-----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, WKqZrmHfi4Wcd2azFbtHv4wJXpJaMBMrAleejUHkQ3j5dvHc4R3CQi4T1hcUVHfU QU6vdr+s/3YTuiGN26VulQ== 0000950168-98-003280.txt : 19981022 0000950168-98-003280.hdr.sgml : 19981022 ACCESSION NUMBER: 0000950168-98-003280 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19981021 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: 98728543 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 ANNUAL REPORT 1998 ANNUAL REPORT [Photos of Working Employees in Plant] [Speizman Logo] SPEIZMAN INDUSTRIES, INC. STOCKHOLDERS' LETTER To Our Stockholders: During the past two years, Speizman has diversified from its core business of distributing sock-knitting machines to enable the Company to continue to grow both in sales and profits. On February 1, 1998, Speizman acquired TMC Automation, a designer and manufacturer of sock boarding and packaging machines. TMC allows Speizman to meet the needs of our sock customers by automating the most labor-intensive area of their operations. Our major supplier, the Lonati Group of Brescia, Italy, acquired six other Italian manufacturers of textile machinery during our past fiscal year. Speizman Industries has been given the exclusive distributorship for each of these six companies in the U.S.A. and Canada. Fiscal 1998 saw revenues increase by 14.9% from $79.1 million in fiscal 1997 to $90.9 million in 1998. The increased revenues resulted in after-tax profits of $1.9 million in 1998 versus $2.7 million in 1997. After-tax profits declined by $0.24 per share from our prior fiscal year. The decline in profits is attributable to a $10.8 million decrease in hosiery related equipment revenues coupled with increased interest and amortization expenses, both associated with the recent acquisitions. Despite this one-year decline, I feel certain our potential for future growth will reflect our ten-year compounded revenue growth rate of 19.5% and profit growth rate of 10.3%, for the following reasons: o Continued diversification of product line. o Economies of scale. o Strong people resources. I would now like to examine each one of these three reasons to show you why I am so optimistic about our future. CONTINUED DIVERSIFICATION The acquisition of TMC Automation creates a substantial potential for additional sales and profits for our Company. Packaging is the most labor-intensive part of the sock manufacturing process. We also feel TMC will allow us to enter other fields of automated packaging, as well. The Lonati Group acquired Marchisio and Vignoni, both circular fabric knitting machine manufacturers, as well as MecMor, a circular sweater knitter, during our current fiscal year. The Lonati Group has allowed us to gain immediate, significant market share in these industries by allowing us to aggressively price and finance the equipment with no financial exposure to our Company. Lonati is applying their special R&D talents to these acquisitions by utilizing their market dominance and technology for high production with total electronic controls. Highly competitive new models for Marchisio, Vignoni and MecMor should be available by the first quarter of fiscal 2000. In 1998, the Lonati Group along with their associates, the Camozzi Group, purchased control of Marzoli and Vouk. Both of these companies produce machines for the yarn processing industry. Speizman was appointed the exclusive distributor for Marzoli and Vouk in the United States and Canada on August 1, 1998. Our Company took over the existing Marzoli operations in Spartanburg, South Carolina, and has added personnel to the sales and service departments. Speizman has also entered the used yarn processing machine business in order to gain market share of new equipment and generate additional profits. The yarn processing industry is highly competitive. As in the circular knitting and circular sweater sectors, the Lonati Group has committed to an aggressive pricing policy while intensifying development of new models. On August 1, 1997, Speizman Industries acquired Wink Davis Equipment Company. Fiscal 1998 was profitable, but far short of our goals for this division. Wink Davis has now significantly reduced their overhead and has begun to sell some new lines of equipment which should increase profitability. In addition, we feel it is reasonable to assume that several large sales projects will conclude in our favor during the current fiscal year. The Santoni Company, which has been a long-time supplier of sock and medical knitting machines, has successfully introduced a new knitting machine for the production of seamless undergarments, action wear and swim suits. The market response in the United States and Canada for these products has been tremendous. Currently, we have a backlog of more than $16 million worth of the Santoni undergarment machines on order. 1 This move toward diversification is a key strategic move for Speizman. The sock machine business is in a state of transition. Demand for athletic socks remains good, while demand for other types of socks is fair, at best. Most athletic sock producers in the United States and Canada are waiting to determine whether the new technology from Lonati for closing the toe of the sock on the knitting machine will meet their customers' and consumers' needs. If Lonati's closed toe is not accepted by our sock customers, we see a continued decline in our sales of sock knitting equipment. ECONOMIES OF SCALE Our recent acquisitions, as well as appointments of additional distributorships from the Lonati Group, have allowed us to begin to use economies of scale to eliminate duplications of efforts within our Company. For example, we are now able to make large-scale purchases which have reduced costs and will continue to produce efficiencies going forward. In addition, we are well along in the process of creating coordinated and comprehensive MIS and accounting systems. STRONG PEOPLE RESOURCES The most important resource of any company is its people. Through our acquisitions, we are delighted and fortunate to have introduced to our company an influx of young, aggressive technical and marketing professionals who bring fresh ideas and are setting up new and innovative procedures and programs. Some investment analysts point out that on a quarter to quarter basis, Speizman's earnings are "lumpy." There may be some truth to that, but I would like to point out, that in managing our business, we strive for long term growth -- a goal we have achieved quite impressively over the past ten years. In fiscal 1988, revenues were $15.2 million and profits were $725,000. In 1998, revenues were $90.9 million; profits were $1.9 million. With the steps we have taken in 1998, we believe we have set the stage and positioned ourselves to continue this performance in the years ahead. Your management will concentrate on implementing our diversification strategy by establishing our presence in a broader range of markets. We will continue to investigate and consider other distributorships and potential acquisitions that can extend our reach, strengthen our financial position and ensure continued growth in sales and profits in establishing long-term value for our stockholders. Sincerely, SPEIZMAN INDUSTRIES, INC. /s/ ROBERT S. SPEIZMAN - ------------------------- Robert S. Speizman President 2 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended ------------------------------------------------------------------- June 27, June 28, June 29, July 1, July 2, 1998 1997 1996 1995 1994 ------------ ---------- ---------- ----------- ------------ (In thousands, except net income per share data) Statement of Income Data: Net revenues $ 90,886 $79,103 $46,280 $61,597 $ 69,526 Cost of sales 74,034 65,935 40,547 53,986 60,004 - ------------------------------------- -------- ------- ------- ------- -------- Gross profit 16,852 13,168 5,733 7,611 9,522 Selling, general and administrative expenses 12,855 8,855 6,577 5,478 4,350 - ------------------------------------- -------- ------- ------- ------- -------- Operating income (loss) 3,997 4,313 (844) 2,133 5,172 Interest (income) expense, net 791 (18) (43) (15) 6 - ------------------------------------- -------- ------- ------- ------- -------- Income (loss) before taxes on income 3,206 4,331 (801) 2,148 5,166 Taxes (benefit) on income 1,273 1,645 (228) 854 1,869 - ------------------------------------- -------- ------- ------- ------- -------- Net income (loss) 1,933 2,686 (573) 1,294 3,297 Preferred stock dividends -- -- -- -- 41 - ------------------------------------- -------- ------- ------- ------- -------- Net income (loss) applicable to common stock $ 1,933 $ 2,686 $ (573) $ 1,294 $ 3,256 - ------------------------------------- -------- ------- ------- ------- -------- Per Share Data: Basic earnings (loss) per share $ 0.59 $ 0.83 $ (0.18) $ 0.40 $ 1.16 Diluted earnings (loss) per share 0.56 0.80 (0.18) 0.40 1.10 Weighted average shares outstanding -- basic 3,284 3,229 3,209 3,209 2,805 Weighted average shares outstanding -- diluted 3,426 3,353 3,209 3,272 2,949 - ------------------------------------- -------- ------- ------- ------- -------- Balance Sheet Data: Working capital $ 20,216 $18,741 $16,313 $17,613 $ 16,579 Total assets 50,034 43,174 36,149 35,704 30,160 Short-term debt 4,000 -- -- -- -- Long-term debt, including current maturity 7,670 112 148 147 293 Stockholders' equity 23,207 20,938 18,203 18,782 17,483 - ------------------------------------- -------- ------- ------- ------- --------
