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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended June 29, 2002
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the transition period from __________________ to _____________________
Commission File No. 0-8544
SPEIZMAN INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 56-0901212
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
701 Griffith Road, Charlotte, North Carolina 28217
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(Address of principal executives offices) (Zip Code)
Registrant's telephone number, including area code: (704) 559-5777
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing such
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of September 20, 2002, was $1,694,308 based on the last
sale price of $0.70 per share reported by the NASDAQ Market System on that date.
As of September 20, 2002, there were 3,255,428 shares of the
registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on November 19, 2002 are incorporated herein by
reference into Part III.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates, and
projections about Speizman's industry, management beliefs, and certain
assumptions made by Speizman's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes, "seeks," "estimates," variations of
such words, and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties, and assumptions
that are difficult to predict; therefore, actual results may differ materially
from those expressed or forecasted in any such forward-looking statements. Such
risks and uncertainties include those set forth herein under "Risk Factors" on
pages 7 through 9. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise. However, readers should carefully review the risk factors
set forth in other reports and documents that the Company files from time to
time with the Securities and Exchange Commission, particularly the Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K.
PART I
Item 1. Business.
General
Speizman Industries, Inc. is a distributor of specialized industrial
machinery, parts and equipment. The Company operates primarily in two segments,
textile division and laundry division. In the textile segment, the Company
distributes sock-knitting machines, other knitting equipment, automated
boarding, finishing and packaging equipment used in the sock industry, and
related parts. In the laundry segment, the Company distributes commercial and
industrial laundry equipment, including the distribution of machines and parts
as well as providing installation and after sales service. The Company refers to
its operations in the textile segment as Speizman Industries, and the laundry
segment as Wink Davis Equipment Co., Inc. ("Wink Davis").
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 2000, 2001 and 2002
contained 52 weeks and ended on July 1, 2000, June 30, 2001 and June 29, 2002,
respectively.
Speizman Industries
The technologically advanced sock knitting machines distributed by Speizman
Industries are manufactured by Lonati, S.p.A., Brescia, Italy ("Lonati"), which
the Company believes is the world's largest manufacturer of hosiery knitting
equipment. The Company and Lonati entered into their present agreement for the
sale of Lonati machines in the United States in 1992. The Company and Lonati
further amended this agreement in January 2002. In May 2002, the Company and
Lonati further amended this agreement to provide for Lonati's forbearance and
payment restructuring with respect to trade debt owed Lonati by the Company.
This amendment was effective February 2002. The Company's agreement with Lonati,
as amended, is referred to herein as the Lonati Agreement. Speizman and Lonati
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 open toe knitting machines in 1989. Its
current product line includes newer technology represented by its single
cylinder closed toe knitting machine, which eliminates the steps associated for
a sock manufacturer in sewing the toe on a sock.
Pursuant to the Lonati agreements discussed above, Lonati has appointed
Speizman Industries as Lonati's distributor and exclusive agent in the United
States and Canada for the sale of its range of single (both open and closed toe
versions) and double cylinder sock knitting machines and related spare parts.
The Lonati Agreement continues through January 2006 and can be terminated by
Lonati earlier in the event of its breach by the Company.
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
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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 that compete with Lonati
machines. Speizman believes that it is and will remain in compliance in all
material respects with these 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 (both closed toe and open toe versions)
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. As these functions are all
electronically controlled, they allow the rapid change of sock design, style and
size, result in increased production volume and efficiency and simplify the
servicing of the machines. Lonati single cylinder machines are also available in
a closed toe version, which enables hosiery manufacturers to automate their
production processes by knitting in the toe as opposed to manually seaming. This
procedure not only results in a higher quality product but manufacturers also
benefit from lower manufacturing costs. In addition to the previously described
machines distributed in the United States, Speizman Industries distributes these
sock knitting machines as well as Lonati sheer hosiery knitting machines in
Canada and Mexico. Speizman also distributes knitting machines, manufactured by
Santoni, SpA, Brescia, Italy ("Santoni"), one of Lonati's subsidiaries, in the
United States and Canada. Santoni products include large diameter circular
knitting machines utilizing new technology in the production of seamless
undergarments, action wear and swimsuits.
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
the Company's net revenues: 25.1% in fiscal 2002, 26.2% in fiscal year 2001 and
21.2% in fiscal 2000. In addition, sales of Santoni machines in the United
States, Canada and Mexico generated 6.8%, 4.2% and 32.3% of the Company's net
revenues in fiscal 2002, 2001 and 2000, respectively.
In addition to the Lonati and Santoni knitting machines, Speizman Industries
distributes new machines and equipment for the seaming, finishing, boarding, and
packaging operations under written agreements and arrangements with other
manufacturers. The following table sets forth certain information concerning
most of these additional distribution arrangements. SRA SrL and Tecnopea are
subsidiaries of Lonati.
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Manufacturer Machine Territory
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Braun (Joint Marketing Pocketed dye and extracting machines Worldwide
Agreement with
Martint Equipment)
Syracuse, NY
Conti Complett, S.p.A., Sock or seaming machines and sock United States, Canada
Milan, Italy turning devices
Matec Dial rib sock knitters, medical knitters United States and Canada
Florence, Italy
Margasa Proycetos E. Fiber waste reclaiming and rag tearing machines United States, Canada and
Ingeniera Textile, S.L. Mexico
Barcelona, Spain
SRA Srl Automated loading, positioning, and finishing United States and Canada
Florence, Italy devices
Tecnopea Automated folding and packaging equipment United States
Brescia, Italy
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Commencing in January 2001 and in conjunction with licensing certain assets
of Todd Motion Controls, Inc. ("TMC"), a subsidiary of the Company, to SRA Srl
("SRA"), the Company obtained exclusive rights to distribute
TMC equipment in the United States and Canada that is manufactured by SRA. SRA
has distribution rights for TMC equipment outside the United States and Canada.
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Speizman Industries sells textile machine parts and used textile equipment
in the United States and in a number of foreign countries. 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. From time to time, Speizman Industries acts as a liquidator of
textile mill equipment and as a broker in the purchase and sale of such
equipment.
Sales and Marketing
Speizman Industries markets and sells knitting machines and related
equipment primarily by maintaining frequent contact with customers and
understanding of its customers' individual business needs. Speizman Industries
exhibits its equipment at trade shows and uses its private showroom to
demonstrate new machines to its customers. In some cases, 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's facilities 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. These marketing strategies are
complemented by Speizman's commitment to service and continuing education. At
September 20, 2002, Speizman Industries employed 4 salespersons and 13 technical
representatives. In addition to its sales staff, Speizman Industries uses
several commission sales agents in a number of foreign countries in connection
with its sales of used machines.
The terms of new machine sales generally are individually negotiated
including the purchase price, payment terms and delivery schedule. Speizman
Industries is usually required to purchase imported machines with a letter of
credit in favor of the manufacturer delivered approximately seven (7) days prior
to the machine's shipment to the customer's plant. Generally, the letter of
credit must be payable 60-90 days from the date of the on-board bill of lading
and upon presentation of the bill of lading. The period from shipment by the
manufacturer to installation in the customer's plant is generally 30-60 days.
The majority all of the new machines sold by Speizman Industries are
drop-shipped from the foreign manufacturer by container or air freight directly
to the customer's plant using Speizman's freight forwarder to coordinate
shipment and the customer takes title at the European port.
Because a substantial portion of Speizman Industries' revenues are derived
from sales of machines and equipment imported from abroad, these sales may be
subject to import controls, duty and currency fluctuations. Since November 2000,
substantially all of Speizman Industries' purchases of Italian machines for sale
in the United States have been denominated in U.S. dollars. Prior to that time,
most of these purchases were denominated in Italian Lira or, more recently, EURO
dollars. Speizman's purchases of parts for resale from these manufacturers are
still denominated in Euro dollars. Speizman anticipates that it will utilize
forward exchange contracts in connection with these purchases of parts in fiscal
2003, although it did not do so in 2002. Speizman has historically adjusted
sales prices or purchased forward exchange contracts in an effort to mitigate
adverse effects of foreign currency fluctuations. Additionally, international
currency fluctuations that result in substantial price level changes could
impede import sales and substantially impact profits. Speizman is not able to
assess the quantitative effect such international price level changes could have
upon Speizman Industries' operations. There can be no assurance that
fluctuations in foreign exchange rates will not have an adverse effect on
Speizman Industries future operations. Substantially, all of Speizman
Industries' export sales originating from the United States are made in U.S.
dollars.
Speizman Industries also markets used machines through its employees and
outside commission salespersons. Speizman Industries markets its used machines
in the United States and in a number of foreign countries. Speizman frequently
distributes lists throughout the industry of used machines that Speizman
Industries has for sale. Additionally, Speizman utilizes its Internet web site
for listing used machines available for sale.
Speizman Industries exports certain new and used machines and parts for sale
in Canada, Mexico and a number of other foreign countries. See Note 1 of Notes
to Consolidated Financial Statements for certain financial information
concerning Speizman Industries' foreign sales in fiscal 2002, 2001 and 2000.
Customers
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Speizman Industries' customers consist primarily of the major sock
manufacturers in the United States and Canada. In fiscal year 2001, one customer
(Sara Lee Sock Company) represented 13.4% of the Company's revenues. In fiscal
years 2002 and 2000, no single customer represented over 10% of the Company's
revenues. Generally, the customers contributing the most to Speizman Industries'
net revenues vary from year to year. Speizman Industries believes that the loss
of any principal customer could have a material adverse effect on the Company.
Competition
The sock knitting machine industry is competitive. The principal competitive
factors in the distribution of sock knitting machines are technology, price,
service, and delivery. Management believes that its competitive advantages are
the technological advantages of machines manufactured by Lonati and its
affiliates and Speizman Industries' staff of technicians whom management
believes is more comprehensive than any maintained by the competition.
Lonati single cylinder machines compete primarily with machines manufactured
by an Italian company (Sangiacomo, S.p.A.) and a Czech company (Ange) and Lonati
double cylinder machines compete primarily with machines manufactured by an
Italian company (Matec) acquired in 1993 by Lonati but not represented by
Speizman Industries. Lonati machines compete, to a lesser extent, with machines
manufactured by a number of other foreign companies of varying sizes and with
companies selling used machines. Management believes that it is at a competitive
disadvantage if a potential customer's decision will be based primarily on price
since, generally, the purchase price of Lonati machines is higher than that of
competing machines.
In its sale of new equipment other than Lonati machines, Speizman Industries
competes with a number of foreign and domestic manufacturers and distributors of
new and used machines. Certain of Speizman Industries' competitors may have
substantially greater resources than Speizman Industries.
Domestic and foreign sales of used sock and sheer hosiery knitting machines
are fragmented and highly competitive. Speizman Industries competes with a
number of domestic and foreign companies that sell used machines as well as
domestic and foreign manufacturers that have used machines for sale as a result
of trade-ins. In the United States, Speizman Industries has one primary
competitor in its sale of used sock knitting machines. The principal competitive
factors in Speizman Industries' domestic and foreign sales of used machines are
price and availability of machines that are in demand. Although Speizman
Industries is the exclusive distributor of original equipment manufacturer
("OEM's") parts for a number of the machines it distributes, it competes with
firms that manufacture and distribute duplicates of such parts.
Wink Davis
Wink Davis, with offices in Smyrna, Georgia, Wood Dale, Illinois, Jessup,
Maryland and Charlotte, North Carolina, distributes commercial laundry equipment
and parts and provides related services, principally installation services. Wink
Davis sells to a wide variety of customers. 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 from
its distribution of washers, dryers, ironers and other finishing equipment
manufactured by Pellerin Milnor and Chicago Dryer. Wink Davis represents both of
these companies in Georgia, South Carolina, North Carolina, Virginia, middle and
eastern Tennessee, Maryland, Washington, DC, northern and central Florida, and
the Chicago, Illinois areas.
The Pellerin Milnor agreement appoints Wink Davis as the exclusive
distributor 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
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most of its current territories since 1972. In 2002, Pellerin Milnor has
presented its annual top distributor award to Wink Davis and has done so for all
but three years since 1980.
