FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-8544
SPEIZMAN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0901212
------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Griffith Road 28217
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Charlotte, North Carolina (Zip Code)
(Address of principal executive offices)
(704) 559-5777
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(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if
changed since last report)
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Outstanding at
Class of Common Stock November 3, 2000
--------------------- ----------------
Par value $.10 per share 3,252,428
Page 1
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SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets....................... 3 - 4
Consolidated Condensed Statements of Operations............. 5
Consolidated Condensed Statement of Comprehensive Income ... 6
Consolidated Condensed Statements of Cash Flows............. 7
Notes to Consolidated Condensed Financial Statements........ 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11 - 17
PART II. OTHER INFORMATION:
Item 6. Exhibits and reports on Form 8-K......................... 18
</TABLE>
Page 2
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SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, July 1,
2000 2000
------------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ - $ 713,754
Accounts receivable, less allowances of
$689,986 and $601,805 18,943,694 30,722,678
Inventories 19,599,837 16,489,494
Prepaid expenses and other current assets 4,848,358 6,181,283
------------- -----------
URRENT ASSETS 43,391,889 54,107,209
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PROPERTY AND EQUIPMENT:
Building and leasehold improvements 7,337,706 7,310,261
Machinery and equipment 1,016,656 1,008,656
Furniture, fixtures and transportation equipment 1,778,708 1,779,829
------------- -----------
Total 10,133,070 10,098,746
Less accumulated depreciation and amortization (2,327,218) (2,092,204)
------------- -----------
NET PROPERTY AND EQUIPMENT 7,805,852 8,006,542
------------- -----------
INCOME TAX RECEIVABLE, LONG TERM 1,789,813 -
OTHER LONG-TERM ASSETS 858,951 910,897
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION 5,120,410 5,230,410
------------- -----------
$58,966,915 $68,255,058
============= ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, July 1,
2000 2000
------------- -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 344,058 $ -
Accounts payable 15,052,133 20,196,790
Customers' deposits 4,177,281 3,351,778
Accrued liability - cash flow derivatives 1,324,680 -
Accrued expenses 1,163,925 1,491,593
Current maturities of long-term debt 904,332 884,996
----------- -----------
TOTAL CURRENT LIABILITIES 22,966,409 25,925,157
Long-term debt 257,498 458,001
Note Payable - bank line of credit 11,488,000 13,800,000
Obligation under capital lease 4,568,501 4,581,593
----------- -----------
TOTAL LIABILITIES 39,280,408 44,764,751
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - par value $.10; authorized 20,000,000
shares, issued 3,393,228, outstanding 3,252,428 339,323 339,323
Additional paid-in capital 13,045,200 13,045,200
Accumulated other comprehensive loss (2,020,142) -
Retained earnings 8,908,949 10,692,607
----------- -----------
Total 20,273,330 24,077,130
Treasury stock, at cost, 140,800 shares (586,823) (586,823)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 19,686,507 23,490,307
----------- -----------
$58,966,915 $68,255,058
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 4
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SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the Three Months Ended
----------------------------------------
September 30, 2000 October 2, 1999
(13 Weeks) (13 Weeks)
------------------ ---------------
<S> <C> <C>
REVENUES $20,895,881 $27,551,666
------------------ ---------------
COSTS AND EXPENSES:
Cost of sales 19,348,129 22,567,407
Selling expenses 2,011,067 2,147,351
General and administrative expenses 1,880,893 1,796,343
------------------ ---------------
Total costs and expenses 23,240,089 26,511,101
------------------ ---------------
(2,344,208) 1,040,565
NET INTEREST EXPENSE 511,404 386,790
------------------ ---------------
Income (loss) before taxes on income (2,855,612) 653,775
TAXES (BENEFIT) ON INCOME (LOSS) (1,071,954) 263,000
------------------ ---------------
NET INCOME (LOSS) $(1,783,658) $ 390,775
================== ===============
Basic earnings (loss) per share $ (0.55) $ 0.12
Diluted earnings (loss) per share $ (0.55) $ 0.12
Weighted average shares outstanding:
Basic 3,252,428 3,228,706
Diluted 3,252,428 3,290,707
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 5
<PAGE>
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the quarter ended September 30, 2000 Pretax (expense) Tax Benefit After-Tax Loss
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net loss ............................................... $ (1,783,658)