3 BUSINESS OVERVIEW GENERAL Speizman Industries, Inc. and subsidiaries (collectively the "Company") is a major distributor operating through three companies: Speizman Industries, Inc. ("Speizman" or "Speizman Industries"), Wink Davis Equipment Co., Inc. ("Wink Davis") and Todd Motion Controls, Inc. ("TMC"). Speizman 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 manufactures automated boarding, finishing and packaging equipment used in the sock knitting industry. TMC's products are sold through Speizman's distribution network. All references herein are to the Company's 52-or-53 week fiscal year ending on the Saturday closest to June 30. The fiscal years 1994 through 1998 each contained 52 weeks and ended on June 27, 1998, June 28, 1997, June 29, 1996, July 1, 1995 and July 2, 1994. SPEIZMAN INDUSTRIES Speizman Industries 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 Speizman Industries believes is the world's largest manufacturer of hosiery knitting equipment. It also distributes Lonati sock and sheer hosiery knitting machines in Canada. In addition, through sales arrangements with other European textile machinery manufacturers, Speizman 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. Speizman sells textile machine parts and used textile equipment in the United States and in a number of foreign countries. Speizman Industries and Lonati entered into their present agreement for the sale of Lonati machines in the United States in January 1992 (the "Lonati Agreement"). Speizman and Lonati also entered into a similar agreement relating to Speizman Industries' distribution of Lonati sock and sheer hosiery knitting machines in Canada in January 1992 and in Mexico in 1997. Speizman Industries has distributed Lonati double cylinder machines in the United States continuously since 1982. Speizman began distributing Lonati single cylinder machines in 1989. Pursuant to the Lonati Agreement, Lonati has appointed Speizman Industries 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. Under the Lonati Agreement, Speizman Industries also serves as the distributor of such equipment in the United States. Although the Lonati Agreement does not establish Speizman Industries as the exclusive distributor of Lonati sock machines in the United States, Speizman 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. Speizman and Lonati also entered into a similar agreement relating to Speizman Industries' distribution of Lonati sock and sheer hosiery knitting machines in Canada in January 1992. The Lonati Agreement contains certain covenants and conditions relating to Speizman Industries' sale of Lonati machines, including, among others, requirements that Speizman Industries, 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. Speizman is prohibited during the term of the Lonati Agreement from distributing any machines or parts that compete with Lonati machines and parts. Speizman believes that it is and will remain in compliance in all material respects with such covenants. The cost to Speizman 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 Speizman determined on a case by case basis. The Lonati single cylinder machines distributed by Speizman Industries 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. 4 Speizman Industries distributes these sock knitting machines as well as Lonati sheer hosiery knitting machines in Canada and in Mexico. In addition, Speizman 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 Speizman Industries in the United States, Canada and Mexico of new machines manufactured by Lonati, S.p.A., generated the following percentages of Speizman's net revenues: 41.1% in fiscal 1998, 60.1% in fiscal 1997 and 46.2% in fiscal 1996. In addition, sales of Santoni machines in the United States, Canada and Mexico generated 5.3%, 7.0% and 4.8% of Speizman Industries' net revenues in fiscal 1998, 1997 and 1996, respectively. In addition to the Lonati machines, Speizman Industries 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 United States, Canada Brescia, Italy for underwear, men's socks and Mexico and women's sheer hosiery and surgical support hose Conti Complett, S.p.A., Sock toe closing machines United States and Canada Milan, Italy and sock turning devices Dinema, Data collection United States and Canada Brescia, Italy Marchisio, Fabric knitting machines United States and Canada Brescia, Italy Mecmor, Fabric knitting machines United States and Canada Varese, Italy Vignoni, Fabric knitting machines United States and Canada Cividino, Italy
There can be no assurance that Speizman will not encounter significant difficulties in any attempt to enforce any provisions of the agreements with foreign manufacturers, or any agreement that may arise in connection with the placement and confirmation of orders for the machines manufactured by foreign manufacturer or obtain an adequate remedy for a breach of any such provision, due principally to the fact that they are foreign companies. Speizman Industries sells used machinery and parts to the textile industry. Speizman Industries carries significant amounts of machinery and parts inventories to meet customers' requirements and to assure itself of an adequate supply of used machinery. Speizman acts as a liquidator of textile mills and as a broker in the purchase and sale of such mills. Marketing and Sales Speizman Industries 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 Speizman's machine in its own work environment alongside competing machines for two weeks to three months. Speizman Industries also offers customers the opportunity to send their employees to Speizman Industries 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, Speizman Industries exhibits its equipment at trade shows and uses its private showroom to demonstrate new machines. These marketing strategies are complemented by Speizman's commitment to service and continuing education. Speizman Industries also produces, at its own expense, training videos for its major lines of equipment. At September 11, 1998, Speizman employed approximately 10 salespersons and 28 technical representatives. In addition to its sales staff, Speizman Industries uses over 40 commission sales agents in a number of foreign countries in connection with its sales of used machines. WINK DAVIS Wink Davis, based in Atlanta, Georgia, distributes commercial laundry equipment and parts and provides related service. Wink Davis was acquired by Speizman on August 1, 1997. Wink Davis sells to a wide variety of customers. 5 A large share of these customers maintain on premise laundries ("OPL's"). OPL's are commonly found in hotels, nursing homes and other institutions that perform their laundry services in-house. Some larger installations of equipment are found in hospitals, prisons and linen processing plants. The largest portion of Wink Davis' sales are generated from its distributorships of both Pellerin-Milnor (washer extractor equipment manufacturers based in Kenner, La.) and Chicago Dryer (commercial ironer/folder manufacturers based in Chicago, IL). Wink Davis represents both of these companies for the southeastern United States and Chicago, Illinois areas. Specifically, Wink Davis' territories include Georgia, South Carolina, North Carolina, Virginia, middle and eastern Tennessee, Maryland, Washington, D.C., northern and central Florida, and the Chicago, Illinois areas. The Pellerin-Milnor agreement appoints Wink Davis as the exclusive agent within its territories. In some instances, a customer's purchase order may be taken in one agent's territory, but the equipment is actually delivered to a territory served by a different Pellerin-Milnor agent. In these instances, Pellerin-Milnor grants the sale to the territory in which the purchase order was taken. The dealer servicing the territory in which the equipment is installed receives a commission for which that dealer must assume responsibility for installing the equipment. Historically, these sales involving two separate Pellerin-Milnor dealers have been infrequent and management feels this issue does not significantly improve or hurt its