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 OEMs, distributes other laundry related equipment. The following table sets
forth, in alphabetical order, certain information concerning the additional
distribution agreements:
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Manufacturer Machine Territory
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Ajax Manufacturing Laundry and dry cleaning presses and Southeastern U.S. & Chicago, IL areas
Cincinnati, Ohio dryers
American Dryer, Commercial dryers Southeastern U.S. & Chicago, IL areas
Fall River, MA
Cissell Manufacturing, Commercial dryers, laundry and dry Southeastern U.S. & Chicago, IL areas
Louisville, KY cleaning pressing equipment
Energenics Corp., Lint collectors and automatic cart Southeastern U.S. & Chicago, IL areas
Naples, FL wash systems
Forenta, Inc., Laundry and dry cleaning presses Southeastern U.S. & Chicago, IL areas
Morrisville, TN
Huebsch Originators, Commercial dryers Southeastern U.S. & Chicago, IL areas
Ripon, WI
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Sales and Marketing
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 ("white machines"), 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
payment with the balance due 10 days after final acceptance. At September 20,
2002, Wink Davis employed approximately 10 sales persons and 25 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 and does not 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 sales of white machines 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
their property, maintenance or housekeeping staffs. These staffs are often small
with
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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. Generally,
each sales office is staffed by two 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 any of the Wink Davis' locations or
shipped directly from the manufacturer.
Customers
Wink Davis has over 4,000 active customers ranging in size from single
washing machine facilities to large laundry systems in hospitals or linen supply
houses. Customers purchasing laundry machines typically continue their
association with Wink Davis through purchase of repair parts or through service
calls for equipment repairs. During the past three fiscal periods, no customer
represented more than 10% of the Company's revenues. Accordingly, the loss of
any single customer would not materially affect the operations of Wink Davis.
Competition
The laundry equipment business is very competitive, with the principal
competitive factors being price and service offerings. Wink Davis competes
directly with several other distributors representing other OEMs. Wink Davis
believes the products they distribute are of equal or better quality than their
competitors' products. In some instances, Wink Davis may be at a price
disadvantage when a customer considers price only. Wink Davis maintains a
well-trained staff of technicians covering all geographic areas of distribution.
Management believes this staff is more comprehensive than any maintained by the
competition.
Regulatory Matters
The Company is subject to various federal, state and local statutes and
regulations relating to the protection of the environment and safety in the work
place. The failure by the Company to comply with any of such statutes or
regulations could result in significant monetary penalties, the cessation of
certain of its operations, or both. Management believes that the Company's
current operations are in compliance with applicable environmental and work
place safety statutes and regulations in all material respects. The Company's
compliance with these statutes and regulations has not materially affected its
business; however, the Company cannot predict the future effects of compliance
with such statutes or regulations.
Employees
As of September 20, 2002, the Company had 115 full-time employees. The
Company's employees are not represented by a labor union, and the Company has
never suffered an interruption of business as a result of a labor dispute. The
Company considers its relations with its employees to be good.
Backlog
The Company's firm backlog of unfilled orders for new and used machines was
$20.1 million at September 13, 2002. The Company's firm backlog of unfilled
orders was $13.8 million and $28.2 million at June 30, 2001 and July 1, 2000,
respectively. The reduction in unfilled orders at June 2001 compared to July
2000 was primarily due to a trend in lower equipment sales which the Company
believes was due to lower capital spending as a result of declining economic
conditions, primarily in the United States. The period of time required to fill
orders varies depending on the machine ordered.
The Company typically fills orders in its backlog within three to four
months. Backlog consists of executed sales orders. Orders in backlog are subject
to cancellation or changes in delivery. In addition, the Company's current
backlog will not necessarily lead to revenues in any future period. Any
cancellation, delay or change in orders which constitute our current or future
backlog may result in lower than expected revenues.
Risk Factors
Risks Related to Speizman's Bank Debt
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As of September 18, 2002, Speizman had $7.4 million in borrowings under its
line of credit facility with a commercial bank. This facility matures December
31, 2002. The Company currently does not have the financial resources to repay
this debt when it becomes due and will therefore need to refinance this debt
prior to maturity. There is no assurance that the Company will be able to
refinance this debt with another lender on a timely basis, on commercially
reasonable terms, or at all. Additionally, the textile industry has continued to
experience tightened lending practices from traditional financial institutions
which may further hinder Speizman's ability to refinance this debt, especially
in light of Speizman's recent financial losses. If Speizman is unable to
refinance this debt or obtain needed additional capital, it would be required to
significantly reduce its operations, dispose of assets and/or sell additional
securities on terms that could be dilutive to current stockholders.
Risks Related to Lonati Agreement
In May 2002, the Company and Lonati S.p.A. entered into an agreement
effective February 2002, providing for the amendment of their agreement under
which Speizman Industries distributes Lonati sock-knitting machines in the
United States and Lonati's forbearance and payment restructuring with respect to
$4.2 million of trade debt owed by the Company to Lonati. The Company entered
into similar agreements with Lonati subsidiaries for the restructuring of
$930,000 of trade debt. The agreements are secured by a subordinated security
interest to all of the assets of the Company. The amendment and forbearance
agreements provide that the following events, among others, will constitute an
event of default under Speizman's distribution agreement with Lonati, as
amended.
. failure to pay any amounts owed when due, which failure continues for 10
days after written notice;
. an event of default occurring under Speizman's existing credit facility
with SouthTrust;
. an event of default for any indebtedness in excess of $1.0 million; or
. failure to refinance its existing credit facility at maturity for a new
term extending beyond July 31, 2003.
Upon the occurrence of an event of default, Lonati can terminate its
distribution agreement with Speizman and can declare all amounts due Lonati
payable in full. The Company was in default of one of its trade notes payable in
excess of $1.0 million at June 29, 2002 for failure to make the required monthly
payments. In July 2002, the Company became current on its payments related to
the trade note and obtained a waiver from the note holder. As a result, the
Company was in default of the Lonati agreement as well and obtained waivers from
Lonati and its subsidiaries for the covenant violation. The Lonati agreement
allows Lonati to make sales directly to customers located in the Company's
distribution territories and pay the Company a commission as determined on a
case by case basis. If direct sales to customers became material, it would have
an adverse affect on the Company's profits since the commissions received by
Lonati are typically less than the profits generated by equipment sales.
Risks Related to Wink Davis Contracts
The Company's distributor agreements with Pellerin Milnor and Chicago Dryer
are renewed on an annual basis. If the Company lost the distribution rights to
either of these product lines, it would have a material adverse impact on the
revenues of the Company.
7
Speizman's Ability to Return to Profitability
Due principally to a decline in sales, Speizman incurred a net loss of $5.3
million in fiscal 2002. In addition, Speizman incurred net losses of $5.9
million in fiscal 2001, principally as a result of losses associated with
foreign currency derivatives. The Company will need to generate increases in
revenues to return to profitability and in order to generate cash from future
operating activities.
Speizman's Large Amount of Debt Could Negatively Impact its Business and
Stockholders
Principally as a result of losses funded during fiscal 2001 and 2002, the
Company is burdened with a large amount of debt. Speizman's large amount of debt
could negatively impact its stockholders in many ways, including:
. reducing funds available to support its business operations and for
other corporate purposes because portions of cash flow from operations
must be dedicated to the payment of its existing debt;
. impairing its ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes;
. increasing vulnerability to increases in interest rates;
. hindering its ability to adjust rapidly to changing market conditions;
and
. making it more vulnerable to a further downturn in general economic
conditions or in its business.
Relationship with Foreign Suppliers
The majority of Speizman Industries' suppliers for parts and equipment are
based in foreign countries primarily concentrated in 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 manufacturers or
obtain an adequate remedy for a breach of any such provision, due principally
that they are foreign companies.
Dependence on Lonati
The Company's operations are substantially dependent on the net revenues
generated from the sale of sock knitting and other machines manufactured by both
Lonati and Santoni and the Company expects this dependence to continue. Sales of
sock knitting and other machines manufactured by Lonati and Santoni generated an
aggregate of approximately 31.9%, 30.4% and 53.5% of the Company's net revenues
in fiscal 2002, 2001 and fiscal 2000, respectively. The Company amended its
agreement with Lonati for the sale of its machines in February 2002 to be the
exclusive agent in the United States and Canada through February 1, 2006. The
agreement can be terminated immediately upon breach of the contract. The Company
and Lonati entered into their present agreement for the sale of Lonati machines
in Mexico in 1997, which is renewable annually. The Company has acted as the
United States sales agent and distributor for certain machines manufactured by
Lonati continuously since 1982. The cost to the Company of Lonati machines, as
well as the delivery schedule of these machines, are in the discretion of
Lonati. Management believes that the Company's relationship with Lonati will
continue to be strong as long as the Company generates substantial sales of
Lonati machines; however, there can be no assurance that the Company will be
able to do so or that the Company's relationship with Lonati will continue or
will continue on its present terms. Any decision by Lonati to sell machines
through another distributor or directly to purchasers would have a material
adverse effect on the Company.
Machine Performance and Delayed Deliveries
During fiscal 2000 and the early part of fiscal year 2001, the Company
experienced issues with machine performance and delays from Lonati in shipments
of closed toe knitting machines and Santoni undergarment knitting machines. The
Company experienced material cancellations or postponements of orders due to
these delays and performance issues. Although the Company did not experience
delays in shipments on issues with machine performance in 2002, there can be no
assurance that delayed deliveries in the future or issues with machine
performance on newer technology will not result in the loss or cancellation of
significant orders. The Company also cannot predict situations in Italy such as
potential employee strikes or political developments which could further delay
deliveries or have other adverse effects on the business of Lonati and the other
Italian manufacturers represented by the Company.
8
Foreign Currency Risk
Prior to November 2000, Speizman Industries' purchases of foreign
manufactured machinery and spare parts for resale were denominated in Italian
lira. For purchases of machines that were denominated in Italian lira or Euro
dollars, Speizman generally purchased hedging contracts to compensate for
anticipated dollar fluctuations; however, during fiscal year 2001, the Company
experienced adverse effects utilizing lira hedging contracts for orders that
were postponed or delayed. Prior to fiscal year 2001 and for approximately 30
years, the Company did not experience any adverse effects from utilizing lira
hedging contracts. During fiscal year 2001, the Company arranged with Lonati and
its affiliates to purchase its products for resale in U.S. dollars through April
2002. As of May 2002, Lonati can require purchases to be in either Euro dollars
or U.S. dollars. For purchases of machines that are denominated in Euro dollars,
Speizman Industries feels its current practices enable the Company to adjust
sales prices, or to commit to hedging contracts that effectively compensate for
anticipated dollar fluctuations. At June 30, 2001, the Company had contracts
maturing through September 2001 to purchase approximately 432.0 million lira for
approximately $198,000 for which the market value at June 30, 2001 if terminated
was $189,000. There were no foreign currency hedging contracts in place as of
June 29, 2002.
Additionally, international currency fluctuations that result in substantial
price level changes could impede or promote import/export sales and
substantially impact profits. Speizman is not able to assess the quantitative
effect of such international price level changes could have upon Speizman
Industries' operations. There can be no assurance of fluctuations and foreign
exchange rates will not have an adverse effect on Speizman Industries' future
operations. All of Speizman Industries' export sales originating from the United
States are made in U.S. dollars.
Industry Conditions
The Company's business is subject to all the risks inherent in acting as a
distributor including competition from other distributors and other
manufacturers of both textile and laundry equipment, as well as the termination
of profitable distributor-manufacturer relationships.
The Company's laundry equipment segment is subject to the risks associated
with new construction in the hospitality industry. Currently, there is a
slowdown in construction of new hotels due to excess room availability as a
whole. This as well as a general slowdown in the U.S. economy recently reduced
demand for new equipment product offered by the Company.
The textile segment is subject to the risks associated with certain
categories in the textile industry, specifically, for socks, underwear, and
actionwear garments. The textile industry risks relating to socks, underwear,
and actionwear garments include the impact of style and consumer preference
changes. These factors may contribute to fluctuations in the demand for the
Company's sock knitting and packaging equipment and knitted fabric equipment
products. There is a slowdown in underwear and actionwear garments that
commenced during the second half of the last fiscal year.
Nasdaq Listing
The Company's Common stock has been listed on the Nasdaq SmallCap Market
since March 20, 2001 and was listed on the Nasdaq National Market System from
October 1993 to March 19, 2001. The Company's continued listing of its common
stock on the Nasdaq SmallCap Market is subject to certain criteria which include
a minimum bid of $1.00 as well as maintaining a minimum market value of public
float of $1.0 million. Since January 2002, the Company's stock has been trading
below $1.00. The Company has been notified by Nasdaq that unless its common
stock maintains a closing bid price of at least $1.00 for a minimum period of 10
consecutive trading days by February 10, 2003, the Company's common stock will
be delisted. If the Company is delisted, its common stock might trade in the OTC
- - Bulletin Board, which is viewed by most investors as a less desirable
marketplace. In such event, the market price of the common stock may be
adversely impacted and a stockholder may find it difficult to dispose, or obtain
accurate quotations as to the market value, of the Company's common stock.