Other income (loss):
Cumulative effect of adopting SFAS 133 as of
July 2, 2000 .................................... $ (1,997,842) $ 799,136 (1,198,706)
Change in fair value of cash flow hedge contracts... (1,369,061) 547,625 (821,436)
------------------ ----------------- -----------------
Total other income (loss) .......................... $ (3,366,903) $ 1,346,761 (2,020,142)
------------------ ----------------- -----------------
Comprehensive loss ..................................... $ (3,803,800)
=================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 6
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SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
------------------------------
For the Three Months Ended
------------------------------
09-30-00 10-02-99
(13 Weeks) (13 Weeks)
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,783,658) $ 390,775
Adjustments to reconcile net income (loss) to cash used
by operating activities:
Depreciation and amortization ,362,362 364,269
Provision for losses on accounts receivable 100,950 37,204
Provision for inventory obsolescence 367,406 226,190
Gain on disposal of assets (658) (3,699)
(Increase) decrease in:
Accounts receivable 11,678,034 711,943
Inventories (3,477,749) (2,531,361)
Prepaid expenses and other current assets (729,648) (49,410)
Other assets (391,105) 33,277
Increase (decrease) in:
Accounts payable and bank overdraft (4,800,599) (4,819,173)
Accrued expenses and customers' deposits 497,835 (188,212)
------------ -----------
Net cash provided (used) in operating activities 1,826,170 (5,828,197)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (38,323) (97,606)
Proceeds on sale of assets 4,658 4,837
------------ -----------
Net cash used in investing activities (33,665) (92,769)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit agreement (2,312,000) 6,400,000
Principal payments on long-term debt (194,259) (384,610)
------------ -----------
Net cash provided (used) by financing activities (2,506,259) 6,015,390
------------ -----------
NET INCREASE (DECREASE) IN CASH (713,754) 94,424
CASH AND CASH EQUIVALENTS at beginning of period 713,754 642,167
------------ -----------
CASH AND CASH EQUIVALENTS at end of period $ - $ 736,591
============ ===========
Supplemental Disclosures:
Cash paid during period for:
Interest $ 474,653 $ 358,295
Income taxes 40,200 10,639
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Management Statement re Adjustments
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present the
Registrant's financial position, the results of operations and
changes in cash flow for the periods indicated.
The accounting policies followed by the Registrant are set forth on
page F-6 of the Registrant's Form 10-K for the fiscal year ended July
1, 2000, which is incorporated by reference.
Note 2. Comprehensive Income (Loss)
Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income, requires the disclosure of comprehensive
income, which includes, in addition to net income, other
comprehensive income consisting of unrealized gains and losses which
bypass the traditional income statement and are recorded directly
into a separate section of shareholders' equity on the balance sheet.
The components of other comprehensive income for the Company consist
of unrealized gains and losses relating to foreign currency contracts
treated as cash flow hedges for accounting purposes.
Note 3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, July 1,
2000 2000
------------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Machines $13,662,755 $11,289,844
Parts and supplies 5,937,082 5,199,650
----------- -----------
Total $19,599,837 $16,489,494
=========== ===========
</TABLE>
Note 4. Taxes on Income
Taxes on income are allocated to interim periods on the basis of an
estimated annual effective tax rate. Other comprehensive losses are
net of an estimated deferred tax benefit of approximately $1.3
million for the quarter ending September 30, 2000.
Note 5. Net Income (Loss) Per Share
Basic net income per share includes no dilution and is calculated by
dividing net income by the weighted average number of common shares
outstanding for the period. Diluted net income per share reflects the
potential dilution of securities that could share in the net income
of the Company which consists of stock options (using the treasury
stock method). In a period with a net loss, the weighted average
shares outstanding will be the same.
Note 6. Intangibles
Goodwill is calculated as the excess cost of purchased businesses
over the value of their underlying net assets and is being amortized
on a straight-line basis over fifteen years.
Page 8
<PAGE>
Note 7. Risk Management and Derivative Financial Instruments
Effective July 2, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as amended by SFAS No. 137, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement became
effective for all fiscal quarters beginning after June 15, 2000.