operations. The Chicago Dryer agreement does not appoint Wink Davis as the exclusive agent within its territories. Both the Pellerin-Milnor and Chicago Dryer agreements are renewed on an annual basis and may be terminated in the event of a breach. Wink Davis has continuously represented both manufacturers for most of its current territories since 1972. Since 1980, Pellerin-Milnor has presented its annual top distributor award to Wink Davis for all but three years. There can be no assurance that the loss of one or both of these distributorships would not have a materially adverse impact to Wink Davis' operations. The Pellerin Milnor and Chicago Dryer agreements contain certain covenants and conditions relating to Wink Davis' sales of these products, including, among other things, that Wink Davis, at its own expense, promote the sale of the manufacturers' machines and assist the manufacturers in maintaining their competitive positions, maintain an efficient sales staff, provide for the proper installation, maintenance and servicing of the machines, maintain adequate inventory of parts and pay for all costs of advertising the machines. Wink Davis believes that it is and will remain in compliance in all material respects with such covenants. Additionally, Wink Davis, under written agreements and other arrangements with original equipment manufacturers ("OEMs"), distributes other laundry related equipment. The following table sets forth certain information concerning the additional distribution agreements:
Manufacturer Machine Territory - ----------------------- --------------------------------- -------------------- Ajax Manufacturing, Laundry and Dry Cleaning Presses Southeastern U.S. Cincinnati, OH & Chicago, IL areas American Dryer, Commercial Dryers Southeastern U.S. Fall River, MA & Chicago, IL areas Cissell Manufacturing, Commercial Dryers, laundry Southeastern U.S. Louisville, KY and dry cleaning & Chicago, IL areas pressing equipment Consolidated Laundry Commercial Dryers Southeastern U.S. Machinery, & Chicago, IL areas Los Angeles, CA Energenics Corp., Lint collectors and automatic Southeastern U.S. Naples, FL cart wash systems & Chicago, IL areas Forenta, Inc., Laundry and Dry Cleaning Presses Southeastern U.S. Morrisville, TN & Chicago, IL areas Huebsch Originators, Commercial Dryers Southeastern U.S. Ripon, WI & Chicago, IL areas Unipress, Inc., Laundry and Dry Cleaning Presses Southeastern U.S. Tampa, FL & Chicago, IL areas VIC Manufacturing, Dry Cleaning Equipment Southeastern U.S. Minneapolis, MN & Chicago, IL areas
6 Marketing and Sales Wink Davis' primary products include washers, dryers, ironers and other finishing equipment. Some of the larger installations include continuous batch washers ("CBW's"), large dryers, pressing and folding equipment and conveyor systems resulting in the laundering process being substantially automated. The majority of the sales consist of washers, with less than 165 pound capacity per load, and corresponding dryers. CBW systems or tunnels are highly customized with a variety of features depending on the unique needs and constraints of each customer. Sales orders are generated through a variety of methods including repeat business referrals, cold calls and unsolicited telephone orders. Typical sales terms on larger contracts require 15% down with the balance due 10 days after delivery. At September 11, 1998, Wink Davis employed approximately 15 sales persons and 32 technical representatives. Most used equipment in smaller facilities has little value and there is little demand for that type of used laundry equipment. Accordingly, Wink Davis rarely accepts trade-ins of low capacity used equipment, nor do they purchase used equipment of that nature. Some used CBW units can be rebuilt at a substantial reduction in price to new units. Wink Davis does occasionally find sales opportunities of this type. Many large orders, especially those at new construction sites, require newly designed or modified electrical, plumbing, construction or other work at the customer site. Wink Davis often subcontracts these tasks for the customer in conjunction with the sale. Wink Davis has a staff of CAD operators, and service personnel who assist and support outside contractors to ensure that the facilities are properly prepared prior to the delivery of equipment. Wink Davis personnel install the equipment and provide training for the customers' operators. Smaller white sales generally require less support and frequently consist of matching the specifications of the newly ordered machine to the existing site. Additionally, Wink Davis provides repair and maintenance services to OPL facilities. Customers' OPL facilities are typically operated and managed by the property, maintenance or janitorial staffs. These staffs are often small with broad areas of responsibilities and limited technical expertise, especially for specific maintenance and repair issues of the laundry equipment. Accordingly, Wink Davis provides a full range of repair and maintenance services. Each sales office is staffed by four or more technicians. Each technician travels to the customer's site in a maintenance van, fully stocked with the most commonly needed parts. Upon notification, Wink Davis will dispatch and commonly have a technician addressing the problem within 24 hours. If additional parts are required, they may be ordered from the main Atlanta warehouse or shipped directly from the manufacturer. TMC TMC assembles automated boarding and finishing equipment for the sock manufacturing industry. Management believes significant potential exists for automating finishing operations in mills that specialize in high volume production which is sold through large discount retail chains. Typically, this denotes athletic socks, but may also include single-color, casual dress socks. The current technology for athletic sock knitting operations is considered highly automated and capital intensive. Raw material on yarn cones directly feeds a machine which knits the entire product. A second off line operation closes the toe using automated turners and toe closing equipment. Finishing processes, unlike knitting operations, are significantly labor intensive. Through a series of steps, socks are boarded, trimmed, paired and bagged. TMC's machine significantly automates this process. In addition to boarding, trimming, pairing and bagging, the equipment can also insert j-hooks (a small plastic hanger for a display case), transfer print and board. Production The production process is basically assembly. Many of the electronic, pneumatic, and structural parts are standard items available from various distributors. A significant portion of the hardware and structural components are custom designed and ordered. As of September 11, 1998, TMC employed 15 direct assemblers, 8 indirect laborers, and 9 persons in research and development. All assembly is done at TMC's leased facility on Patterson Avenue in Winston-Salem, N.C. Since the acquisition by Speizman Industries on February 6, 1998 through September 11, 1998, TMC has shipped approximately 33 machines. Historically, most of the products have been built to order based on unique customer specifications. Currently, research and development, together with manufacturing, are designing a modularization project. The modularization project will transform the product from a custom ordered machine to standardized configurations. Customers will 7 have the opportunity to select the most commonly requested features for addition to the standard product. Management believes that this will continue to meet virtually all of the potential customers' needs. However, by creating modular components, management hopes to improve production efficiencies. Management also hopes to reduce cycle time between receiving the customer order and delivery of the equipment. Research and Development TMC has 9 employees in research and development, including William Todd, the former owner and current Vice President. Key components of the product have been patented and several other patents are pending. Currently, the research and development staff is developing equipment for additional hosiery manufacturing functions and other packaging applications, possibly outside the hosiery industry. Sales and Marketing TMC was acquired by Speizman on February 6, 1998. Prior to the acquisition, equipment was sold directly through TMC's sales force. After the acquisition, all sales are now made through Speizman Industries' sales force. The customer base for TMC's product significantly overlaps with the customer base for hosiery knitting machinery. BACKLOG The Company's backlog of unfilled orders for new and used machines was $24.5 million, $16.8 million and $19.3 million at June 27, 1998, June 28, 1997 and June 29, 