-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SnCqzw4MMzxLJYLNo4grh36wEqB8Rkxve276XPSBGP8WN20bFXUSFFqrZx/j8JzE ys4e+rkLyTMHxoSuZskIig== 0000950168-97-003048.txt : 19971023 0000950168-97-003048.hdr.sgml : 19971023 ACCESSION NUMBER: 0000950168-97-003048 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19971022 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPEIZMAN INDUSTRIES INC CENTRAL INDEX KEY: 0000092827 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 560901212 STATE OF INCORPORATION: DE FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: ARS SEC ACT: SEC FILE NUMBER: 000-08544 FILM NUMBER: 97699068 BUSINESS ADDRESS: STREET 1: 508 W. 5TH STREET CITY: CHARLOTTE STATE: NC ZIP: 28231 BUSINESS PHONE: 7043723751 MAIL ADDRESS: STREET 1: 508 W. 5TH STREET CITY: CHARLOTTE STATE: NC ZIP: 28231 ARS 1 SPEIZMAN INDUSTRIES ANNUAL REPORT (Photos of Machinery & Staff Appear on Cover) (Speizman logo) SPEIZMAN INDUSTRIES, INC. 1997 ANNUAL REPORT 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. 2 (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. 3 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 4 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA FISCAL YEAR ENDED JUNE 28, JUNE 29, JULY 1, JULY 2, JULY 3, 1997 1996 1995 1994 1993 (IN THOUSANDS, EXCEPT NET INCOME PER SHARE DATA) 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
5 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, 6 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:
MANUFACTURER MACHINE TERRITORY 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
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. 7 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. 8 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. 9 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 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 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.
HIGH LOW 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
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 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 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 28, JUNE 29, JULY 1, 1997 1996 1995 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
See accompanying summary of accounting policies and notes to consolidated financial statements. 14 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
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
See accompanying summary of accounting policies and notes to consolidated financial statements. 15 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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
See accompanying summary of accounting policies and notes to consolidated financial statements. 16 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 28, JUNE 29, JULY 1, 1997 1996 1995 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
See accompanying summary of accounting policies and notes to consolidated financial statements. 17 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 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:
JUNE 28, JUNE 29, 1997 1996 Basic earnings per share $ 0.83 $(0.17) Diluted earnings per share $ 0.82 $(0.17)
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 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:
JUNE 28, JUNE 29, 1997 1996 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
NOTE 3 -- INVENTORIES Inventories are summarized as follows:
JUNE 28, JUNE 29, 1997 1996 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
20 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:
JUNE 28, JUNE 29, 1997 1996 Furniture, fixtures and transportation equipment $ 6,568 $105,264 Less accumulated amortization (2,069 ) (89,037) Net leased property $ 4,499 $ 16,227
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:
CAPITAL OPERATING LEASES LEASES 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
Total rent expense for operating leases approximated $1,021,600, $791,400 and $515,800 for fiscal years 1997, 1996 and 1995, respectively. 21 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:
1997 1996 1995 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
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:
JUNE 28, JUNE 29, 1997 1996 Net current assets $383,000 $436,000 Net noncurrent assets (liabilities) 152,000 (22,000) $535,000 $414,000
Principal items making up the deferred income tax assets (liabilities) are as follows:
YEAR ENDED JUNE 28, JUNE 29, 1997 1996 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
22 The Company's effective income tax rates were different than the U.S. Federal statutory tax rate for the following reasons:
1997 1996 1995 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%
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:
JUNE 28, 1997 JUNE 29, 1996 TOTAL CURRENT TOTAL CURRENT 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
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 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:
YEAR ENDED WEIGHTED WEIGHTED WEIGHTED JUNE 28, AVERAGE JUNE 29, AVERAGE JULY 1, AVERAGE 1997 PRICE/SH. 1996 PRICE/SH. 1995 PRICE/SH. 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
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 A summary of non-employee directors stock option and other information for 1997 and 1996 follows:
YEAR ENDED WEIGHTED WEIGHTED JUNE 28, AVERAGE JUNE 29, AVERAGE 1997 PRICE/SH. 1996 PRICE/SH. 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
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:
YEAR ENDED JUNE 28, JUNE 29, 1997 1996 Pro forma net income $2,512,366 $(627,969) Pro forma earnings per share $ 0.75 $ (0.19)
The following table summarizes information about stock options outstanding at June 28, 1997: 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
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 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
YEAR ENDED JUNE 28, JUNE 29, JULY 1, 1997 1996 1995 Cash paid during year for: Interest $ 101,315 $ 81,578 $ 86,704 Income taxes 1,440,696 120,086 524,464
26 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 -----END PRIVACY-ENHANCED MESSAGE-----