The statement requires the Company to recognize all derivatives on
the balance sheet at fair value. If the derivative is a hedge,
changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments
through earnings or recognized in comprehensive income (equity) until
the hedged item is recognized in earnings. The ineffective portion of
a derivative's change in fair value is recognized in earnings. In
transition, the statement required all hedging relationships to be
evaluated and designated anew, resulting in cumulative-effect-type
transition adjustments to earnings and other comprehensive income
(equity).
The Company has historically entered into forward exchange contracts
to reduce the foreign currency exchange risks associated with its
committed and anticipated lira denominated purchases, and not for
speculation. As of July 2, 2000, the Company had contracts to
purchase approximately 83.3 billion lira for approximately $46.3
million, for which the market value at July 2, 2000 was approximately
$41.2 million. Of these contracts, the Company has designated
approximately 37 billion lira as cash flow hedges for anticipated
purchases and approximately 46.3 billion lira as fair value hedges
for committed purchase contracts. For fair value hedges, changes in
the fair value of the hedging instrument are recognized in the
statement of operations in the period that the underlying hedged
transaction is recognized as a sale. For cash flow hedges, changes in
the fair value of the hedging instrument are deferred and recorded in
other comprehensive income (equity), then recognized in the statement
of operations in the same period as the sale is recognized on the
hedged item.
The following details the components of other comprehensive income
(loss) related to changes in the fair value associated with the
Company's cash flow hedges:
<TABLE>
<CAPTION>
<S> <C>
Cumulative effect, net of income tax benefit, of
adopting SFAS 133, as of July 2, 2000 ................... $(1,198,706)
Change in fair value of cash flow hedge contracts from
further lira devaluation for the quarter ending
September 30, 2000, net ................................. (821,436)
------------
Balance at September 30, 2000 ............................... $(2,020,142)
============
</TABLE>
Note 8. Line of Credit
On November 13, 2000, the Company amended its agreement with
SouthTrust Bank, N.A. for its revolving credit facility maturing on
May 31, 2003. The term of the amendments as stated in the amended
agreement shall remain in effect until June 30, 2001, or later by the
election of the Bank. The amended agreement provides for a revolving
credit facility up to $20 million and an additional line of credit
for issuance of Documentary Letters of Credit of $7.5 million. The
availability under this facility is limited to a borrowing base as
defined in the amended agreement. The $20.0 million Revolving Credit
Facility also incorporates a $2.0 million line of credit specific for
funding
Page 9
<PAGE>
uncommitted foreign currency cash flow hedge contracts that
mature in various amounts primarily during the months of December
2000 through April 2001.
Amounts outstanding under the amended line of credit are broken down
into two components for the calculation of interest expense: the
London Interbank Offered Rate (LIBOR) component that accrues
interest at the LIBOR rate plus 3%, and a base rate component that
accrues interest at prime plus 1 1/4%. Prior to the amendment and
based upon the Company's funded debt as defined in the original
agreement, the LIBOR component accrued interest at the LIBOR rate
plus 1 1/2% to 2 1/2%, and the base rate component accrued interest
at prime plus 0% to 1%. The rates are scaled based upon the
Company's funded debt as defined in the original agreement.
The amended Credit Facility waives certain covenants that the
Company was not in compliance with as of the September 30, 2000 as
stated in the original agreement and contains specific covenants
that require, among other things, the Company to maintain a
specified level of earnings, tangible net worth, and debt to equity
ratios in each of the three quarters for the balance of fiscal year
2001. The facility is secured by accounts receivable, inventory and
outstanding Documentary Letters of Credit.