1996, respectively. Management believes that all Speizman Industries' unfilled orders at June 27, 1998 will be filled by the end of fiscal 1999. The period of time required to fill orders varies depending on the machine ordered. RECEIPT OF MARZOLI AND VOUK PRODUCT LINES On August 1, 1998, the Company was granted the exclusive United States and Canadian distribution rights of the Marzoli product line manufactured by Fratelli Marzoli & C. SpA, an Italian corporation. Lonati has an ownership interest in Fratelli Marzoli & C. Spa. Operations of this product line are being conducted through a new, wholly-owned subsidiary of the Company, Speizman Yarn Equipment, Inc. As part of its agreement with Fratelli Marzoli & C. SpA, the Company will assume the operations of the current offices, showrooms and personnel. Fratelli Marzoli & C. SpA manufactures equipment used in the yarn processing industry. Prior to the Company's receipt of distribution rights, Fratelli Marzoli & Co. SpA distributed their products in the United States through its wholly-owned subsidiary, Marzoli International, Inc., a domestic corporation based in Spartanburg, South Carolina. Revenues of Marzoli International, Inc. for the twelve months ended December 31, 1997 were approximately $13.9 million. On August 1, 1998, the Company was granted the exclusive United States and Canadian distribution rights of the Vouk product line manufactured by Vouk SpA Officine Meccanotessili, an Italian corporation in which Lonati has an ownership interest. Vouk SpA Officine Meccanotessili manufactures equipment used in the yarn processing industry. Operations of this product line are being conducted through Speizman Yarn Equipment, Inc. Prior to the Company's receipt of the distribution rights, Vouk SpA Officine Meccanotessili sold directly in the United States and Canada through several agents. 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 equipment and, to a lessor extent, from the sale of parts used in such equipment and the sale of used equipment) and commercial laundry equipment and services (principally commercial washers and dryers and, to a lessor extent, the sale of parts used in such equipment and related services). The Company began operating in the laundry equipment and services segment with the purchase of Wink Davis on August 1, 1997. 8 RESULTS OF OPERATIONS Year Ended June 27, 1998 Compared to Year Ended June 28, 1997 Net Revenues. Net revenues in fiscal 1998 were $90.9 million as compared to $79.1 million in fiscal 1997, an increase of $11.8 million or 14.9%. This increase is primarily due to the acquisition of Wink Davis on August 1, 1997. Wink Davis recognized revenues in fiscal 1998 of $23.7 million. Additional components of the increase include $2.0 million increase from sales of TMC products (acquired on February 6, 1998) and an increase of $0.7 million in parts sales, offset by an $10.8 million decrease in hosiery related equipment, a $1.6 million decrease in knitted fabric equipment and a decrease of $2.2 million in products no longer represented, including sweater, and garment wet processing equipment. Cost of Sales. In fiscal 1998 cost of sales were $74.0 million an increase of $8.1 million from $65.9 million in fiscal 1997. Cost of sales as a percentage of revenues decrease to 81.5% in fiscal 1998 as compared to 83.3% in fiscal 1997. This decrease results from higher margins on hosiery related parts and equipment and the exclusion of lower margin liquidations of products discontinued in 1997. This decrease in cost of sales as a percentage of revenues was slightly offset by lower margins on Wink Davis sales. Selling Expenses. Selling expenses increased to $6.9 million in fiscal 1998 as compared to $5.8 million in fiscal 1997. This net increase of $1.1 million results from increased selling expenses of $1.8 million at Wink Davis and TMC, offset by decreases of $443,000 in textile equipment related salaries and commissions and other decreases in letter of credit expenses, professional fees, advertising and other expense decreases generally related to lower overall sales volume of textile machinery. General and Administrative. General and administrative expense increased in fiscal 1998 to $5.9 million from $3.0 million in fiscal 1997. This increase results primarily from additional administrative expenses of $1.7 million of Wink Davis and TMC, amortization expenses of $405,000 and rental expense of the new facility of $324,000. Interest Expense. Interest expense is expressed net of interest income. In fiscal 1998, net interest expense was $791,000. This significant increase in interest expense is related directly to the debt funded acquisitions of Wink Davis and TMC. Taxes (Benefit) on Income (Loss). The provision for income taxes in fiscal 1998 is $1,273,000 or 39.7% of income before taxes. The provision for income taxes in fiscal 1997 is $1,645,000 or 38.0% of income before taxes. Net Income (Loss). Net income for fiscal 1998 decreased to $1.9 million compared to net income of $2.7 million for fiscal 1997. Basic earnings per share decreased to $0.59 and diluted earnings per share decreased to $0.56. In fiscal 1997, basic earnings per share was $0.83 and diluted earnings per share was $0.80. 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. 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. 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 Copy Guard 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. 9 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. Basic earnings per share increased to $0.83 and diluted earnings per share increased to $0.80 in fiscal 1997. In fiscal 1996, basic and diluted loss per share was $0.18. LIQUIDITY AND CAPITAL RESOURCES The Company has a credit facility with NationsBank, opened on August 1, 1997, in conjunction with the purchase of Wink Davis, amended on February 6, 1998, in conjunction with the purchase of TMC and expiring on July 31, 2000. This facility furnished term loan financing for these acquisitions and also provides a line of credit for direct borrowings and issuance of documentary letters of credit. The line of credit provides up to $38.3 million, subject to current collateral balances, including up to a maximum of $8.5 million for direct borrowings, with the balance available for documentary letters of credit and term debt. Amounts outstanding under the line of credit bear interest at the greater of prime plus 1.0% or the Federal Funds Rate plus 1.5% for base rate loans and the Eurodollar Rate plus 2.0% for Eurodollar 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. Working capital at June 27, 1998 was $20.2 million as compared to $18.7 million at June 28, 1997, an increase of $1.5 million. Operating activities in fiscal 1998 used $1.3 million. In fiscal 1997 operating activities used $3.4 million. Significant funds were used in investing activities, primarily the purchases of Wink Davis and TMC for $9.5 million and $1.8 million respectively. Funds for these acquisitions were provided from financing activities, primarily through the issuance of $8.3 million in long term notes and $4.0 million of borrowings on the revolving line of credit. Cash flows from investing and financing activities in fiscal 1997 were significantly less. 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, the Company's purchases of foreign manufactured machinery for resale are 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 U.S. 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 generally exceed 12 months. Substantially all of the increase or decrease of the lira denominated purchase 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. A substantial portion of the Company's textile 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. At June 27, 1998, the Company had contracts maturing through March 1999 to purchase approximately 24.3 billion Lira for approximately $13.7 million, which approximates the spot rate on that date. 