9
Item 2. Properties.
The Company leases all of its real property. Significant leases are
summarized in the table below:
Lease Monthly Approximate
Lease Origination Term Rental Rental Square
Use Location Date (months) Rate Footage
- --------------------------------------------------------------------------------------------------------------------------
Properties used primarily by Speizman Industries:
- ------------------------------------------------
Executive, administrative, machinery Charlotte, NC December 1, 1999 180 $66,667 221,000 (a)
rebuilding and warehousing
Properties used primarily by Wink Davis:
- ---------------------------------------
Administrative, general Smyrna, GA May 1, 2001 61 $ 5,248 12,000
office and warehouse
Sales and service office and Wood Dale, IL June 1, 2002 61 $ 5,555 6,800
warehouse
Sales and service office and Jessup, MD October 1, 2001 18 $ 2,460 2,500
warehouse
Sales and service office and Charlotte, NC March 1, 2000 60 $ 6,682 10,800
warehouse
- ------------
(a) The Company's headquarters are leased from a limited liability company
owned by Robert S. Speizman, his wife and their children.
The Company believes its office and warehouse space is sufficient to meet its
needs for the foreseeable future.
Item 3. Legal Proceedings.
On June 29, 2000, Hazel Hernandez filed a lawsuit against the Company and
Wink Davis Equipment Company, Inc. (a wholly-owned subsidiary of Speizman
Industries) in the U.S. District Court for the Northern District of Illinois,
Case No. 00-CV-5183 and is seeking damages of $2.7 million. The plaintiff
alleges that her spouse, a laundry company employee, was killed by a Milnor
2-stage laundry press machine, which was sold by Wink Davis Equipment Company,
Inc. to the employer of Hernandez's spouse. The manufacturer of the machine, as
well as manufacturers of certain components therein, have also been joined as
defendants in the lawsuit. The legal grounds for including the Company as a
defendant are not clear. The plaintiff's claims include allegations that the
Company and Wink Davis Equipment Company, Inc. placed an unreasonably dangerous
machine in the stream of commerce, were negligent in the design, manufacture,
sale, and distribution of the machine, and other grounds. The court has
dismissed the claim against Speizman Industries. Wink Davis Equipment Company,
Inc. denies the allegations and believes that it will ultimately prevail in the
matter.
In fiscal 2001, the Company filed suit in the Superior Court, District of
Montreal, Province of Quebec, Canada (Civil Action No. 500-17-010102-013)
against Nalpac for breach of contract associated with nonpayment of machines. On
July 30, 2001, the Nalpac Company filed a counterclaim against the Company.
Nalpac claims that it set up a joint venture with Gentry Mills, known as
Seamless Knit, Inc., to knit and sell seamless garments, investing as much as
$6.0 million (Canadian) in the project. It also alleges that delays in delivery
of the machines, and defects in their operation, caused Nalpac to suffer
financial loss in the amount of $6.8 million (Canadian) (approximately 4.3
million U.S. dollars), plus interest and penalties in an unspecified amount,
under Quebec law. The Company denies the allegations of the counterclaim, and is
defending its position vigorously, and believes that it will ultimately prevail.
Due to the inherent uncertainty as to the outcome of litigation, the Company
cannot estimate the amount of loss, if any, that will result from the resolution
of the lawsuits described above.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 2002.
10
Executive Officers of Registrant
The following table sets forth certain information regarding the executive
officers of the Company as of September 17, 2002:
Name Age Positions with the Company
---- --- --------------------------
Robert S. Speizman 62 Chairman of the Board, President and Director
Bryan D. Speizman 37 Vice President-Parts Sales and Non-Hosiery Division
Mark A. Speizman 31 Senior Vice President, Hosiery
Paul R.M. Demmink 47 Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer
P. Donald Mullen II 38 President, Wink Davis Equipment Company, Inc.
Robert S. Speizman has served as President of the Company since November
1976. From 1969 to October 1976, Mr. Speizman served as Executive Vice President
of the Company. Mr. Speizman has been a director of the Company since 1967 and
Chairman of the Board of Directors since July 1987.
Bryan D. Speizman, son of Robert S. Speizman, began serving as Vice
President-Parts Sales and Non-Hosiery Division in July 2002. He served as a
sales representative from 2001 to July 2002, Senior Vice President-Non-Hosiery
from 1997 to May 2001 and as a sales representative from 1990 to June 1997.
Mark A. Speizman, son of Robert S. Speizman, began serving as Senior Vice
President, Hosiery in July 1997 and served as a sales representative of the
Company from 1995 to June 1997.
Paul R.M. Demmink began serving as Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer in July 2002. He served as President of
Mid-South Sales Group, Inc., a privately held distributor, from May 1994 to
September 2001 and was a private investor from September 2001 to June 2002. From
1989 to 1994, he served as Executive Vice President and Chief Financial Officer
of Broadway and Seymour.
P. Donald Mullen II, son-in-law of Robert S. Speizman, began serving as
President of Wink Davis Equipment Company, Inc. in August 2000. He served as
Vice President of Wink Davis from June 1998 to August 2000 and as Sales Engineer
of Wink Davis from August 1997 to June 1998. He also served as a Sales Manager
of Speizman from August 1996 to August 1997. Prior to that, he served four years
as a key account manager for a division of TimeWarner.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been included for quotation on the NASDAQ
National Market System under the NASDAQ symbol "SPZN" from October 1993 to March
19, 2001. Commencing on March 20, 2001, the Company began trading on the NASDAQ
SmallCap System under SPZN. The following table sets forth, for the periods
indicated, the high and low sale prices as reported by the NASDAQ Market System.
Fiscal 2001 High Low
---- ---
First Quarter (ended September 30, 2000) ........... $ 3.43 $ 2.25
Second Quarter (ended December 30, 2000) ........... 2.36 0.50
Third Quarter (ended March 31, 2001) ............... 1.68 0.50
Fourth Quarter (ended June 30, 2001) ............... 1.50 0.53
Fiscal 2002
First Quarter (ended September 29, 2001) ........... $ 1.24 $ 0.66
Second Quarter (ended December 29, 2001) ........... 0.85 0.49
Third Quarter (ended March 33, 2002) ............... 0.60 0.28
Fourth Quarter (ended June 29, 2002) ............... 0.70 0.33
As of June 29, 2002, there were approximately 196 stockholders of record of
the Common Stock. Management believes that when the number of beneficial
stockholders are included with the number of record stockholders, the Company is
in compliance with the maintenance standards set by the Nasdaq Stock Market.
11
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 limit the
Company's ability to pay cash dividends on its capital stock.
Item 6. Selected Consolidated Financial Data.
The following sets forth selected consolidated financial information for
Speizman Industries, Inc. as of and for each of the years in the five-year
period ended June 29, 2002, and has been derived from the Company's audited
consolidated financial statements. The selected consolidated financial data
should be read together with the Company's consolidated financial statements and
related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Fiscal Year Ended
--------------------------------------------------------------------
June 29, June 30, July 1, July 3, June 27,
2002(a) 2001 2000 1999 1998 (b)
------- ---- ---- ---- --------
(In thousands, except per share data)
Statement of Operations Data:
Net revenues .............................................. $ 57,103 $ 82,233 $ 115,182 $ 101,412 $ 90,886
Cost of sales ............................................. 49,344 70,511 96,443 85,564 74,034
--------- --------- --------- ---------- ---------
Gross profit .............................................. 7,759 11,722 18,739 15,848 16,852
Selling, general and administrative expenses .............. 12,671 14,849 15,420 15,124 12,658
--------- --------- --------- --------- ---------
Operating income (loss) ................................... (4,912) (3,127) 3,319 724 4,194
Interest (income) expense, net ............................ 1,930 2,422 1,973 1,103 988
Loss on settlement of uncommitted foreign currency
derivative contracts ..................................... - 3,926 - - -
Income (loss) before taxes on income ...................... (6,842) (9,475) 1,346 (379) 3,206
Taxes (benefit) on income ................................. (1,500) (3,612) 544 (126) 1,273
--------- --------- --------- ----------------------
Net income (loss) ......................................... $ (5,342) $ (5,863) $ 802 $ (253) $ 1,933
========= ========= ========= ========= =========
Per Share Data:
Basic earnings (loss) per share ........................... $ (1.64) $ (1.80) $ 0.25 $ (0.08) $ 0.59
Diluted earnings (loss) per share ......................... (1.64) (1.80) 0.24 (0.08) 0.56
Weighted average shares outstanding - basic ............... 3,255 3,253 3,243 3,274 3,284
Weighted average shares outstanding - diluted ............. 3,255 3,253 3,296 3,274 3,426
Balance Sheet Data:
Working capital ........................................... $ 8,952 $ 17,300 $ 28,182 $ 16,058 $ 20,210
Total assets .............................................. 40,047 54,873 68,255 56,456 51,925
Short-term debt ........................................... - - - 4,900 4,000
Long-term debt, including current maturity ................ 15,610 16,404 19,725 7,196 9,561
Stockholders' equity ...................................... 12,119 17,366 23,490 22,577 23,207
- ------------
(a) As described in Note 5 to Financial Statements, in 2002, the Company
discontinued amortizing goodwill and recorded an impairment charge of $1.0
million.
(b) On August 1, 1997, the Company acquired Wink Davis. On February 6, 1998, the
Company acquired TMC.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the Financial Condition and Results of
Operations of Speizman contains forward-looking statements within the meaning of
Section 21e of the Securities Exchange Act of 1934. Speizman's actual results
and timing of certain events could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including, but
not limited to, those set forth under "Risk Factors" and "Cautionary Note
Regarding Forward-Looking Information" and elsewhere in this Annual Report on
Form 10-K.
12
Overview
The Company's revenues are generated primarily from its distribution of
textile equipment (principally knitting equipment and, to a lesser extent, from
the sale of parts used in such equipment and the sale of used equipment) and
commercial laundry equipment (principally commercial washers and dryers and, to
a lesser 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.
The Company's sales have decreased to $57.1 million in 2002 from $82.2
million in 2001 and $115.2 million for fiscal 2000. In addition, the Company
incurred net losses of $5.3 million in 2002 and $5.8 million in 2001. The
Company believes that the decrease in sales over the previous two years are due,
in large part, to the delay in the sales of closed toe machines and the slowdown
in the overall economy. Factors contributing to the losses in 2002, include the
$1.0 million goodwill impairment charge. Factors that have contributed to the
losses for 2001 include losses from the use of lira hedging contracts for
anticipated sales that were postponed or cancelled.
The Company has responded to the decrease in sales by reducing its personnel
in all departments, restructuring its commission arrangement with sales
personnel, and reducing general and administrative expenses, including a
reduction of the lease payments for its main facility. In addition, the Company
has reduced its bank financing, and interest expense through aggressive asset
management. In order to further improve its available cash, the Company has
entered into extended payment terms with Lonati and its subsidiaries. The
Company is currently in discussions with potential lenders regarding refinancing
its credit facility, which is scheduled to expire on December 31, 2002.
Recently the Company began to experience an increase in equipment bookings
for both the Textile and Laundry divisions. Management believes that revenues
will improve as customers begin purchasing new labor saving equipment and as
general economic conditions improve.
Results of Operations
Year Ended June 29, 2002 Compared to Year Ended June 30, 2001
Net Revenue. Net revenues decreased to $57.1 million in fiscal 2002 from
$82.2 million in fiscal 2001, a reduction of 30.6%. Revenues in the textile
division decreased to $31.5 million in fiscal 2002 from $47.3 million in fiscal
2001. The $15.8 million reduction in textile revenue is primarily attributable
to lower sales of new and used sock knitting equipment ($13.5 million), used
yarn processing equipment ($2.0 million), and sales commissions and licensing
fees ($1.0 million), offset by increases in finishing and boarding equipment
($1.7 million). The decrease in textile revenues was primarily from the overall
downturn of the economy and difficult market conditions during the year.
Revenues in the laundry division decreased to $25.6 million in fiscal 2002 from
$34.9 million in the prior year. The $9.3 million decrease is primarily due to
reduced sales of new equipment and reflects the downturn in the hospitality
industry.
Cost of Sales and Gross Profit. Cost of sales as a percentage of revenues
increased to 86.4% in fiscal 2002 from 85.7% in the prior year.