Note 9. Segment Information
The Company operates primarily in two segments of business, textile
equipment and laundry equipment and services. The table below
summarizes financial data by segment:
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------
09-30-00 10-02-99
----------- ------------
<S> <C> <C>
Total revenues for the period ended
Textile equipment ....................... $13,536,630 $19,223,927
Laundry equipment and services ........... 7,359,251 8,327,739
----------- -----------
$20,895,881 $27,551,666
Income before interest and taxes for
the period ended
Textile equipment ....................... $(2,361,326) $ 909,458
Laundry equipment and services ........... 17,118 131,107
------------ -------------
$(2,344,208) $ 1,040,565
Total assets for the period ended
Textile equipment ....................... $45,478,433 $41,541,453
Laundry equipment and services ........... 13,488,482 12,585,909
------------ ------------
$58,966,915 $54,127,362
============ ============
</TABLE>
Note 10. Subsequent Event
Subsequent to September 30, 2000, the lira has continued to devalue
in relation to the U.S. dollar. On November 13, 2000, the Company
commenced entering into offsetting foreign currency derivatives in
order to fix its exposure on the foreign currency contracts
associated with its cash flow hedges. As of November 13, 2000, and in
accordance with Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133), as amended by SFAS No. 137, the cash flow hedges are deemed
ineffective for hedge purposes. Accordingly, the Company expects to
report in its statement of operations for the second quarter of
fiscal year 2001 a recognized loss on the settlement of cash flow
derivatives in the range of $3.8 million to $4.0 million, before
income tax benefit.
Page 10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
-------
Speizman Industries, Inc. and subsidiaries (collectively the "Company") is a
major distributor operating through six companies: Speizman Industries, Inc.
("Speizman"), Wink Davis Equipment Co., Inc. ("Wink Davis"), Todd Motion
Controls, Inc. ("TMC"), Speizman Yarn Equipment, Inc. ("Speizman Yarn"),
Speizman Canada, Inc. ("Speizman Canada") and Speizman de Mexico S.A. de C.V.
("Speizman Mexico"). Speizman Industries, Speizman Canada and Speizman Mexico
(collectively "Speizman Industries") distributes sock knitting machines, other
knitting equipment and related parts. Wink Davis sells commercial and industrial
laundry equipment, including the distribution of machines and parts as well as
installation and after sales service. TMC assembles, distributes and services
automated boarding, finishing and packaging equipment used in the sock
manufacturing industry. Commencing in January 2001, the Company expects to
source TMC and other related automation equipment in connection with its intent
to license TMC patents to an unrelated party. Speizman Yarn distributes
equipment and related parts used in the yarn processing industry.
DISCLOSURE ABOUT FOREIGN CURRENCY LOSSES
----------------------------------------
Generally, Speizman Industries' purchases of foreign manufactured machinery and
spare parts for resale are denominated in Italian lira. As part of its risk
management programs, the Company historically has used forward exchange
contracts to protect against the currency exchange risk associated with the
Company's anticipated and firm commitments of lira-denominated purchases for
resale. In cases where anticipated or firm commitments are cancelled or
postponed that were previously hedged with foreign currency contracts, the
utilization of these forward exchange contracts on future purchases may
positively or negatively affect the earnings of the Company, depending upon the
position of the U.S. dollar against the lira at the time of the actual
purchases.
The Company cancelled or postponed orders during calendar year 2000 due to
unanticipated delays associated with the closed toe machines as well as
cancellations by customers who had signed sales orders with the Company for
closed toe hosiery and knitted fabric equipment. Associated with these cancelled
purchase orders, the Company had committed to purchase contracts of
approximately 76 billion lira. The Company has determined that the utilization
of this lira during fiscal year 2001 coupled with the continual strengthening
position of the dollar will have a significant adverse effect on net income
during fiscal year 2001. The adverse effect on earnings during the first quarter
ending September 30, 2000 was approximately $1.3 million. The Company
anticipates, based upon its currently projected sales and its current
outstanding fair value hedge contracts associated with purchase commitments that
a consistent adverse effect should continue over the remainder of the fiscal
year 2001 amounting to reduced net income of approximately $2.7 million during
this period.
Additionally, of the 76 billion lira contracts associated with the cancelled
purchase orders, approximately 37 billion lira remain uncommitted and are
treated as cash flow hedges for accounting purposes. For cash flow hedges,
changes in the fair value of the hedging instrument are deferred and recorded in
other comprehensive income (equity), then recognized in the statement of
operations in the same period as the sale is recognized on the hedged item. The
amount recognized as a component of other comprehensive loss as of September 30,
2000 was approximately $3.3 million, less tax benefit of approximately $1.3
million.