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 acquisition 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. YEAR 2000 COMPLIANCE The Company has reviewed its computer and business systems to identify those areas that could be adversely affected by Year 2000 software failures. The primary information system used by both Speizman Industries and TMC has been reviewed and all known issues related to the Year 2000 issues have been resolved. Costs incurred were not significant. The primary information system used by Wink Davis is not Year 2000 compliant. In conjunction with the purchase of Wink Davis on August 1, 1997, management planned to integrate Wink Davis' information into the existing system used by Speizman Industries. The integration project, which was not accelerated due to the Year 2000 issue, is scheduled to be completed in December 1998. The estimated project cost of integrating Wink Davis' information system is approximately $100,000. A substantial portion of the equipment distributed by the Company has computerized controls and features. However, to the Company's knowledge, no operating features of the equipment are dependent on any time or date information, such as the Year 2000 issue. The Company is aware of one subsidiary's voice mail system and there may be other computer-based systems which may require upgrading to ensure operational continuity beyond December 31, 1999. The Company has substantially completed identification of all such systems and believes that all significant systems will be compliant in time to ensure no disruption to the Company's operations. The cost of bringing these minor systems into compliance is not anticipated to be material. Currently, the Company cannot predict the effect of the Year 2000 problem on entities with which it transacts business and there can be no assurance it will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. The Company will be formulating a contingency plan to address the possible effects of any of its customers experiencing Year 2000 problems. NEW ACCOUNTING PRONOUNCEMENTS 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. 11 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. Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is presently assessing the impact of the adoption of SFAS No. 133, on its consolidated financial statements. In May, 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs at Start-Up Activities. SOP 98-5 requires that entities expense start-up costs and organization costs as they are incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Management does not anticipate SOP 98-5 having a material impact on its consolidated financial statements. 12 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 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 Fiscal 1998 First Quarter (ended September 27, 1997) 9.50 4.88 Second Quarter (ended December 27, 1997) 9.19 5.38 Third Quarter (ended March 28, 1998) 7.25 5.38 Fourth Quarter (ended June 27, 1998) 7.13 5.00 - ------------------------------------------ ------- -------
As of June 27, 1998, there were approximately 241 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. 13 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 27, 1998 and June 28, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 27, 1998. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 27, 1998 and June 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 27, 1998, in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP ------------------------ BDO SEIDMAN, LLP Charlotte, North Carolina August 27, 1998 14 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 27, June 28, 1998 1997 --------------- --------------- ASSETS Current: Cash and cash equivalents $ 2,193,329 $ 3,832,534 Accounts receivable (Notes 1, 2 and 7) 19,817,834 21,075,138 Inventories (Notes 3 and 7) 15,934,745 12,970,134 Prepaid expenses and other current assets 3,372,266 2,988,786 - ------------------------------------------------------------------ ------------ ------------ Total Current Assets 41,318,174 40,866,592 - ------------------------------------------------------------------ ------------ ------------ Property and Equipment: (Note 7) Leasehold improvements 552,655 750,140 Machinery and equipment 1,825,959 1,770,886 Furniture, fixtures and transportation equipment 1,341,728 1,078,429 - ------------------------------------------------------------------ ------------ ------------ 3,720,342 3,599,455 Less accumulated depreciation and amortization (1,632,367) (1,811,183) - ------------------------------------------------------------------ ------------ ------------ Net Property and Equipment 2,087,975 1,788,272 - ------------------------------------------------------------------ ------------ ------------ Other long-term assets 517,352 518,957 Intangibles, net of accumulated amortization (Note 4) 6,110,410 -- - ------------------------------------------------------------------ ------------ ------------ $50,033,911 $43,173,821 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current: Note payable -- bank line of credit (Note 7) $ 4,000,000 $ -- Accounts payable 10,809,976 19,075,766 Customers' deposits 2,158,512 1,380,621 Accrued expenses 2,188,557 1,667,621 Current maturities of long-term debt (Note 8) 1,945,000 1,769 - ------------------------------------------------------------------ ------------ ------------ Total Current Liabilities 21,102,045 22,125,777 Long-Term Debt (Note 8) 5,725,000 110,344 - ------------------------------------------------------------------ ------------ ------------ Total Liabilities $26,827,045 $22,236,121 - ------------------------------------------------------------------ ------------ ------------ Commitments and Contingencies (Notes 5, 10, 11, 12 and 13) Stockholders' Equity (Notes 9 and 10): Common Stock -- par value $.10; authorized 20,000,000 shares, issued 3,357,406, outstanding 3,319,806; and issued 3,262,866, outstanding 3,235,266, respectively 335,741 326,287 Additional paid-in capital 12,889,546 12,512,299 Retained earnings 10,143,226 8,209,911 Foreign currency translation adjustment -- (11,000) - ------------------------------------------------------------------ ------------ ------------ Total 23,368,513 21,037,497 Treasury stock, at cost, 37,600 shares and 27,600 shares (161,647) (99,797) - ------------------------------------------------------------------ ------------ ------------ Total Stockholders' Equity 23,206,866 20,937,700 - ------------------------------------------------------------------ ------------ ------------ $50,033,911 $43,173,821 - ------------------------------------------------------------------ ------------ ------------
See accompanying summary of accounting policies and notes to consolidated financial statements. 15 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended -------------------------------------------------- June 27, June 28, June 29, 1998 1997 1996 ---------------- -------------- -------------- Net Revenues (Note 1) $90,886,285 $79,103,225 $46,279,969 - ------------------------------------------- ----------- ----------- ----------- Costs and Expenses: Cost of sales 74,033,817 65,934,696 40,546,962 Selling expenses 6,944,079 5,810,360 4,699,280 General and administrative expenses 5,911,007 3,045,269 1,878,193 - ------------------------------------------- ----------- ----------- ----------- Total costs and expenses 86,888,903 74,790,325 47,124,435 - ------------------------------------------- ----------- ----------- ----------- 3,997,382 4,312,900 (844,466) Interest (Income) Expense, net of interest income of $102,968, $113,137 and $ 126,522 791,067 (17,651) (43,400) - ------------------------------------------- ----------- ----------- ----------- Net Income (Loss) Before Taxes 3,206,315 4,330,551 (801,066) Taxes (Benefit) on Income (Note 6) 1,273,000 1,645,000 (228,000) - ------------------------------------------- ----------- ----------- ----------- Net Income (Loss) $1,933,315 $2,685,551 (573,066) - ------------------------------------------- ----------- ----------- ----------- Earnings (loss) per share: Basic 0.59 0.83 (0.18) Diluted 0.56 0.80 (0.18) Weighted average shares outstanding: Basic 3,284,278 3,228,745 3,208,599 Diluted 3,425,899 3,353,419 3,208,599 - ---------- ----------- ----------- -----------
See accompanying summary of accounting policies and notes to consolidated financial statements. 16 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, 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 Net income -- -- -- 1,933,315 -- -- 1,933,315 Exercise of stock options 94,540 9,454 275,547 -- -- -- 285,001 Purchase of treasury stock -- -- -- -- -- (61,850) (61,850) Foreign currency translation adjustment -- -- -- -- 11,000 -- 11,000 Tax effect of exercise of stock options -- -- 101,700 -- -- -- 101,700 - -------------------------------- --------- -------- ----------- ----------- ---------- ---------- ----------- Balance, June 27, 1998 3,357,406 $335,741 $12,889,546 $10,143,226 $ -- $ (161,647) $23,206,866 - -------------------------------- --------- -------- ----------- ----------- ---------- ---------- -----------