Gross profit in the textile division decreased from $6.1 million in 2001 to
$3.9 million in 2002. As a percentage of revenues, gross margin decreased from
12.8% to 12.2%. The reduction in gross margin dollars primarily reflects the
reduction in sales noted above. The reduction in gross margin percentage was
primarily due to the Company's inability to pass on price increases for closed
toe machines to its customers due to weakness in the economy. The price increase
was the result of Lonati's agreement to allow the Company to purchase equipment
in U.S. dollars. In prior years, the Company purchased equipment in Italian lira
and assumed the risk of foreign exchange fluctuations.
Gross profit in the laundry division decreased from $5.7 million in 2001 to
$3.9 million in 2002. As a percentage of revenues, gross margin decreased from
16.2% to 15.3%. The reduction in gross margin dollars primarily reflects the
reduction in sales noted above. The reduction in gross margin percentage was
primarily due to an increase in the number of large projects relative to total
revenues in 2002 as compared to 2001. Large projects are more competitive than
smaller white machine sales and are therefore more price sensitive.
Selling Expenses. Selling expenses decreased to $5.4 million (9.5% of net
revenue) in fiscal 2002 from $7.8 million (9.5% of net revenue) in fiscal 2001.
The $2.4 million reduction was primarily due to lower personnel costs
13
($715,000), travel ($515,000) and commissions ($668,000). The reduction in
selling expenses were attributable to a change in the compensation plans for the
Sales team from a salary and commission structure plan that was more fixed in
nature to an all commission plan that is variable with revenues and gross
margins.
General and Administrative. General and administrative expenses decreased
to $6.2 million (10.9% of revenue) in fiscal 2002 from $7.1 million (8.6% of net
revenue) in fiscal 2001. The decrease of $900,000 was primarily attributable to
reduced personnel costs ($540,000), ceasing to amortize goodwill ($440,000),
lower travel costs ($94,000), and property insurance ($111,000), offset by
increases in bad debt reserves ($122,000), health insurance ($135,000) and bank
service fees ($101,000). The increase as a percentage of sales reflects the
fixed nature of certain of these expenses including salaries, rents, etc.
Loss on Goodwill Impairment. Loss on goodwill impairment in fiscal 2002 of
$1.0 million reflects an adjustment of the goodwill associated with the
Company's 1998 acquisition of TMC. The impairment in the carrying value of TMC's
goodwill is due primarily to the elimination of license fee revenues in
connection with an agreement to restructure certain trade debt with Lonati and
its subsidiaries (see Liquidity and Capital Resources).
Interest Expense. Interest expense decreased to $1.9 million in fiscal 2002
compared to $2.4 million in the prior year and reflects reduced borrowings under
the Company's revolving line of credit during the current year. Because the
Company uses interest rate swap derivatives which covered the majority of its
borrowings during the year, fluctuations of interest rates had an immaterial
effect on interest expense.
Benefit for Income Taxes. The benefit for income taxes decreased to $1.5
million in fiscal 2002 (22% of pretax loss) compared to $3.6 million (38.1% of
pretax loss) in the prior year. The reduction in the effective rate is due
primarily to the nondeductablility of the writedown of goodwill noted above and
is partially offset by the valuation reserve against deferred tax assets.
Net Loss. Net loss for the year was $5.3 million, or $1.64 per share (basic
and diluted), for fiscal 2002 compared to a net loss of $5.9 million, or $1.80
per share (basic and diluted), in the prior year.
Year Ended June 30, 2001 Compared to Year Ended July 1, 2000
Net Revenues. Net revenues decreased to approximately $82.2 million for the
year ended June 30, 2001, a decrease of $33.0 million (or 28.6%) from the prior
year. Revenues in the laundry equipment and services segment increased to $34.9
million, an increase of $5.1 million (or 17%) compared to the prior year. The
increase in laundry equipment and service revenue was primarily due to two large
installation projects completed during fiscal year 2001. The increase in
revenues for laundry equipment and services was offset by a decrease in textile
equipment revenues. Revenues decreased in the textile equipment segment to $47.3
million for the year ended June 30, 2001, a decrease of $38.1 million (or 44.6%)
from the prior year. Approximately $34.0 million of the decrease in textile
equipment revenues (or 89%) was due to decreased sales in the United States and
Canada for knitted fabric equipment, resulting from the dramatic softening in
demand in the seamless underwear category.
Cost of Sales. Cost of sales as a percentage of revenues increased
unfavorably to 85.7% for the fiscal year 2001 as compared to 83.7% in fiscal
year 2000. The net increase is due to increased costs on lira denominated
equipment and parts sold primarily during the first half of fiscal year 2001.
The increase in lira costs was a result of an overall devaluation in the Euro
and lira coupled with the company utilizing foreign exchange derivatives
contracted at stronger exchange rates for commitments that were subsequently
delay or cancelled. Refer to Disclosure about Foreign Currency Losses in Fiscal
Year 2001 for more discussion. The increase in lira costs associated with
utilizing these foreign exchange contracts for equipment and parts sold during
fiscal year 2001 was $3.2 million and represented a 3.9% component of
consolidated cost of sales as a percentage of consolidated revenues for fiscal
year 2001. This increase was offset primarily by reduced costs of approximately
$1.5 million reflected in the second half of fiscal year 2001 from the planned
elimination of non-performing business operations including the manufacturing
activities of TMC.
Selling Expenses. Selling expenses decreased by $120,000 (or 1.5%) to $7.8
million in fiscal 2001. As a percentage of revenue, selling expenses increase
unfavorably to 9.5%, compared to 6.9% in the prior fiscal year. As a percentage
of revenue, the increase is due to selling expense, primarily personnel and
related costs, in the textile equipment segment being primarily fixed in nature
coupled with a decrease in annual textile equipment sales, and higher total
14
commissions due to a higher mix of laundry equipment sales compared to the mix
in the prior fiscal year. Commissions on laundry equipment sales are generally
higher compared to commissions on sales of textile equipment.
General and Administrative. General and administrative expenses decreased
favorably by $450,000 (or 6%) to $7.1 million, compared to the prior fiscal
year. The reduction primarily resulted from savings reflected in second half of
fiscal year 2001 from reduced personnel and overhead associated with the
Company's planned elimination of certain non-performing operations as well as
the consolidation of certain administrative activities for its laundry segment.
Interest Expense. Interest expense increased unfavorably by $450,000 to $2.4
million in fiscal year 2001 compared to $1,973,000 in the prior year. The
increase is due to higher average balances throughout the fiscal year 2001 on
the Company's line of credit to fund operations.
Loss on Settlement of Uncommitted Foreign Currency Derivatives. Loss on
settlement of uncommitted foreign currency derivatives of $3.9 million reflects
a one-time loss associated with the discontinuation of the Company's uncommitted
foreign currency derivatives classified as cash flow hedges. Refer to Disclosure
about Foreign Currency Losses in Fiscal Year 2001 for more discussion.
Taxes (Benefit) on Income (Loss). The benefit for income taxes was $3.6
million for the current year, a rate of 38.1% of the net loss. The effective
rate in the prior fiscal year was 40.4%. The reduced rate in the current year is
primarily due to a reduced effective state tax rate in the current fiscal year.
The Company recognized as of June 30, 2001 a deferred tax benefit of $3.0
million for which the Company believes will be recoverable through the normal
course of its business in the future.
Net Loss. Net loss for the year was $5.9 million or $1.80 per share, both
basic and diluted. In the prior year, net income was $802,000 or $0.25 per basic
share and $0.24 per diluted share.
Liquidity and Capital Resources
Over the past three fiscal periods, the Company satisfied its cash
requirements from operations and/or borrowings under credit facility
arrangements and negotiating extended terms of trade debt. The Company has a
revolving credit facility with SouthTrust Bank, N.A. The agreement with
SouthTrust as amended on July 31, 2002, expires on December 31, 2002 and
provides a revolving line of credit up to $13.0 million and an additional line
of credit for issuance of Documentary Letters of Credit up to $6.0 million. The
availability under the combined lines of credit is limited by the percentage of
accounts receivable and inventory advance rates determined from time to time by
SouthTrust. As of September 7, 2002, the Company's revolving line of credit was
$7.7 million and the usage for documentary letters of credit was $3.4 million.
The unused amount available to the Company as determined by the Bank was $2.2
million. Amounts outstanding under the line of credit for direct borrowings bear
interest based upon two components: London Interbank Offered Rate (LIBOR) rate
plus the applicable margin (1.5% to 2.5%) for a short term fixed period and
prime plus the applicable margin (0% to 1.25%) for the non-fixed period. The
rates vary based upon the Company's funded debt as defined in the loan
agreement. During the year, the Company had two interest rate swap derivatives.
The first swap which expired on June 2, 2002, fixed the interest rate for
borrowing levels at $3.0 million at 7.77% plus the applicable margin. The second
swap which expires on June 2, 2003 fixes the interest rate for borrowing levels
at $5.0 million at 7.79% plus applicable margin. In connection with the
SouthTrust facility, the Company granted a security interest in all assets of
the Company.
Working capital at June 29, 2002 was $8.9 million, a decrease of $8.4
million from $17.3 at June 30, 2001. The Working capital ratio at June 29, 2002
was 1.47 compared with 1.79 at June 30, 2001. Net cash provided by operating
activities was $7.0 million for 2002 compared with $2.8 million provided by
operating activities during 2001. Net cash provided by operating activities in
2002 was primarily due to a net reduction in accounts receivable of $8.8
million, inventory reductions of $1.7 million, non-cash expenses of $4.0
million, a reduction in deferred tax assets of $1.2 million, partially offset by
a net loss of $5.3 million, and a $3.2 million decrease in customer deposits and
accrued expenses. During fiscal 2002, the Company restructured $6.4 million in
trade debt. Had the Company not renegotiated the terms this debt, cash flow from
operations and working capital would have been lower by $6.4 million.
The reduction of $9.3 million in accounts receivable during fiscal year 2002
was due to a decline in sales or billings for fiscal year 2002 when compared to
the prior fiscal year coupled with an improvement in the number of days of sales
15
in accounts receivable from year to year, partially offset by deductions for
losses on accounts of $535,000. The percentage drop in sales from year to year
of 30.6% accounted for a decrease in net accounts receivable of approximately
$5.9 million. The number of days of sales in accounts receivable improved at
June 29, 2002 to 93 days compared with 104 days at June 30,2001. The improvement
of 11 days accounted for a further reduction in net accounts receivable of
approximately $1.7 million and was primarily due to an increased effort on cash
collections. The number of days of sales in accounts receivable is calculated by
dividing the average net accounts receivable balance by the revenues for the
prior fiscal period multiplied by 360 days for the fiscal period.
The reduction in inventory of $3.2 million was primarily due to sales of
used hosiery and yarn processing equipment coupled with increases in inventory
reserves related to used hosiery equipment.
The decrease in current and long-term deferred taxes of $1.3 million was
primarily due to new tax legislation in 2002 which enabled the Company to carry
back operating losses rather than using them to offset future operating income.
As a result, the Company received a tax refund of $2.2 million in 2002 and has
classified $523,000 as a current income tax receivable. The deferred tax asset
was further reduced by a $200,000 valuation reserve against net operating loss
carry forwards in the event that they expired prior to utilization. These
reductions were offset by increases in deferred tax benefits associated with the
current year operating loss of $1.4 million and inventory valuation reserves of
$300,000. The Company believes the net deferred tax benefits will be recoverable
through its normal course of business in the future.
The net decrease in accounts payable and overdraft of $5.5 million during
fiscal year 2002 was primarily due to a decrease in costs associated with the
decrease in the Company's sales. The percentage drop in cost of sales of $49.3
million in fiscal year 2002 as compared to cost of sales of $70.0 million in
fiscal year 2001 was approximately 30%. This accounted for a $4.6 million
decrease in accounts payable and bank overdraft.
The net decrease in customer deposits of $2.4 million during fiscal 2002 was
primarily due to the restructuring of one customer's deposit for $1.3 million
into a trade note payable from fiscal 2001. The remaining decrease is
attributable to lower sales in 2002 compared with 2001.
Net cash provided in investing activities for 2002 was $115,000 which was
primarily from proceeds on the disposition of assets. This compared to net cash
used in investing activities in 2001 of $132,000 primarily from capital
expenditures. Net cash used in financing activities was $6.1 million in 2002,
primarily from net payments of $6.0 million on the Company's line of credit and
payments of other long-term debt of $81,000. This compared to net cash used by
financing activities in the prior year of $3.4 million, primarily related to
payments net of borrowings on the Company's line of credit.
The Company's credit facility with SouthTrust matures December 31, 2002. As
of September 18, 2002, Speizman had $7.4 million in borrowings under its line of
credit facility with a commercial bank. This facility matures December 31, 2002.
