENT-FINANCE,
TREASURER AND SECRETARY
LOCATIONS
Speizman Industries, Inc.
Executive Offices:
508 W. Fifth Street
Charlotte, N.C. 28202
Wink Davis Equipment
Company, Inc.
800 Miami Circle, NE
Atlanta, GA 30324
Speizman Canada, Inc.
5205 boul. Metropolitain est,
Suite 3
Montreal, Quebec H1R 1Z7
Canada
LISTING
Speizman Industries, Inc.
Common Stock is listed
on the NASDAQ National
Market System under the
symbol "SPZN."
GENERAL COUNSEL
Odom & Groves, P.C.
Charlotte, N.C.
INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
BDO Seidman, LLP
Charlotte, N.C.
FORM 10-K
Copies of the Company's Annual Report on Form 10-K for the year ended June 28,
1997, may be obtained without charge by writing:
Mr. Josef Sklut
Speizman Industries, Inc.
P.O. Box 31215
Charlotte, N.C. 28231