Page 11
<PAGE>
The following details the components of other comprehensive income (loss)
related to changes in the fair value associated with the Company's cash flow
hedges as of September 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Cumulative effect, net of income tax benefit as of
July 2, 2000 ............................................ $(1,198,706)
Change in fair value of cash flow hedge contracts
from further lira devaluation for the quarter
ending September 30, 2000, net .......................... (821,436)
------------
Balance at September 30, 2000 ............................... $(2,020,142)
============
</TABLE>
In light of the lira continuing to devalue against the dollar, on November 13,
2000, the Company commenced entering into offsetting foreign currency
derivatives in order to fix its exposure on the foreign currency contracts
associated with its cash flow hedges. As of November 13, 2000, and in accordance
with Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), as amended by SFAS No.
137, the cash flow hedges are deemed ineffective for hedge purposes.
Accordingly, the Company expects to report in its statement of operations for
the second quarter of fiscal year 2001 a recognized loss on the settlement of
cash flow derivatives in the range of $3.8 million to $4.0 million.
In summary, the total losses associated with the utilization of the Company's
fair value hedge contracts and the settlement of its cash flow hedges are
projected to be in the range of approximately $7.8 million to $8.0 million for
fiscal year 2001, before tax benefit. In the future, currency fluctuations of
the lira could result in substantial price level changes and therefore impede or
promote import/export sales and substantially impact profits. Generally, the
Company is not able 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 Speizman Industries' future operations. In addition, the
Company is continually evaluating other alternatives to limit its risk on
foreign currency fluctuations including future foreign purchases denominated in
U.S. dollars.
RESULTS OF OPERATIONS
---------------------
Revenues for the Company's first fiscal quarter were $20.9 million, a decrease
of approximately $6.7 million as compared to the same quarter of the prior
fiscal year. Sales of textile equipment and laundry equipment decreased by
approximately $5.7 million and $1.0 million, respectively.
The largest component of the decrease relates to knitted fabric equipment sales.
Knitted fabric equipment includes the Santoni line for producing ladies'
seamless apparel. Revenues for knitted fabric equipment decreased by
approximately $6.7 million. This decrease is largely related to the reduced
market demand in this category. This decrease was offset by higher sales of
hosiery equipment including some deliveries of closed toe equipment. The
decrease in laundry equipment was anticipated and is due to the timing of
completion on certain installation projects that should be recognized in
subsequent periods.
Cost of sales as a percentage of revenues increased unfavorably to 92.6% in the
first fiscal quarter compared to 81.9% for the same period in the prior year.
The primary increase in total cost of sales was primarily attributable to
increased costs of approximately $1.3 million on lira-denominated equipment and
parts sales. The cost increase resulted from the continual devaluation of the
lira over the past twelve months, and the Company utilizing foreign exchange
contracts that had a higher effective cost in U.S. dollars than current Lira
market rates at time of purchase (refer to further discussion under Disclosure
of Foreign Currency Losses).
Page 12
<PAGE>
The increase relating to the devaluation of the lira amounts to 6.5% of the
total cost of sales percentage of total revenues in the first fiscal quarter
compared to the same period in the prior year.
An increase in the cost of sales of approximately $480,000, or as a percentage
of total revenues of 2.3%, is attributable to one-time costs associated with
severance expenses of the planned discontinuation of the TMC manufacturing
operation and the elimination of personnel in the hosiery rebuild department as
well as reserves for potential write downs on TMC inventory. The remaining
increase in cost of sales of $400,000 or as a percentage of total revenues of
1.9%, is due to reduced margins realized from lower selling prices in the
knitted fabric equipment in the current fiscal quarter sales compared with the
same period in the prior year due to current market pressures and reduced
demands.
Selling expenses decreased approximately $136,000 compared with the first
quarter of last year. Selling expenses as a percentage of revenues increased
unfavorably to 9.6% in the first quarter compared to 7.8% for the same period
last year. This was principally due to lower sales volume and selling expenses
such as personnel that are fixed in nature.
Variable selling expenses, such as commissions, also increased marginally as a
percentage of revenue compared with the same period last year due to a greater
mix of laundry equipment in the current quarter compared to the same period in
the prior year. Commissions on laundry equipment sales are generally higher
compared to commissions on sales of textile equipment.