The Company currently does not have the financial resources to repay this debt
when it becomes due and will therefore need to refinance this debt prior to
maturity. There is no assurance that the Company will be able to refinance this
debt with another lender on a timely basis, on commercially reasonable terms, or
at all. Additionally, the textile industry has continued to experience tightened
lending practices from traditional financial institutions which may further
hinder Speizman's ability to refinance this debt, especially in light of
Speizman's recent financial losses. If Speizman is unable to refinance this debt
or obtain needed additional capital, it would be required to significantly
reduce its operations, dispose of assets and/or sell additional securities on
terms that could be dilutive to current stockholders. The Company believes that
it will refinance with another bank as it has in the past few years. However,
there is no assurance that additional financing will be available when needed or
desired on terms favorable to the Company or at all.
16
Contractual Obligations and Commitments
The following table presents our long-term contractual obligations:
Payment Due By Periods
-----------------------------------------------------------------------------------
Less Than
Total One Year 1-3 Years 4-5 Years After 5 Years
----------- ----------- ----------- ---------- -------------
Long-term debt $11,109,000 $ 6,565,000 $ 4,544,000 $ - $ -
Capital lease obligations 10,334,000 800,000 2,400,000 1,600,000 5,534,000
Irrevocable letters of credit 5,012,000 5,012,000 - - -
Operating leases 1,384,000 609,000 708,000 67,000 -
----------- ----------- ----------- ---------- -------------
Total contractual
cash obligations $27,839,000 $12,986,000 $ 7,652,000 $1,667,000 $ 5,534,000
=========== =========== =========== ========== =============
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 domestic 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 Losses in Fiscal Year 2001
Historically, Speizman Industries' purchases of foreign manufactured
machinery and spare parts for resale have been denominated in Italian lira. As
part of its risk management programs, the Company historically has used forward
exchange contracts to protect against the currency exchange risk associated with
the Company's anticipated and firm commitments of lira-denominated purchases for
resale. In cases where anticipated or firm commitments are cancelled or
postponed that were previously hedged with foreign currency contracts, the
utilization of these forward exchange contracts on future purchases may
positively or negatively affect the earnings of the Company, depending upon the
position of the U.S. dollar against the lira at the time of the actual
purchases.
The Company cancelled or postponed orders during calendar year 2000 due to
unanticipated delays associated with the closed toe machines as well as
cancellations by customers who had signed sales orders with the Company for
closed toe hosiery and knitted fabric equipment. Associated with these cancelled
purchase orders, the Company had committed to purchase contracts of
approximately 76 billion lira during the latter part of calendar year 1999. The
utilization of this lira during fiscal year 2001 for other purchases coupled
with the continual strengthening position of the dollar since 1999 had a
significant adverse effect on gross profit during fiscal year 2001. The adverse
effect on gross profit through increased cost of sales during the year ended
June 2001 was approximately $3.2 million.
Additionally, of the 76 billion lira contracts associated with the cancelled
purchase orders, approximately 37 billion lira were uncommitted and were treated
as cash flow hedges for accounting purposes. For cash flow hedges, changes in
the fair value of the hedging instrument are deferred and recorded in other
comprehensive income (equity), then recognized in the statement of operations in
the same period as the sale is recognized on the hedged item. These commitments
were initially designated to be utilized on anticipated purchase commitments
primarily related to two product lines. Due to delays by the manufacturers, the
Company renegotiated its future purchases with these foreign suppliers in U.S.
dollars. In light of this, on November 13, 2000, the Company deemed these
foreign currency derivatives as ineffective for hedge accounting as originally
designated going forward. Accordingly, and in light of the potential future
devaluation of the lira in relation to the U.S. dollar, the Company entered into
offsetting foreign currency derivatives in order to fix its exposure on the
ineffective cash flow derivatives and reported a loss on
17
settlement of cash flow derivatives of approximately $3.9 million, before income
tax benefit. The Company had no foreign exchange contracts designated as cash
flow hedges as of June 29, 2002.
In summary, the total losses associated with the utilization of the
Company's fair value hedge contracts and the settlement of its cash flow hedges
were approximately $7.1 million for fiscal year 2001, before tax benefit. In the
future, currency fluctuations of the lira could result in substantial price
level changes and therefore impede or promote import/export sales and
substantially impact profits. Generally, the Company is not able 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 Speizman
Industries' future operations. In addition, the Company is continually
evaluating other alternatives to limit its risk on foreign currency fluctuations
and is currently purchasing a majority of its textile equipment denominated in
U.S. dollars.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
Impairment of Goodwill
In assessing the value of the Company's goodwill, management must make
assumptions regarding estimated future cash flows and other factors to determine
the carrying account of the assets. If these estimates or their related
assumptions change in the future, the Company may be required to record
impairment charges for these assets. Effective July 1, 2001, the Company adopted
Statement of Financial Standards No. 142, "Goodwill and Other Intangible Assets"
and is now required to analyze goodwill for impairment issues on an annual
basis. During fiscal 2002, the Company reduced the carrying account of goodwill
associated with its finishing division and took a charge to income for $1.0
million.
Inventory and Bad Debt Reserves
In assessing the value of the Company's accounts receivable and inventory,
management must make assumptions regarding the collectibility of accounts
receivable and the market value of the Company's inventory. In the case of
accounts receivable, the Company considers the current and future financial
condition of it's customers and judgmentally determines the reserve required. In
the case of inventory, the Company considers recent sales of similar products,
trends in the industry and other factors when establishing an inventory reserve.
Deferred Tax Assets
The Company has recorded a deferred tax benefit associated with its net
operating losses and other timing differences associated with tax regulations
and generally accepted accounting principles, because management believes these
assets will be recoverable by offsetting future taxable income. If the Company
does not return to profitability, or if the loss carryforwards cannot be
utilized within federal statutory deadlines (currently 20 years), the asset may
be impaired. During fiscal 2002, the Company reduced its deferred tax asset by
$200,000 in light of these uncertainties.
18
New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The standard retains the
previously existing accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held and used while
expanding the measurement requirements of long-lived assets to be disposed of by
sale to include discontinued operations. It also expands on the previously
existing reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is classified as held
for sale. Management does not believe the adoption of SFAS No. 144 will have a
material effect on the Company's financial statements.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in foreign currency exchange
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce these risks by utilizing financial instruments, pursuant to Company
policies.
To minimize interest rate exposures, the Company may use interest rate swap
derivatives. These derivatives fix the interest rate for borrowings specified in
the swap agreements. The Company used interest rate swap derivatives during
fiscal 2001 and 2002.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates (primarily the Euro) may positively or negatively
affect the Company's revenues (as expressed in U.S. dollars), cost of sales,
gross margins, operating expenses, and retained earnings. Where the Company
deems it prudent, it engages in hedging those transactions aimed at limiting in
part the impact of currency fluctuations. As discussed in the Foreign Currency
Risk section set forth herein under "Risk Factors", the Company purchases
forward exchange contracts to protect against currency exchange risks associated
with the Company's anticipated and firm commitments of lira-dominated purchases
for resale.
These hedging activities provide only limited protection against currency
exchange risks and interest rate fluctuation. Factors that could impact the
effectiveness of the Company's programs include volatility of the currency
markets, interest rate fluctuation and availability of hedging instruments. All
hedging contracts that are entered into by the Company are components of hedging
programs and are entered into for the sole purpose of hedging an existing or
anticipated exposure, not for speculation. Although the Company maintains
programs to reduce the impact of changes in currency exchange rates, when the
U.S. dollar sustains a strengthening position against the euro in which the
Company has anticipated purchase commitments, the Company's gross margins could
be adversely affected if future sale prices cannot be increased because of
market pressures.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this Item 8
appear on Pages F-1 through F-17 and S-1 through S-2 of this Annual Report on
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this Item 10 is set forth in part under the caption
"Executive Officers of the Registrant" in Part I of Item 14 of this Annual
Report on Form 10-K and the remainder is set forth in the Company's 2002 Proxy
Statement for the 2002 Annual Meeting of Stockholders
Item 11. Executive Compensation.
19
The response to this Item 11 is set forth in the Company's 2002 Proxy
Statement under the section captioned "Executive Compensation and Related
Information," which section, other than the subsections captioned "Report of the
Compensation Committee and the Stock Option Committee on Executive Compensation"
and "Comparative Performance Graph," is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this Item 12 is set forth in the Company's 2002 Proxy
Statement under the section captioned "Stock Ownership of Certain Beneficial
Owners and Management," which section is incorporated by reference.
Equity Compensation Plan Information
The following table provides information as of June 29, 2002 about the
Company's common stock that may be issued upon the exercise of options to
purchase common stock outstanding under the Company's existing stock option and
equity compensation plans:
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise of outstanding equity compensation plans
of outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
----------------------- ----------------------- -------------------------
Plan category (a) (b) (c)
- ------------------------------ ----------------------- ----------------------- -------------------------
Equity compensation plans
approved by stockholders(1) 463,750 4.29 156,250
Equity compensation plans not
approved by stockholders - - -
------- ---- -------
Total 463,750 4.29 156,250
======= ==== =======
_____________
(1) The Company's existing stock option and equity compensation plans have been
approved by stockholders.
Item 13. Certain Relationships and Related Transactions.
The response to this Item 13 is set forth in the Company's 2002 Proxy
Statement under the section captioned "Certain Transactions," which section is
incorporated herein by reference.
Item 14. Controls and Procedures.
Not applicable.
20
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are included as part of the Annual Report on
Form 10-K:
1. Financial Statements: Page
----
Report of Independent Certified Public Accountants ..................................................... F-1
Consolidated Balance Sheets - June 29, 2002 and June 30, 2001 .......................................... F-2
Consolidated Financial Statements for each of the three years in the period ended June 29, 2002,
June 30, 2001 and July 1, 2000:
Consolidated Statements of Operations ............................................................ F-3
Consolidated Statements of Stockholders' Equity .................................................. F-4
Consolidated Statements of Cash Flows ............................................................ F-5
Summary of Significant Accounting Policies ............................................................. F-6
Notes to Consolidated Financial Statements ............................................................. F-8
2. Financial Statement Schedules: Page
----
Report of Independent Certified Public Accountants on Financial Statement Schedule ..................... S-1
Schedule II - Valuation and Qualifying Accounts ........................................................ S-2
3. Exhibits:
(a) The Exhibits filed as part of this Annual Report on Form 10-K are
listed on the Exhibit Index immediately preceding such Exhibits, and are
incorporated herein by reference.
(b) Reports on Form 8-K
On May 31, 2002, the Company filed a Current Report on Form 8-K
pursuant to Item 5 thereof reporting the resignation of John C. Angelella as
Vice President and Chief Financial Officer of the Company.
21
SIGNATURES
Pursuant to the requirements of Section 131 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SPEIZMAN INDUSTRIES, INC.
Date: September 27, 2002
By: /s/ Robert S. Speizman
------------------------------------
Robert S. Speizman, President
Pursuant to the requirements of the Securities Act of 1933, this has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Robert S. Speizman Chairman of the Board, President September 27, 2002
- ------------------------
Robert S. Speizman and Director (Principal Executive
Officer)
/s/ Paul R. M. Demmink Vice President-Finance, CFO, September 27, 2002
- ------------------------
Paul R. M. Demmink Secretary and Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Jon P. Brady Director September 26, 2002
- ------------------------
Jon P. Brady
/s/ William Gorelick Director September 18, 2002
- ------------------------
William Gorelick
/s/ Scott C. Lea Director September 26, 2002
- ------------------------
Scott C. Lea
/s/ Josef Sklut Director September 26, 2002
- ------------------------
Josef Sklut
22
CERTIFICATIONS
I, Robert S. Speizman, Chairman of the Board and President of Speizman
Industries, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Speizman
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report.
Date: September 27, 2002
/s/ Robert S. Speizman
---------------------------------------
Robert S. Speizman
Chairman of the Board and President
(Principal Executive Officer)
I, Paul R.M Demmink, Vice President-Finance, CFO, Secretary and
Treasurer of Speizman Industries, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Speizman
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report.