See accompanying summary of accounting policies and notes to consolidated financial statements. 17 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended -------------------------------------------------- June 27, June 28, June 29, 1998 1997 1996 --------------- --------------- -------------- Cash Flows From Operating Activities: Net income (loss) $ 1,933,315 $ 2,685,551 $ (573,066) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on disposal of fixed assets (4,980) -- -- Depreciation and amortization 1,184,724 484,152 173,336 Provision for losses on accounts receivable 189,545 214,521 113,500 Provision for inventory obsolescence 275,000 154,133 139,436 Provision for deferred income taxes (187,000) (121,000) (58,000) Provision for deferred compensation 379 (25,220) 6,782 Foreign currency translation adjustment 11,000 (5,777) (5,954) (Increase) decrease in: Accounts receivable 5,304,947 (9,129,210) 3,804,734 Inventories (337,132) (1,484,715) 1,649,026 Prepaid expenses 22,717 (701,675) 159,244 Other assets 590,564 229,728 (69,076) Increase (decrease) in: Accounts payable (9,302,942) 4,211,199 (192,360) Accrued expenses and customers' deposits (985,393) 114,895 1,214,580 - -------------------------------------------------------- ----------- ------------ ---------- Net cash provided by (used in) operating activities (1,305,256) (3,373,418) 6,362,182 - -------------------------------------------------------- ----------- ------------ ---------- Cash Flows From Investing Activities: Acquisition of Wink Davis Equipment Company, Inc. (9,467,677) -- -- Acquisition of Todd Motion Controls, Inc (1,841,304) -- -- Capital expenditures (470,221) (846,845) (1,159,659) Proceeds from property and equipment disposals 76,304 27,125 347,557 - -------------------------------------------------------- ----------- ------------ ---------- Net cash used in investing activities (11,702,898) (819,720) (812,102) - -------------------------------------------------------- ----------- ------------ ---------- Cash Flows From Financing Activities: Net borrowings on line of credit agreement 4,000,000 -- -- Principal payments on long term debt (1,154,202) (11,052) (5,216) Issuance of common stock upon exercise of stock options 285,001 55,001 -- Purchase of treasury stock (61,850) -- -- Proceeds from issuance of long term notes due to bank 8,300,000 -- -- - -------------------------------------------------------- ----------- ------------ ---------- Net cash provided by (used in) financing activities 11,368,949 43,949 (5,216) - -------------------------------------------------------- ----------- ------------ ---------- Net Increase (Decrease) in Cash and Cash Equivalents (1,639,205) (4,149,189) 5,544,864 Cash and Cash Equivalents, at beginning of year 3,832,534 7,981,723 2,436,859 - -------------------------------------------------------- ----------- ------------ ---------- Cash and Cash Equivalents, at end of year $ 2,193,329 $ 3,832,534 $7,981,723 - -------------------------------------------------------- ----------- ------------ ----------
See accompanying summary of accounting policies and notes to consolidated financial statements. 18 SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Speizman Industries, Inc. and subsidiaries (collectively the "Company") include all of its subsidiaries, all of which are wholly owned. All material intercompany transactions (domestic and foreign) have been eliminated. The financial statements of the Company's United Kingdom subsidiary were translated from pounds sterling to U.S. dollars in accordance with generally accepted accounting principles. The United Kingdom subsidiary was liquidated on June 28, 1997. Wink Davis Equipment Company, Inc. ("Wink Davis") was acquired on August 1, 1997. Todd Motion Controls, Inc. ("TMC") was acquired on February 6, 1998. 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 equivalents approximates fair value due to 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 27, 1998, the Company had contracts maturing through March 1999 to purchase approximately 24.3 billion Lira for approximately $13.7 million, which approximates the spot rate on that date. TAXES ON INCOME The Company has adopted the SFAS Statement No. 109, "Accounting for Income Taxes." Accordingly, deferred tax assets or liabilities 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 The Company has adopted SFAS Statement no. 128, "Earnings per Share." Accordingly, 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). 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 27, 1998, June 28, 1997 and June 29, 1996 included 52 weeks. 19 ADVERTISING The Company expenses advertising costs as incurred. Total advertising expense approximated $97,000, $95,000 and $80,000 for fiscal years 1998, 1997 and 1996, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments of the Company include long-term debt and line of credit agreements. Based upon the current borrowing rates available to the Company, estimated fair values of these financial instruments approximate their recorded carrying amounts. 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 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. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is presently assessing the impact of the adoption of SFAS No. 133 on its consolidated financial statements. In May, 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs at Start-Up Activities. SOP 98-5 requires that entities expense start-up costs and organization costs as they are incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Management does not anticipate SOP 98-5 having a material impact on its consolidated financial statements. 20 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 and commercial laundry industries. With operations in the United States, Canada, Mexico and formerly the United Kingdom, the Company primarily sells to customers located within the United States. Export sales from the United States were approximately $15,992,000, $12,433,000 and $7,196,000 during fiscal 1998, 1997 and 1996, respectively. There were no export sales by the Canadian operations or the commercial laundry 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: 41.1% in 1998, 60.1% in 1997 and 46.2% in 1996. In addition, sales of Santoni machines in the United States and Canada generated 5.3%, 7.0% and 4.8% of the Company's net revenues in fiscal 1998, 1997 and 1996, respectively. In 1998, approximately 12% and 4% of revenues consisted of sales to the Company's two largest customers. 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. 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 27, June 28, 1998 1997 -------------- -------------- Trade receivables $20,671,045 $21,549,615 Less allowance for doubtful accounts (853,211) (474,477) - -------------------------------------- ----------- ----------- Net accounts receivable $19,817,834 $21,075,138 - -------------------------------------- ----------- -----------
NOTE 3 -- INVENTORIES Inventories are summarized as follows:
June 27, June 28, 1998 1997 ------------- ------------- Machines New $ 3,051,280 $ 3,961,362 Used 6,414,845 4,807,479 Parts and supplies 6,468,620 4,201,293 - -------------------- ----------- ----------- Total $15,934,745 $12,970,134 - -------------------- ----------- -----------
NOTE 4 -- INTANGIBLES Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets and is amortized on a straight-line basis over fifteen years. Goodwill is net of accumulated amortization of $327,500 at June 27, 1998. 21 NOTE 5 -- LEASES The Company conducts its operations from leased real properties which include offices, warehouses and manufacturing facilities. The primary operating facility of the textile operations and corporate offices is leased from a partnership in which Mr. Robert S. Speizman, the Company's President, has a 50% interest. The lease extends through March 1999. Lease payments to the partnership approximated $356,000, $356,000 and $323,000 in fiscal years 1998, 1997 and 1996, respectively. The Company plans to consolidate several textile machinery warehouses and the corporate offices into a single location. After renovating this new facility, the Company plans to complete this consolidation in the spring of 1999. This new facility is leased from a corporation owned by Robert S. Speizman, his wife and their children. This lease extends through September 2012. Lease payments to the corporation, net of sublease payments received from the former lessor, approximated $307,000 in fiscal 1998. The primary operating facility and certain sales offices of the laundry equipment and services operations are leased from a partnership in which Mr. C. Alexander Davis, President of Wink Davis, has a 50% interest. The leases extend through July 1999. Lease payments to the partnership approximated $128,000 in fiscal 1998. As of June 27, 1998, future minimum rental payments required under operating leases that have initial or remaining noncancelable terms in excess of one year are as follows:
Operating Leases ------------- 1999 $ 1,239,816 2000 920,929 2001 744,327 2002 684,179 2003 664,012 Beyond 6,101,389 - ---- ----------- Total minimum lease payments $10,354,652 - ------------------------------ -----------