General and administrative expenses for the quarter ended September 30, 2000
were approximately $1,881,000, which were comparable to $1,796,000 in the prior
year. Interest expense is shown net of interest income. Net interest expense in
the current fiscal quarter was approximately $511,000 as compared to
approximately $387,000 for the same period last year. This increase is primarily
due to higher interest expense related to the capital lease obligation on the
Company's main facilities as a result of the additional warehouse space
completed during the prior fiscal year.
Income tax benefit in the current fiscal year was approximately $1,072,000, a
rate of 37.6% as compared to an effective rate of 40.2% in the prior year.
Net loss for the first quarter was approximately $1,784,000 or $0.55 per share
both basic and diluted. In the first quarter of the prior fiscal year, the net
income was approximately $391,000 or $0.12 per share both basic and diluted.
OUTLOOK
-------
The Company Expects to Report a Significant Loss for the Fiscal Year 2001-
Principally as a result of the losses associated with the Company's utilization
of foreign currency hedge derivatives (refer to further discussion under
Disclosure about Foreign Currency Losses), the Company is projecting a
significant net loss for the fiscal year 2001.
Hosiery Equipment - The closed toe machine produced by Lonati has taken longer
than anticipated to finalize an acceptable production model. Lonati will be
sending Speizman nine of their latest version closed toe machines during the
first part of December 2000. The Company anticipates that this new version of
closed toe machines will be more commercially acceptable than the previous
generation and could gradually replace most of the conventional athletic sock
machines in the United States and Canada over the next two to four years.
Knitted Fabric Equipment - After its introduction over two years ago, the market
demand for seamless actionwear machines has leveled off dramatically. The
Company does not feel that this is the end of the demand for seamless type
garments. However, it now appears that only the large, well-capitalized
underwear and lingerie firms who have significant resources with brand names and
direct relationships with major retail outlets will have the ability to purchase
significant quantities of additional seamless garment machines. However, with
the seamless bodywear and actionwear, there is a significant amount of sample
design, styling
Page 13
<PAGE>
and product development involved in launching these garments. In order to
complement its equipment product offering, Speizman Industries has developed a
Sample Design Service, which will allow our customers to develop their product
lines with complete confidentiality at Speizman's showroom facility in
Charlotte.
TMC - In August, the Company announced its letter of intent to license TMC
patents and other intellectual property to S.R.A. srl ("SRA") of Florence,
Italy, a division of the Lonati Group. Associated with this arrangement, the
Company began closing its manufacturing operation in Winston-Salem. As of
September 30, 2000, the Company incurred one-time costs of approximately
$350,000 related to its planned closure. The Company expects to source TMC and
other automation equipment from SRA commencing in January 2001. The license
arrangement provides for fees to Speizman of $2 million payable quarterly over
the contract period of four years.
Yarn Processing Equipment - Speizman Industries maintains a presence in the yarn
processing industry through its sales of new and used equipment and related
parts. The Company has obtained exclusive distribution agreements with several
manufacturers of new equipment. The Company believes the most promising of the
new machines is the ring spinning frames produced by Shanghai Erfrangi of
Shanghai, China. At the date of this writing, the first of these ring spinning
frames has been installed in a major producer of ring spun yarn in North
Carolina. The Shanghai machine has automation features similar to European
machines and sells for a lower price. A testing period is expected to last
approximately six months to determine the quality of the yarn produced and how
the machine holds up under mill conditions.
In addition, our Yarn Division is now sourcing parts directly from machine shops
in Europe for various yarn processing machines which are sold by other people in
the United States. Although this business is relatively new, based upon the
Company's limited experience, it believes this business shows good potential and
it intends to grow it at a steady rate. Revenues from used yarn processing
equipment sales are contingent upon having an adequate availability of such
equipment and products. Frequently the company may purchase substantial portions
of equipment from liquidating mills.
Wink Davis - No significant changes are anticipated in the laundry equipment and
services segment. The backlog as of September 30, 2000 was approximately $2
million greater than the amount as of the same period last year due to several
installation projects currently in progress. Competition continues to put
pressure on margins.