Date: September 27, 2002
/s/ Paul R.M. Demmink
------------------------------------------
Paul R.M. Demmink
Vice President-Finance, CFO, Secretary and
Treasurer (Principal Financial Officer)
23
[BDO SEIDMAN LETTERHEAD]
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 29, 2002 and June 30, 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 29, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Speizman Industries,
Inc. and subsidiaries at June 29, 2002 and June 30, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended June 29, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Charlotte, North Carolina BDO Seidman, LLP
August 30, 2002
F-1
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 29, June 30,
2002 2001
---------------- ----------------
ASSETS
Current:
Cash and cash equivalents .............................................. $ 970,000 $ -
Accounts receivable .................................................... 10,144,000 19,440,000
Inventories ............................................................ 13,542,000 16,722,000
Income tax refund ...................................................... 523,000 578,000
Deferred tax asset, current ............................................ 1,773,000 1,366,000
Prepaid expenses and other current assets .............................. 1,004,000 1,198,000
---------------- ----------------
TOTAL CURRENT ASSETS ................................................ 27,956,000 39,304,000
---------------- ----------------
Property and Equipment:
Building and leasehold improvements .................................... 6,887,000 7,336,000
Machinery and equipment ................................................ 939,000 1,084,000
Furniture, fixtures and transportation equipment ....................... 1,575,000 1,658,000
---------------- ----------------
9,401,000 10,078,000
Less accumulated depreciation and amortization ......................... (3,089,000) (2,866,000)
---------------- ----------------
NET PROPERTY AND EQUIPMENT .......................................... 6,312,000 7,212,000
---------------- ----------------
Deferred tax asset, long-term .............................................. 1,561,000 3,298,000
Other long-term assets ..................................................... 428,000 269,000
Goodwill, net of accumulated amortization .................................. 3,790,000 4,790,000
---------------- ----------------
$ 40,047,000 $ 54,873,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Bank Overdraft ......................................................... $ - $ 1,438,000
Accounts payable ....................................................... 9,994,000 14,007,000
Customers' deposits .................................................... 1,779,000 4,183,000
Accrued expenses ....................................................... 545,000 1,475,000
Current maturities of long-term debt ................................... 6,565,000 844,000
Current maturity of obligation under capital lease ..................... 121,000 57,000
---------------- ----------------
TOTAL CURRENT LIABILITIES ........................................... 19,004,000 22,004,000
Long-term debt ............................................................. 4,544,000 10,978,000
Obligation under capital lease ............................................. 4,380,000 4,525,000
---------------- ----------------
TOTAL LIABILITIES ................................................... 27,928,000 37,507,000
---------------- ----------------
Commitments and Contingencies
Stockholders' Equity:
Common stock - par value $.10; authorized 12,000,000 shares
at June 29, 2002 and 20,000,000 shares at June 30, 2001,
issued 3,396,228, outstanding 3,255,428 ............................. 340,000 340,000
Additional paid-in capital ............................................. 13,047,000 13,047,000
Accumulated other comprehensive loss ................................... (169,000) (264,000)
Retained earnings (accumulated deficit) ................................ (512,000) 4,830,000
---------------- ----------------
Total ............................................................... 12,706,000 17,953,000
Treasury stock, at cost, 140,800 shares ................................ (587,000) (587,000)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY .......................................... 12,119,000 17,366,000
---------------- ----------------
$ 40,047,000 $ 54,873,000
================ ================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-2
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
----------------------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
---------------- --------------- ---------------
(52 weeks) (52 weeks) (52 weeks)
---------------- --------------- ---------------
REVENUES $ 57,103,000 $ 82,233,000 $ 115,182,000
COST OF SALES 49,344,000 70,511,000 96,443,000
---------------- --------------- ---------------
GROSS PROFIT 7,759,000 11,722,000 18,739,000
SELLING EXPENSES 5,443,000 7,770,000 7,890,000
GENERAL AND ADMINISTRATIVE EXPENSES 6,228,000 7,079,000 7,530,000
GOODWILL IMPAIRMENT CHARGES 1,000,000 - -
---------------- --------------- ---------------
OPERATING INCOME (LOSS) (4,912,000) (3,127,000) 3,319,000
Net Interest Expense 1,930,000 2,422,000 1,973,000
Loss on settlement of uncommitted
foreign currency derivative contracts - 3,926,000
---------------- --------------- ---------------
EARNINGS (LOSS) BEFORE
PROVISION (BENEFIT) FOR (6,842,000) (9,475,000) 1,346,000
INCOME TAX
PROVISION (BENEFIT) FOR
INCOME TAX (1,500,000) (3,612,000) 544,000
---------------- --------------- ---------------
NET EARNINGS (LOSS) $ (5,342,000) $ (5,863,000) $ 802,000
================ =============== ===============
Basic earnings (loss) per share $ (1.64) $ (1.80) $ $ 0.25
Diluted earnings (loss) per share $ (1.64) $ (1.80) $ $ 0.24
Weighted average shares
Outstanding:
Basic 3,255,428 3,252,577 3,243,311
Diluted 3,255,428 3,252,577 3,295,579
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Accumulated
Additional Earnings Other
Common Common Paid-In (accumulated Comprehensive Treasury Comprehensive
Shares Stock Capital deficit) Loss Stock Loss
--------- ----------- ------------ ------------ ------------- ------------ -------------
BALANCE, JULY 3, 1999 ........ 3,369,506 $ 337,000 $12,936,000 $ 9,891,000 $ - $ (587,000)
Net income ................... - - - 802,000 - -
Exercise of stock options .... 23,722 2,000 109,000 - - -
--------- --------- ---------- ---------- ----------- -----------
BALANCE, JULY 1, 2000 ........ 3,393,228 $ 339,000 $13,045,000 $10,693,000 $ - $ (587,000)
Net loss ..................... - - - (5,863,000) - - $(5,863,000)
Accumulated Comprehensive loss
- Interest rate swap, net
of tax ..................... - - - - (264,000) - (264,000)
-----------
Comprehensive Loss ........ - - - - - - $(6,127,000)
===========
Exercise of stock options .... 3,000 1,000 2,000 - - -
--------- --------- ---------- ---------- ----------- -----------
BALANCE, JUNE 30, 2001 3,396,228 340,000 13,047,000 4,830,000 (264,000) (587,000)
Net loss ..................... - - - (5,342,000) - - $(5,342,000)
Accumulated Comprehensive loss
- Interest rate swap, net
of tax ..................... - - - - 95,000 - 95,000
-----------
Exercise of stock options .... - - - - - - $(5,247,000)
===========
--------- --------- ---------- ---------- ----------- -----------
BALANCE, JUNE 29, 2002 ....... 3,396,228 $ 340,000 $13,047,000 $ (512,000) $ (169,000) $ (587,000)
========= ========= ========== ========== =========== ===========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
----------------------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
----------------- ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ (5,342,000) $ (5,863,000) $ 802,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
(Gain) loss on disposal of fixed assets ...................... 38,000 6,000 (6,000)
Depreciation ................................................. 747,000 922,000 998,000
Amortization ................................................. 246,000 532,000 573,000
Writedown for goodwill impairment ............................ 1,000,000
Provision for losses on accounts receivable .................. 535,000 413,000 259,000
Provision for inventory obsolescence ......................... 1,432,000 689,000 807,000
Deferred income taxes ....................................... 1,213,000 (3,028,000) (246,000)
(Increase) decrease in:
Accounts receivable ...................................... 8,761,000 10,869,000 (9,843,000)
Inventories .............................................. 1,748,000 (922,000) (936,000)
Prepaid expenses and other assets ........................ (106,000) 3,599,000 105,000
Increase (decrease) in:
Accounts payable and bank overdraft ...................... (186,000) (4,753,000) 5,128,000
Accrued expenses and customers' deposits ................. (3,122,000) 322,000 (1,872,000)
---------------- ---------------- ---------------
Net cash provided by (used in) operating activities .......... 6,964,000 2,786,000 (4,231,000)
---------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (10,000) (219,000) (473,000)
Proceeds from property and equipment disposals ............... 125,000 87,000 79,000
---------------- ---------------- ---------------
Net cash provided by (used in) investing activities ...... 115,000 (132,000) (394,000)
---------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit ................................. 50,461,000 40,386,000 13,510,000
Payments on line of credit ................................... (56,439,000) (43,208,000) (4,610,000)
Principal payments on long-term debt ......................... (81,000) (499,000) (5,641,000)
Debt issue costs ............................................. (50,000) (50,000) (244,000)
Other borrowings ............................................. - - 1,570,000
Issuance of common stock upon exercise of stock options ...... - 3,000 112,000
---------------- ---------------- ---------------
Net cash provided by (used in) financing activities ...... (6,109,000) (3,368,000) 4,697,000
---------------- ---------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................................ 970,000 (714,000) 72,000
CASH AND CASH EQUIVALENTS, at beginning of year ................ - 714,000 642,000
---------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS, at end of year ...................... $ 970,000 $ - $ 714,000
================ ================ ===============
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT 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. Wink Davis Equipment Company, Inc. ("Wink Davis")
was acquired on August 1, 1997. Todd Motion Controls, Inc. ("TMC") was acquired
on February 6, 1998. Speizman Yarn Equipment Co., Inc. ("Speizman Yarn") began
operations on August 1, 1998. Speizman Canada, Inc. was incorporated on February
16, 1989. Speizman de Mexico S.A. de C.V. was incorporated on April 2, 1997.
REVENUE RECOGNITION
The major portion of the Company's revenues consists of sales and
commissions on sales of machinery and equipment. The revenue derived therefrom
for the textile segment is recognized in full at the time of shipment, and for
the laundry segment, at time of installation. In some instances the laundry
equipment and services business is engaged in installation projects for
customers on a contract basis. Some contracts call for progress billings. In
such cases, the Company uses the percentage of completion method to recognize
revenue whereby sales are recorded based upon the ratio of costs incurred to
total estimated costs at completion. Billings in excess of the revenue
recognized, or deferred revenue at June 29, 2002 and June 30, 2001 was
immaterial. Shipping and handling charges to customers are included in revenues.
Costs associated with shipping are included in cost of sales.
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 and accelerated
methods for financial reporting purposes and by accelerated methods for income
tax purposes. Useful lives are generally five years for computer equipment,
seven years for machinery, and ten years for office furniture. Assets recorded
under capital leases and leasehold improvements are amortized using the
straight-line method over the lesser of their useful lives or the related lease
term (between 5-15 years).
LONG-LIVED ASSETS
Long-lived assets, such as goodwill and property and equipment, are
evaluated for impairment annually, when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated discounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down to fair
value. In 2001 and prior, the Company amortized goodwill on a straight-line
basis over fifteen years. Goodwill is net of writedowns and accumulated
amortization of $2,648,000 and $1,648,000 at June 29, 2002 and June 30, 2001,
respectively. See Note 5 for discussion of adoption on Statement of Financial
Accounting Standards ("SFAS") No. 142.
FINANCIAL INSTRUMENTS
The Company does not hold or issue financial instruments for trading
purposes. Amounts to be paid or received under interest rate swap agreements are
recognized as increases or reductions in interest expense in the periods in
which they accrue.
TAXES ON INCOME
The Company provides for income taxes using the liability method.
Deferred tax assets or liabilities at the end of each period are determined
using the enacted tax rates. Income tax expense will increase or decrease in the
same period in which a change in tax rates is enacted.
F-6
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
FOREIGN CURRENCY TRANSACTIONS
The Company has certain transactions denominated in foreign currency.
Assets and liabilities are translated into U.S. dollars at the year-end exchange
rate. Income and expense accounts are translated at the current rates in effect
during the year. Gains or losses from foreign currency transactions are
reflected in the statements of operations.
INCOME (LOSS) PER SHARE
Basic net income per share includes no dilution and is calculated by
dividing net income (loss) 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).
A reconciliation of shares used in calculating basic and diluted earnings
per share for years ending July 29, 2002, June 30, 2001 and July 1, 2000 is as
follows:
The basic shares outstanding for the fiscal year 2002, 2001 and 2000 is
3,255,428, 3,252,577 and 3,243,311, respectively. The effect of the assumed
conversion of employee stock options was 0, 0 and 52,268 for fiscal years 2002,
2001 and 2000, respectively. Options to purchase approximately 463,000, 389,000
and 284,500 shares of common stock at prices from $0.56 to $6.31, $1.88 to $6.31
and $4.87 to $6.13 per share were outstanding during portions of fiscal years
2002, 2001 and 2000, respectively, but were not included in the computation of
diluted earnings per share for each of the respective years because they were
anti-dilutive.
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. The years ending June
29, 2002, June 30, 2001 and July 1, 2000 included 52 weeks.
ADVERTISING
The Company expenses advertising costs as incurred. Total advertising
expense approximated $17,000, $103,000 and $169,000 for fiscal years 2002,
2001and 2000, 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.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial
statements to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The standard retains the
previously existing accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held and used while
expanding the measurement requirements of long-lived assets to be disposed of by
sale to include discontinued operations. It also expands on the previously
existing reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is classified as held
for sale. Management does not believe the adoption of SFAS No. 144 will have a
material effect on the Company's financial statements.