Total rent expense for operating leases approximated $1,566,000, $1,021,600 and $791,400 for fiscal years 1998, 1997 and 1996, respectively. NOTE 6 -- TAXES ON INCOME Provisions for federal and state income taxes in the consolidated statements of operations are made up of the following components:
1998 1997 1996 ------------- ------------- ------------- Current: Federal $1,206,000 $1,482,000 $ (70,000) State 251,000 282,000 (15,000) Foreign 3,000 2,000 (85,000) - --------------------------------- ---------- ---------- ---------- 1,460,000 1,766,000 (170,000) - --------------------------------- ---------- ---------- ---------- Deferred: Federal (152,000) (87,000) (50,000) State (35,000) (34,000) (8,000) - --------------------------------- ---------- ---------- ---------- (187,000) (121,000) (58,000) - --------------------------------- ---------- ---------- ---------- Total taxes (benefit) on income $1,273,000 $1,645,000 $ (228,000) - --------------------------------- ---------- ---------- ----------
22 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 27, June 28, 1998 1997 ---------- ----------- Net current assets $647,000 $383,000 Net noncurrent assets 147,000 152,000 - ----------------------- -------- -------- $794,000 $535,000 -------- --------
Principal items making up the deferred income tax assets (liabilities) are as follows:
Year Ended ----------------------------- June 27, June 28, 1998 1997 ------------- ------------- Inventory valuation reserves $ 195,000 $ 162,000 Depreciation (110,000) (107,000) Deferred charges 161,000 107,000 Inventory capitalization 224,000 191,000 Accounts receivable reserves 324,000 182,000 - ------------------------------ ---------- ---------- Net deferred tax asset $ 794,000 $ 535,000 - ------------------------------ ---------- ----------
The Company's effective income tax rates are different than the U.S. Federal statutory tax rate for the following reasons:
1998 1997 1996 ---------- ---------- ---------- U.S. Federal statutory tax rate 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit 5.1 4.3 3.6 Non-deductible expenses 1.2 1.5 (5.3) Foreign tax rates -- (0.8) (4.9) Net tax effect of prior year adjustments -- -- 2.5 Other (0.6) (1.0) (1.4) - ------------------------------------------------------- ---- ---- ---- Effective tax rate 39.7% 38.0% 28.5% - ------------------------------------------------------- ---- ---- ----
NOTE 7 -- LINE OF CREDIT The Company has a credit facility with NationsBank, opened on August 1, 1997, in conjunction with the purchase of Wink Davis, amended on February 6, 1998, in conjunction with the purchase of TMC and expiring on July 31, 2000. This facility furnished term loan financing for these acquisitions and also provides a line of credit for direct borrowings and issuance of documentary letters of credit. The line of credit provides up to $38.3 million, subject to current collateral balances, including up to a maximum of $8.5 million for direct borrowings, with the balance available for documentary letters of credit and term debt. Amounts outstanding under the line of credit bear interest at the greater of prime plus 1.0% or the Federal Funds Rate plus 1.5% for base rate loans and the Eurodollar Rate plus 2.0% for Eurodollar loans. At June 27, 1998, the interest rate on the line of credit was 9.50%. 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 8) This credit facility contains certain covenants that require, among other things, the Company to maintain levels of current assets to current liabilities, gross borrowings to EBITDA, working capital, tangible net worth, restrictions on dividends, and certain fixed charge coverage. As of June 27, 1998, the Company was in compliance with such covenants. 23 NOTE 8 -- LONG-TERM DEBT Long-term debt consists primarily of a term loan with NationsBank which provided $8.3 million used for financing the acquisitions of Wink Davis and TMC. The repayment schedule requires quarterly principal payments of $380,000, a single annual prepayment calculated as a percentage of the prior year's adjusted earnings, and the balance due on the loan's expiration date, July 31, 2000. The term loan agreement permits the Company to select either a base interest rate or a Eurodollar interest rate plus 2.0%. The base interest is the greater of prime plus 1.0% or the Federal Funds Effective Rate plus 1.5%. At June 27, 1998, $7,250,000 of the term loan was borrowed under the Eurodollar selection bearing interest at 7.625% and the balance of $420,000 was borrowed under the base rate selection bearing interest at 9.5%. The term loan agreement requires that the Company enter an interest rate swap agreement for a portion of the outstanding principal. The swap agreement is an interest rate hedge which, in effect, converts the interest rate from a variable to a fixed rate over a three-month period. At June 27, 1998, $7,250,000 was fixed at an interest rate of 7.625% through August 15, 1998. Long-term debt consists of:
June 27, 1998 June 28, 1997 --------------- -------------- Total Total --------------- -------------- Term loan $ 7,670,000 $ -- Other -- 112,113 - -------------------- ------------ -------- Total 7,670,000 112,113 Current maturities (1,945,000) (1,769) - -------------------- ------------ -------- $ 5,725,000 $110,344 ------------ --------
Annual maturities of long-term debt are 1999, $1,945,000; 2000, $1,520,000; and 2001, $4,205,000. NOTE 9 -- STOCK OPTIONS The Company has reserved 125,000, 250,000 and 450,000 shares of Common Stock under employee stock plans adopted in 1981, 1991 and 1995, respectively. As of June 27, 1998, options to purchase 4,000, 85,385 and 371,000 were outstanding under the 1981, 1991 and 1995 Plans, respectively. Currently, outstanding options become exercisable in two to four years from the grant date. All options, subject to certain exceptions with regard to termination of employment and the percentage of outstanding shares of common stock owned, must be exercised within ten (10) years of the grant date. 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 Plan 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 1998, 1997, and 1996 follows: 24
Year Ended ------------------------------------------------------------------------- Weighted Weighted Weighted June 27, Average June 28, Average June 29, Average 1998 Price/Sh. 1997 Price/Sh. 1996 Price/Sh. ------------ ----------- ------------ ----------- ------------ ---------- Shares under option, beginning of year 466,925 $ 4.17 334,092 $ 3.13 150,429 $ 3.15 Options granted 88,000 6.31 159,500 6.00 183,663 3.10 Options exercised (94,540) 3.01 (26,667) 2.06 -- -- Options expired -- -- -- -- -- -- - ---------------------------------------- ------- ------- ------- ------- ------- ------- Shares under option, end of year 460,385 $ 4.81 466,925 $ 4.17 334,092 $ 3.13 - ---------------------------------------- ------- ------- ------- ------- ------- ------- Options exercisable 236,410 141,668 117,086 - ---------------------------------------- ------- ------- ------- Prices of options exercised $ .75 to $ 2.063 -- $ 5.50 Prices of options outstanding, $ .75 to $ .75 to $ .75 to end of year $ 6.31 $ 6.00 $ 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 9,000 shares were granted and outstanding at the end of the year at a price of $2.88 to $6.13. A summary of non-employee directors stock option and other information for 1998, 1997 and 1996 follows:
Year Ended ------------------------------------------------------------------------- Weighted Weighted Weighted June 27, Average June 28, Average June 29, Average 1998 Price/Sh. 1997 Price/Sh. 1996 Price/Sh. ------------- ----------- ------------- ----------- ---------- ---------- Shares under option, beginning of year 6,000 $ 4.16 3,000 $ 2.88 -- $ -- Options granted 3,000 6.13 3,000 5.44 3,000 2.88 Options exercised -- -- -- -- -- -- Options expired -- -- -- -- -- -- - ---------------------------------------- ----- ------- ----- ------- ----- ----- Shares under option, end of year 9,000 $ 4.81 6,000 $ 4.16 3,000 $ 2.88 - ---------------------------------------- ----- ------- ----- ------- ----- ------ Options exercisable 4,500 1,500 -- - ---------------------------------------- ----- ----- ----- Prices of options exercised -- -- -- Prices of options outstanding, $ 2.88 to $ 2.88 to end of year $ 6.13 $ 5.44 $ 2.88 - ---------------------------------------- --------- --------- -------
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 10.0 years, expected volatility of 0.574, risk-free interest rate of 6.5% and dividend yield of 0.0%. The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions and changes in these assumptions can materially impact the fair value of the options and the Company's options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options. The estimated fair value of stock options granted during fiscal 1998 and 1997 was $4.69 and $4.46 per share, respectively. 25 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 27, June 28, 1998 1997 --------------- --------------- Pro forma net income $ 1,480,353 $ 2,512,366 Pro forma basic earnings per share $ 0.45 $ 0.78 Pro forma diluted earnings per share 0.43 0.75 - -------------------------------------- ----------- -----------