Other Areas of Development - The Company continually explores opportunities for
additional growth including new relationships with manufacturers that have
competitive product offerings in its existing market channels. Recently, the
Company was named exclusive distributor by Tecnopea commencing in January 2001
which manufactures state of the art equipment for boarding, pairing and
packaging that previously competed with TMC. The Company is also reviewing its
overhead structure as well as any nonperforming lines that should be eliminated.
During October, the Company announced its circular fabric division would be
eliminated by the end of the calendar year 2000. The elimination of this
division is anticipated to reduce costs, primarily in personnel, by $300,000
annually, commencing in January 2001.
BACKLOG
-------
As of November 3, 2000, the Company's backlog of unfilled orders was
approximately $38 million. The period of time required to fill orders varies
depending on the model ordered, manufacturers' production capabilities,
availability of overseas shippers, etc. The Company typically fills its backlog
within 12 months; however, orders constituting the current backlog are subject
to customer cancellation, changes in delivery and machine performance. As a
result, the Company's backlog may not necessarily be indicative of future
revenue. In addition, the Company's current backlog will not necessarily lead to
revenues in any future period. Any cancellation, delay or change in orders which
constitute our current or future backlog may result in lower than expected
revenues.
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
On November 13, 2000, the Company amended its agreement with SouthTrust Bank,
N.A. for its revolving credit facility maturing on May 31, 2003. The term of the
amendments as stated in the amended agreement shall remain in effect until June
30, 2001, or later by the election of the Bank. The amended agreement provides
for a revolving credit facility up to $20 million and an additional line of
credit for issuance of Documentary Letters of Credit of $7.5 million. The
availability under this facility is limited to a borrowing base as defined in
the amended agreement. The $20.0 million Revolving Credit Facility also
incorporates a $2.0 million line of credit specific for funding uncommitted
foreign currency cash flow hedge contracts that mature in various amounts
primarily during the months of December 2000 through April 2001. The Company
expects the Bank's revolving line of credit to provide sufficient funds for its
working capital needs for the balance of the year based upon the Company's
latest estimates.
Working capital at September 30, 2000 was approximately $20.4 million as
compared to $28.2 million as of July 1, 2000, a decrease of $7.8 million.
Approximately $3.3 million of the decrease is due to the reporting of an accrued
liability relating to the change in fair value associated with the Company's
foreign currency cash flow derivatives recognized in other comprehensive loss
(equity).
For the three months ending September 30, 2000, operating activities provided
approximately $1.8 million as compared to using approximately $5.8 million for
the same period in the prior year. Investing activities were minimal, with only
limited capital expenditures. No significant capital expenditures are
anticipated in the near future.
Financing activities used approximately $2.5 million during the first quarter of
the current year. The primary use of financing was for payments on the Company's
line of credit.
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 hosiery 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.
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
--------------------------------------
Generally, Speizman Industries' purchases of foreign manufactured machinery and
spare parts for resale are denominated 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. Generally, 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
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significant adverse effect on Speizman Industries' future operations. Please
refer to Disclosure about Foreign Currency Losses.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in foreign currency exchange
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce these risks by utilizing financial instruments, pursuant to Company
policies.
The value of the U.S. dollar affects the Company's financial results. Changes in
exchange rates may positively or negatively affect the Company's revenues (as
expressed in U.S. dollars), cost of sales, gross margins, operating expenses,
and retained earnings. Where the Company deems it prudent, it engages in hedging
those transactions aimed at limiting in part the impact of currency
fluctuations. As discussed in the Disclosure about Foreign Currency Losses, the
Company purchases forward exchange contracts to protect against currency
exchange risks associated with the Company's anticipated and firm commitments of
lira-dominated purchases for resale.
These hedging activities provide only limited protection against currency
exchange risks. Factors that could impact the effectiveness of the Company's
programs include volatility of the currency markets, and availability of hedging
instruments. All currency contracts that are entered into by the Company are
components of hedging programs and are entered into for the sole purpose of
hedging an existing or anticipated currency exposure, not for speculation.
Although the Company maintains these programs to reduce the impact of changes in
currency exchange rates, when the U.S. dollar sustains a strengthening position
against the lira in which the Company has anticipated purchase commitments, the
Company's earnings could be adversely affected if future sale prices cannot be
increased because of market pressures.