F-7
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
and Mexico, the Company primarily sells to customers located within the United
States. Export sales from the United States were $832,000, $4,310,000 and
$16,633,000 during fiscal 2002, 2001 and 2000, 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 also 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, Canada and Mexico of machines manufactured by Lonati, S.p.A., generated
the following percentages of the Company's net revenues: 25.1% in 2002, 26.2% in
2001 and 21.2% in 2000. In addition, sales of Santoni machines in the United
States, Canada and Mexico generated 6.8%, 4.2% and 32.3% of the Company's net
revenues in fiscal 2002, 2001 and 2000, respectively. In 2001, sales to one
customer approximated 13.4% of revenues. In 2002 and 2000, there were no sales
to customers in excess of 10% of revenues. Generally, the customers contributing
the most to the Company's net revenues vary from year to year.
NOTE 2 -- RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
Effective July 2, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended by SFAS No. 137 and SFAS No. 138, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.
SFAS 133, as amended, requires the Company to recognize all derivative
instruments on the balance sheet at fair value. If the derivative is a hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in comprehensive income (equity) until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value is
recognized in earnings. In transition, the statement required all hedging
relationships to be evaluated and designated anew, resulting in
cumulative-effect-type transition adjustments to other comprehensive income. The
effect on earnings in transition was immaterial.
The Company has historically entered into forward exchange contracts to
reduce the foreign currency exchange risks associated with its committed and
anticipated lira and Euro denominated purchases, and not for speculation. As of
June 29, 2002, the Company had no foreign currency exchange contracts.
For derivatives classified as cash flow hedges, changes in the fair value
of the hedging instrument are deferred and recorded in other comprehensive
income (equity), then recognized in the statement of operations in the same
period that the hedged transaction is recognized. In transition, and effective
July 2, 2000, the Company's designated commitments to purchase 37.0 billion lira
as cash flow hedges. These commitments were initially designated to be utilized
on anticipated purchase commitments primarily related to two product lines. Due
to delays by the manufacturers, the Company renegotiated its future purchases
with these foreign suppliers in U.S. dollars. In light of this, on November 13,
2000, the Company deemed these foreign currency derivatives as ineffective for
hedge accounting as originally
F-8
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
designated. Accordingly, and in light of the potential future devaluation of the
lira in relation to the U.S. dollar, the Company entered into offsetting foreign
currency derivatives in order to fix its exposure on the ineffective cash flow
derivatives. On November 13, 2000, and in accordance with SFAS 133, as amended,
the Company reported a loss on settlement of cash flow derivatives of
approximately $3.9 million, before income tax benefit. The Company had no
foreign exchange contracts designated as cash flow hedges as of June 29, 2002.
The Company had one interest rate swap derivative designated as a cash
flow hedge at June 29, 2002. The change in the fair market value was a gain of
$95,000 net of tax expense, and was recognized in Other Comprehensive Income
(equity) at June 29, 2002. The liability of approximately $280,000 is included
in accrued expenses on the Company's balance sheet. For interest rate swap
agreements, increases or reductions in interest expense are recognized in the
periods in which they accrue.
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
June 29, 2002 June 30, 2001
------------- -------------
Trade receivables ............................................. $ 10,963,000 $ 20,187,000
Less allowance for doubtful accounts .......................... (819,000) (747,000)
-------------- --------------
Net accounts receivable ....................................... $ 10,144,000 $ 19,440,000
=============== ==============
NOTE 4 -- INVENTORIES
Inventories net of reserves are summarized as follows:
June 29, 2002 June 30, 2001
------------- -------------
Machines
New ...................................................... $ 6,539,000 $ 6,453,000
Used ..................................................... 2,166,000 4,457,000
Parts and supplies ............................................ 4,837,000 5,812,000
-------------- --------------
Total ......................................................... $ 13,542,000 $ 16,722,000
============== ==============
NOTE 5 -- GOODWILL
Goodwill is calculated as the excess of the cost of purchased businesses
over the value of their underlying net assets. In 2002, the Company ceased
amortizing goodwill and began evaluating it for impairment in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets". During the year, the
Company recognized a loss on impairment of $1,000,000 associated with its
finishing division. The impairment in the carrying value of goodwill is due
primarily to the elimination of license fee revenues in connection with an
agreement to restructure certain trade debt with Lonati. In 2001 and prior, the
Company amortized goodwill on a straight-line basis over fifteen years. Goodwill
is net of writedowns and accumulated amortization of $2,648,000 and $1,648,000
at June 29, 2002 and June 30, 2001, respectively.
F-9
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Effective July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". The following table presents the impact of this new
standard on prior years earnings (losses) and per share amounts:
2002 2001 2000
----------------- ---------------- ----------------
NET EARNINGS (LOSS)
As reported ............................... $ (5,342,000) $ (5,863,000) $ 802,000
Add back Goodwill amortization, net
of tax effect ........................... - 226,000 218,000
------------- ------------- ------------
Adjusted .................................. $ (5,342,000) $ (5,637,000) $ 1,020,000
============= ============= ============
Basic earnings (loss) per share
As reported ............................... $ (1.64) $ (1.80) $ 0.25
Add back Goodwill amortization, net
of tax effect ........................... - 0.07 0.07
------------- ------------- ------------
Adjusted .................................. $ (1.64) $ (1.73) $ 0.32
============= ============= ============
Diluted earnings (loss) per share
As reported ............................... $ (1.64) $ (1.80) $ 0.24
Add back Goodwill amortization, net
of tax effect ........................... - 0.07 0.07
------------- ------------- ------------
Adjusted .................................. $ (1.64) $ (1.73) $ 0.31
============= ============= ============
NOTE 6 -- LEASES
The Company conducts its operations from leased real properties, which
include offices and warehouses.
In April 1999, several textile machinery warehouses and the corporate
offices were relocated into a new facility. This new facility is leased from The
Speizman LLC, a limited liability company owned by Mr. Robert S. Speizman, his
wife and their children. In accordance with SFAS No. 13, "Accounting for
Leases", the Company recognized this as a capital lease, except the portion of
the lease applicable to the land, which was recorded as an operating lease.
In December 1999, The Speizman LLC completed construction of an
additional 100,000 square feet of warehouse space to the facility. In order to
consolidate the remaining textile equipment warehouses to this single location,
the Company entered into a new lease agreement. In June 2000, the Company
amended the lease with The Speizman LLC. The amendment extended the term to 180
months, ending May 2015, and made maintenance and taxes the responsibility of
the Company. In January 2002, the lease was amended to reduce the monthly
payments from $88,000 to $67,000. The reduction was treated as a reduction to
interest expense on the capital lease obligation. Prior to relocating to its new
facility, the Company leased office and warehouse facilities from a partnership
in which Mr. Robert Speizman, the Company's president had a 50% interest. Lease
payments to the partnership approximated $76,000 in fiscal 2000.
Lease payments to The Speizman LLC approximated $928,000, $1,055,000 and
$860,000 in fiscal years 2002, 2001 and 2000, respectively.
The primary operating facility and certain sales offices of the laundry
equipment and services operations were leased from a partnership in which Mr. C.
Alexander Davis, former President of Wink Davis, has a 50% interest. The primary
lease expired in fiscal 2001. Lease payments to the partnership were
approximately $203,000 and $205,000 in fiscal years 2001 and 2000, respectively.
F-10
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In April 2000, Wink Davis entered into a five-year lease for office
facilities with The Speizman LLC II, a limited liability company owned by Mr.
Robert S. Speizman, his wife and their children. In November 2001, Speizman LLC
II sold the property and assigned the lease to a third party. Lease payments to
The Speizman LLC II totaled approximately $38,000, $80,000 and $19,000 in 2002,
2001 and 2000, respectively. The lease has been accounted for as an operating
lease.
In addition, the Company leases autos and other equipment under operating
lease agreements.
As of June 29, 2002, future net minimum lease payments under capital and
operating leases that have initial or remaining noncancelable terms in excess of
one year are as follows:
Capital Operating
Lease Leases
------------ ----------
2003 ............................................................... $ 800,000 $ 609,000
2004 ............................................................... 800,000 360,000
2005 ............................................................... 800,000 216,000
2006 ............................................................... 800,000 132,000
2007 ............................................................... 800,000 67,000
Beyond ............................................................. 6,334,000 -
------------ ----------
Total minimum lease payments .................................. $ 10,334,000 $1,384,000
==========
Less amount representing interest at 15% ...................... (5,833,000)
------------
Present value of net minimum lease payments ................... 4,501,000
Current portion ............................................... (121,000)
------------
$ 4,380,000
============
The following summarizes property held under capital leases:
2002 2001
------------ ----------
Land and Building .................................................. $ 5,127,000 $5,127,000
Less accumulated depreciation ...................................... (962,000) (640,000)
------------ ----------
$ 4,165,000 $4,487,000
============ ==========
Total rent expense for all operating leases approximated $915,000,
$1,125,000 and $1,057,000 in fiscal years 2002, 2001 and 2000, respectively.
NOTE 7-- TAXES (BENEFIT) ON INCOME
Provisions (benefit) for federal and state income taxes in the consolidated
statements of operations are made up of the following components:
2002 2001 2000
------------- ------------- -----------
Current:
Federal ............................. $ (2,731,000) $ (629,000) $ 550,000
State ............................... 18,000 45,000 240,000
------------- ------------- -----------
(2,713,000) (584,000) 790,000
------------- ------------- -----------
Deferred:
Federal ............................. 1,328,000 (2,194,000) (167,000)
State ............................... (115,000) (834,000) (79,000)
------------- ------------- -----------
1,213,000 (3,028,000) (246,000)
------------- ------------- -----------
Total taxes (benefit) on income ......... $ (1,500,000) $ (3,612,000) $ 544,000
============= ============= ===========
F-11
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax benefits and liabilities are provided for the temporary
differences between the book and tax bases of assets and liabilities. Deferred
tax assets are reflected in the consolidated balance sheets as follows:
June 29, 2002 June 30, 2001
------------- -------------
Net current assets ................. $ 1,773,000 $ 1,366,000
Net noncurrent assets .............. 1,561,000 3,298,000
------------- -------------
$ 3,334,000 $ 4,664,000
============= =============
Principal items making up the deferred income tax assets (liabilities) are as
follows:
Year Ended
-------------------------------
June 29, June 30,
2002 2001
------------- -------------
Inventory valuation reserves ....... $ 955,000 $ 617,000
Depreciation ....................... 116,000 27,000
Deferred compensation .............. 263,000 286,000
Deferred charges and other ......... (21,000) 116,000
Inventory capitalization ........... 420,000 299,000
Accounts receivable reserves ....... 307,000 294,000
Net operating loss carryforwards ... 1,381,000 2,795,000
Interest rate swap ................. 113,000 230,000
Deferred tax valuation reserve ..... (200,000) -
------------- -------------
Net deferred tax asset ......... $ 3,334,000 $ 4,664,000
============= =============
Deferred taxes include federal and state net operating loss carryforwards
of approximately $2,460,000 and $13,506,000, respectively, which may be utilized
to offset future taxable income. These carryforwards expire at various dates
through 2022.
The Company's effective income tax rates are different than the U.S.
Federal statutory tax rate for the following reasons:
2002 2001 2000
---- ---- ----
U.S. Federal statutory tax rate .................................. (34.0)% (34.0)% 34.0%
State income taxes, net of federal income tax benefit ............ (1.0) (5.5) 7.9
Non-deductible goodwill impairment ............................... 5.5 - -
Other non-deductible expenses .................................... 1.7 1.6 3.3
Deferred tax valuation reserve ................................... 2.9 - -
Other ............................................................ 3.0 (0.2) (4.8)
----- ----- -----
Effective tax rate ............................................... (21.9)% (38.1)% 40.4%
===== ===== =====
NOTE 8 - LONG-TERM DEBT
The Company has a revolving credit facility and a line of credit for
issuance of Documentary Letters of Credit with SouthTrust Bank, N.A. Effective
February 19, 2002, the Company entered into a Third Amendment and Forbearance
Agreement ("Third Amendment") relating to its original Credit Facility Agreement
with SouthTrust. The Third Amendment provides a revolving credit facility up to
$15.0 million and an additional line of credit for issuance of Documentary
Letters of Credit up to $4.0 million. The availability under the combined
facility is limited to a borrowing base as defined in the Third Amendment and
the original Credit Facility Agreement.