The following table summarizes information about stock options outstanding at June 27, 1998:
Range of exercise prices $ 0.75 to $6.31 Outstanding options Number outstanding 469,385 Weighted average remaining contractual life (years) 7.2 Weighted average exercise price $ 4.81 Exercisable options Number outstanding 264,609 Weighted average exercise price $ 4.07 - ------------------------------------------------------- ----------------
NOTE 10 -- STOCK REDEMPTION AGREEMENTS The Company has an agreement with its principal stockholder 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 out more than the amount of life insurance proceeds received by the Company as a result of the death of the stockholder, nor will the Company redeem a number of shares that would reduce the principal holder's estate's percentage of the outstanding common stock of the Company to less than 16%. At June 27, 1998, there were 673,475 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 11 -- 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 $50,362, $48,885 and $53,885 for the fiscal years 1998, 1997 and 1996, respectively. NOTE 12 -- EMPLOYEES' RETIREMENT PLAN The Company adopted a 401(k) retirement plan, effective October 7, 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 $107,000, $47,000 and $21,000 in fiscal years 1998, 1997 and 1996, respectively. 26 NOTE 13 -- COMMITMENTS AND CONTINGENCIES The Company had outstanding commitments backed by letters of credit of approximately $8,220,000 and $16,631,000 at June 27, 1998 and June 28, 1997, respectively, relating to the purchase of machine inventory for delivery to customers. The Company is presently the Defendant in a lawsuit filed by a former employee of the Company who lost his job in 1997, pursuant to a reduction in workforce. At the present time, both Plaintiff and the Company are engaged in discovery processes including depositions, and it is the Company's position that it will defend vigorously against all claims brought by this former employee through trial, if necessary. While the amount claimed may be substantial, the ultimate liability cannot now be determined because of a number of considerable uncertainties, both factual and legal, that presently exist. Therefore, it is possible that results of operations in a particular period could be materially affected. Based on facts currently available, management believes that the disposition of this matter will not have a materially adverse effect on the financial position of the Company. NOTE 14 -- SUBSEQUENT EVENT On August 1, 1998, the Company was granted the exclusive United States and Canadian distribution rights of the Marzoli product line manufactured by Fratelli Marzoli & C. SpA, an Italian corporation. As part of its agreement with Fratelli Marzoli & C. SpA, the Company will assume the operations of the current offices, showrooms and personnel. Fratelli Marzoli & C. SpA manufactures equipment used in the yarn processing industry. Prior to the Company's receipt of distribution rights, Fratelli Marzoli & Co. SpA distributed its products in the United States through its wholly-owned subsidiary, Marzoli International, Inc., a domestic corporation based in Spartanburg, South Carolina. Revenues of Marzoli International, Inc. for the twelve months ended December 31, 1997 were approximately $13.9 million. NOTE 15 -- BUSINESS ACQUISITIONS On August 1, 1997, the Company acquired all of the outstanding stock of Wink Davis, a Georgia corporation. For financial statement purposes, the acquisition was accounted for as a purchase and accordingly, Wink Davis' results for the eleven months since the date of acquisition are included in the consolidated financial statements. The aggregate purchase price was approximately $9,467,677. There is a possible additional conditional payment of up to $1.5 million in cash over a five-year period based on certain pre-tax earnings calculations. These contingent payments, if any, will be capitalized as increases to the original purchase price and amortized accordingly. The aggregate purchase price, which was financed through available cash resources, borrowings on the revolving line of credit and issuance of a term loan, has been allocated to the assets based upon their respective fair market values. The excess of the purchase price over assets acquired (Goodwill) approximated $4,343,662 and is being amortized over fifteen years. On February 6, 1998, the Company acquired all of the outstanding stock of TMC, a North Carolina corporation. For financial statement purposes the acquisition was accounted for as a purchase and, accordingly, TMC's results are included in the consolidated financial statements since the date of acquisition. The aggregate purchase price was approximately $1,841,304. The aggregate purchase price, which was financed through available cash resources, borrowings on the revolving line of credit and issuance of a term loan, has been allocated to the assets based upon their respective fair market values. The excess of the purchase price over assets acquired (Goodwill) approximated $2,094,247 and is being amortized over fifteen years. The following unaudited pro forma consolidated results of operations for fiscal 1997 have been prepared as if the acquisition of Wink Davis occurred as of the beginning of fiscal 1997. Pro forma operating results for fiscal 1998 as though the enterprises had been combined as of the beginning of the fiscal year would not differ materially from actual results for fiscal 1998. The acquisition of Wink Davis occurred early in fiscal 1998, and, accordingly, operating results for the incremental period of approximately one month would not be significant. The incremental operating results of TMC for fiscal 1997 and incremental period of approximately seven months in fiscal 1998 would not be significant. 27
Pro Forma Results for the Year Ended June 28, 1997 -------------------------- Net sales $ 111,739,000 Net income $ 2,589,000 Net income per share -- basic $ 0.80 Net income per share -- diluted $ 0.77 - --------------------------------- -------------
The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisitions been in effect for the period presented, nor do they purport to be indicative of the results that will be obtained in the future. NOTE 16 -- SEGMENT INFORMATION The Company operates primarily in two segments of business, textile equipment and laundry equipment and services. Prior to the acquisition of Wink Davis on August 1, 1997, the Company operated only in the textile segment. TMC is included in the textile equipment classification. The table below summarizes financial data by segment.
Total revenues Textile equipment $67,229,741 Laundry equipment and services 23,656,544 - --------------------------------- ----------- $90,886,285 - --------------------------------- ----------- Total assets Textile equipment $38,744,098 Laundry equipment and services 11,289,813 - --------------------------------- ----------- $50,033,911 - --------------------------------- ----------- Income before interest and taxes Textile equipment $ 3,915,662 Laundry equipment and services 81,720 - --------------------------------- ----------- $ 3,997,382 - --------------------------------- -----------
NOTE 17 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended ---------------------------------------- June 27, June 28, June 29, 1998 1997 1996 ------------ ------------ ---------- Cash paid during year for: Interest $ 776,544 $ 101,315 $ 81,578 Income taxes 1,381,196 1,440,696 120,086 - --------------------------- --------- --------- --------
28 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 Bryan D. Speizman Senior Vice President- Non-Hosiery Mark A. Speizman Senior Vice President- Hosiery 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 GENERAL COUNSEL Odom & Groves, P.C. Charlotte, N.C. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS BDO Seidman, LLP Charlotte, N.C. 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 Todd Motion Controls, Inc. 5511 Reynolda Road Winston-Salem, NC 27106 LISTING Speizman Industries, Inc. Common Stock is listed on the NASDAQ National Market System under the symbol "SPZN." FORM 10-K Copies of the Company's Annual Report on Form 10-K for the year ended June 27, 1998, may be obtained without charge by writing: Mr. Josef Sklut Speizman Industries, Inc. P.O. Box 31215 Charlotte, N.C. 28231 Speizman Industries, Inc. logo appears here. -----END PRIVACY-ENHANCED MESSAGE-----