The Company is also subject to interest rate exposure on $11.5 million of debt
outstanding at September 30, 2000 that was priced at interest rates that float
with the market. Reference is made to Note 8 for additional information.
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
due to the factors discussed below. All such forward-looking statements are
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995.
OTHER RISK FACTORS
------------------
Dependence on Lonati - The Company's operations are substantially dependent on
the net revenues generated from the sale of sock knitting and other machines
manufactured by both Lonati and Santoni, S.r.l., Brescia, Italy ("Santoni"), one
of Lonati's subsidiaries, and the Company expects this dependence to continue.
Sales of sock knitting and other machines manufactured by Lonati and Santoni
generated an aggregate of approximately 60% of the Company's net revenues in
fiscal 2000. The Company and Lonati entered into their present agreement for the
sale of Lonati machines in the United States and Canada in January 1992 and for
Mexico in 1997 (the "Lonati Agreements"). Although the Lonati Agreements are not
long-term, the Company has acted as the United States sales agent and
distributor for certain machines manufactured by Lonati continuously since 1982.
The cost to the Company of Lonati machines, as well as the delivery schedule of
these machines, are in the discretion of Lonati. Management believes that the
Company's relationship with Lonati will continue to be strong as long as the
Company generates substantial sales of Lonati machines; however, there can be no
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assurance that the Company will be able to do so or that the Company's
relationship with Lonati will continue or will continue on its present terms.
Any decision by Lonati to sell machines through another distributor or directly
to purchasers would have a material adverse effect on the Company.
Machine Performance and Delayed Deliveries - During fiscal 2000, the Company
experienced issues with machine performance and delays from Lonati in shipments
of closed toe knitting machines and Santoni undergarment knitting machines. The
Company experienced material cancellations or postponements of orders due to
these delays. There can be no assurance that delayed deliveries in the future or
issues with machine performance on newer technology will not result in the loss
or cancellation of significant orders. The Company also cannot predict
situations in Italy such as potential employee strikes or political developments
which could further delay deliveries or have other adverse effects on the
business of Lonati and the other Italian manufacturers represented by the
Company.
Industry Conditions - The Company's business is subject to all the risks
inherent in acting as a distributor including competition from other
distributors and other manufacturers of both textile and laundry equipment, as
well as the termination of profitable distributor-manufacturer relationships.
The Company's laundry equipment segment is subject to the risks associated with
new construction in the hospitality industry. Currently, there is a slowdown in
construction of new hotels due to excess room availability as a whole. This
slowdown could reduce the demand for new equipment product offered by the
Company.
The textile segment is subject to the risks associated with certain categories
in the textile industry, specifically, for socks, underwear, and actionwear
garments. The textile industry risks relating to socks, underwear, and
actionwear garments include the impact of style and consumer preference changes.
These factors may contribute to fluctuations in the demand for the Company's
sock knitting and packaging equipment and knitted fabric equipment products.
There is a slowdown in underwear and actionwear garments that commenced during
the second half of the last fiscal year. Currently, there also appears to be a
slight downturn in the sock industry.
Nasdaq National Market Listing - The Company's Common Stock is presently listed
on the Nasdaq National Market and is subject to all requirements of the
Company's listing agreement with Nasdaq. Among the events that could cause the
Company to have its status as a Nasdaq Market Issuer terminated is a failure to
maintain a minimum value of public float of $5.0 million or a failure to
maintain a minimum bid price of $1.00. Since November 1, 2000, the minimum value
of public float of the Company's common stock has been below $5.0 million.
If the Company loses its Nasdaq National Market status, its common stock might
trade in the Nasdaq Small Cap or the over-the-counter market, either of which is
viewed by most investors as a less desirable, less liquid marketplace. In such
event, the market price of the Common Stock may be adversely impacted and a
stockholder may find it difficult to dispose, or obtain accurate quotations as
to the market value, of the Company's Common Stock.
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PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPEIZMAN INDUSTRIES, INC.
(Registrant)
Date: November 14, 2000 /s/ Robert S. Speizman
----------------------------- ---------------------------------------
Robert S. Speizman
President
Date: November 14, 2000 /s/ John C. Angelella
----------------------------- ---------------------------------------
John C. Angelella
CFO/Secretary-Treasurer
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