F-12
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Advances under the revolving credit facility and line of credit as
amended are broken down into two components for the calculation of interest
expense: the London Interbank Offered Rate (LIBOR) component that accrues
interest at the LIBOR rate plus 1 1/2% to 2 1/2%, and a base rate component that
accrues interest at prime plus 1 1/4%. The rates are scaled based upon the
Company's funded debt as defined in the original Credit Facility Agreement.
Prior to the Second Amendment and pursuant to the terms of the First Amendment
dated November 13, 2000, the LIBOR component accrued interest at the LIBOR rate
plus 3%, and the base rate component accrued interest at prime plus 1 1/4 %. The
Company also has in effect an interest rate swap derivative that fixes the
interest rate for advances under the LIBOR component at 7.79% plus the
applicable margin for borrowing levels of $5.0 million, which expires on June 2,
2003. As of June 29, 2002, amounts outstanding of $5.0 million were advanced
under the LIBOR component at a rate of 1.84% plus 2.5%. The facility is secured
by all the assets of the Company.
The Credit Facility as amended by the Third Amendment contains specific
covenants that require, among other things, the Company to maintain specified
EBITDA targets for each month through July 31, 2002. The Company was in
compliance at June 29, 2002 with its bank covenants.
Effective July 31, 2002, the Company executed a Fourth Amendment to the
credit facility with SouthTrust. The amendment extends the maturity date to
December 31, 2002, decreases the revolving credit facility to $13.0 million and
increases the line of credit to $6.0 million. In addition, it requires the
Company to meet specific EBITDA targets for each month through maturity. As of
June 29, 2002, the Company had $3.8 million available under its credit facility.
Other long-term obligations primarily include trade debt with payment
dates beyond one year. Effective February 2002, the Company restructured its
payment terms with Lonati S.p.A., its largest supplier, on current trade
obligations amounting to $5.2 million, less $1.0 million owed to the Company.
The net balance of $4.2 million is payable over a 24-month period commencing
March 1, 2004. The restructured terms also include an interest charge at 6% per
annum, payable quarterly commencing September 2002. The agreement also provides
the Company through February 2006 with exclusive distribution rights for
Lonati's product line and the ability to purchase in U.S. dollars. In
consideration, the Company entered into a non-binding agreement and is in the
process of amending its License Agreement with Todd Motion Controls, Inc.
("TMC") and SRA, an affiliate of Lonati, whereby license fees previously due
under this agreement would be eliminated, commencing January 1, 2002.
Previously, the agreement provided for quarterly license fees of $125,000
payable to the Company through December 2004. At June 29, 2002, the Company was
in violation of one of its covenants related to the Lonati agreement and
obtained a waiver from Lonati and its subsidiaries for the violation.
The Company also restructured a refundable customer deposit in the amount
of $1.2 million included in trade notes payable below, to a two-year period,
payable monthly commencing January 31, 2002. The amount of this obligation bears
no interest.
Long-term debt consists of:
June 29, 2002 June 30, 2001
--------------- --------------
Total Total
----- -----
Revolving Credit Facility .................. $ 5,000,000 $ 10,978,000
Trade notes payable ........................ 6,109,000 844,000
--------------- --------------
Total ...................................... 11,109,000 11,822,000
Current maturities ......................... (6,565,000) (844,000)
--------------- --------------
$ 4,544,000 10,978,000
=============== ==============
Annual maturities of long-term debt excluding capital lease obligations
are:
2003 ............................... $ 6,565,000
2004 ............................... 1,025,000
2005 ............................... 2,112,000
2006 ............................... 1,407,000
---------------
$ 11,109,000
===============
F-13
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 -- STOCK OPTIONS
The Company has reserved 450,000 and 155,000 shares of Common Stock under
employee stock plans adopted in 1995 and 2000, respectively. As of June 29,
2002, options to purchase 444,500 and 5,000 were outstanding under the 1995 and
2000 Plans, respectively. Generally, 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 1995 and 2000 Plans are not
limited and may be less than 100% of the fair market value on the date of the
grant. The Company has reserved 15,000 shares of Common Stock under a
non-employee directors stock option plan adopted in 1995. As of June 29, 2002,
14,250 options to purchase were outstanding under this plan. 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. A summary of employee and non-employee
directors stock option transactions and other information for 2002, 2001 and
2000 follows:
Year Ended
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
June 29, Average June 30, Average July 1, Average
2002 Price/Sh 2001 Price/Sh 2000 Price/Sh
----------- -------- ----------- -------- ----------- --------
Shares under option, beginning of year ..... 442,000 $ 4.56 478,163 $ 4.81 452,385 $ 4.84
Options granted ............................ 34,000 0.63 45,000 1.00 49,500 4.53
Options exercised .......................... - - (3,000) 0.75 (23,722) 4.81
Options expired ............................ (12,250) 3.87 (78,163) 4.08 - -
--------- -------- --------- -------- --------- --------
Shares under option, end of year ........... 463,750 $ 4.29 442,000 $ 4.56 478,163 $ 4.81
========= ======== ========= ======== ========= ========
Options exercisable ........................ 455,000 384,500 427,163
========= ========= =========
Prices of options exercised ................ - $ 0.75 $ 0.75 to
$ 4.95
Prices of options outstanding, end of ...... $ 0.56 to $ 1.00 to $ 0.75 to
year ....................................... $ 6.31 $ 6.31 $ 6.31
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). Accordingly, no compensation cost has been recognized for the
stock option plans. The fair value of these options was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for fiscal years 2002, 2001 and 2000: expected
lives of 10.0 years, expected volatility of 73.9% for fiscal year 2002, 70.4%
for fiscal year 2001 and 53% for fiscal year 2000, risk-free interest rate of
4.9% for 2002, 5.4% for 2001 and 6.5% for 2000, and dividend yield of 0.0% for
all three years.
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 years 2002, 2001 and 2000 was $0.63, $1.00
and $3.36 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the 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 Year Ended Year Ended
June 29, 2002 June 30, 2001 July 1, 2000
------------- ------------- ------------
Pro forma net (loss) income ......................... $ (5,402,000) $ (5,914,000) $ 670,000
Pro forma basic (loss) earnings per share ........... $ (1.66) $ (1.82) $ 0.20
Pro forma diluted (loss) earnings per share ........ (1.66) (1.82) 0.21
F-14
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options
outstanding at June 29, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------------
Number of Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Weighted-Average Exercisable Exercise Price
Exercise price at 6/29/02 Contractual Life Exercise Price at 6/29/02
-------------------------------------------------------------------------------------------------------------------
$ 0 to 2 79,000 8.4 0.84 70,250 0.87
2 to 4 124,000 3.4 3.05 124,000 3.05
4 to 6 188,750 4.5 5.83 188,750 5.83
6 to 8 72,000 5.0 6.31 72,000 6.31
------- -------
463,750 455,000
======= =======
NOTE 10 -- DEFERRED COMPENSATION PLANS
The Company has deferred compensation agreements with one active and one
retired employee providing for remaining payments amounting to $1,285,000. One
agreement, as modified, has been in effect since 1972 and the second agreement
was effective October 1989. The earliest of the agreements matured in December
1998. The agreements provide for monthly payments on retirement or death
benefits over fifteen year periods. The agreements are funded under trust
agreements whereby the Company pays to the trust amounts necessary to meet the
obligations under the deferred compensation agreements.
Charges to operations applicable to those agreements were $94,000,
$20,000 and $30,000 for the fiscal years 2002, 2001 and 2000, respectively.
NOTE 11 -- EMPLOYEES' RETIREMENT PLAN
During 1989, the Company adopted a 401(k) retirement plan 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. In prior years,
the Company made discretionary contributions that matched 50% of each employee's
contribution up to 4% of pretax eligible compensation. During 2002, the Company
ceased matching contributions. The Company's discretionary contributions totaled
approximately $33,000, $173,000 and $163,000 in fiscal years 2002, 2001 and
2000, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company had outstanding commitments backed by letters of credit of
approximately $5,012,000 and $5,321,000 at June 29, 2002 and June 30, 2001,
respectively, relating to the purchase of machine inventory for delivery to
customers.
The Company filed a lawsuit with one of its customers for
nonperformance associated with certain sales contracts. On July 30, 2001, the
defendant filed a counterclaim alleging damages due to delay in delivery of
machines and defects in operation in the amount of $6.8 million (Canadian) or
approximately U.S. $4.3 million, plus interest and penalties in an unspecified
amount. Based upon discussions with its legal counsel, the Company believes the
counterclaim is without merit and intends to defend its position vigorously.
In the normal course of business, the Company is named in various other
lawsuits. The Company vigorously defends such lawsuits, none of which are
expected to have a material impact on operations, either individually or in the
aggregate.
F-15
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 -- SEGMENT INFORMATION
The Company operates primarily in two segments of business, textile
equipment ("textile") and laundry equipment and services ("laundry"). Prior to
the acquisition of Wink Davis on August 1, 1997, the Company operated only in
the textile segment. TMC and Speizman Yarn are included in the textile equipment
classification. Corporate operations include general corporate expenses,
amortization of debt issuance costs, interest expense related to the Company's
credit facility and elimination of intersegment balances. The table below
summarizes financial data by segment.
Total Textile Total Laundry
Segment Segment Corporate Total
------------- ------------- ------------- --------------
Net Revenues ...................................... 2002 $ 31,548,000 $ 25,555,000 $ - $ 57,103,000
2001 47,337,000 34,896,000 - 82,233,000
2000 85,370,000 29,812,000 - 115,182,000
Earnings (Loss) before Interest & Taxes ........... 2002 (3,956,000)(2) 220,000 (1,176,000) (4,912,000)
2001 (6,398,000)(3) 714,000 (1,369,000) (7,053,000)
2000 4,481,000 145,000 (1,307,000) 3,319,000
Total Assets ...................................... 2002 30,258,000 9,789,000 - 40,047,000
2001 43,339,000 14,570,000 (3,036,000) 54,873,000
2000 55,328,000 13,499,000 (572,000) 68,255,000
Capital Expenditures .............................. 2002 10,000 - - 10,000
2001 182,000 37,000 - 219,000
2000 3,214,000 59,000 - 3,273,000
Depreciation and Amortization ..................... 2002 684,000 63,000 246,000 993,000(1)
2001 914,000 447,000 92,000 1,453,000
2000 967,000 471,000 133,000 1,571,000
Interest Expense (Income) ......................... 2002 845,000 8,000 1,077,000 1,930,000
2001 963,000 28,000 1,431,000 2,422,000
2000 727,000 8,000 1,238,000 1,973,000
- ------------
(1) The Company discontinued amortization of goodwill in 2002.
(2) The textile segment includes a $1.0 million loss on impairment of goodwill
in 2002.
(3) In 2001, the loss before interest and taxes for the textile segment included
a one-time loss on settlement of uncommitted cash flow foreign currency
derivative contracts of $3.9 million.
NOTE 14 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended
----------------------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
------------ ------------ -----------
Cash paid (received) during year for:
Interest expense .......................................... $ 1,951,000 $ 2,389,000 $ 2,054,000
Income taxes .............................................. (2,775,000) (304,000) 873,000
Non-Cash Investing and Financing Transactions:
The Company acquired $255,000 of inventory through financing arrangements
with one of its vendors in 2001.
A capital lease obligation of $1,900,000 was incurred in fiscal 1999 when
the Company entered into a lease for its corporate offices and warehouses. An
additional $2,800,000 was incurred in fiscal 2000 from the addition of 100,000
square feet of warehouse space leased and related land during the year.
F-16
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 15 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents unaudited supplemental quarterly financial
information for the years ended June 29, 2002 and June 30, 2001:
QUARTER ENDED
September 29, 2001 December 29, 2001 March 30, 2002 June 29, 2002
------------------ ----------------- -------------- -------------
2002
Revenues ............................ $ 12,177,000 $ 15,107,000 $ 12,932,000 $ 16,887,000
Gross Profit ........................ 1,490,000 2,094,000 1,715,000 2,460,000
Operating Income (loss) ............. (1,622,000) (738,000) (2,303,000)(a) (249,000)
Income (loss) before taxes .......... (2,177,000) (1,320,000) (2,702,000) (643,000)
Net Income (loss) ................... $ (1,427,000) $ (1,040,000) $ (2,214,000) $ (661,000)
Basic earnings (loss) per share ..... $ (0.44) $ (0.32) $ (0.68) (0.20)
Diluted earnings (loss) per share ... (0.44) (0.32) (0.68) (0.20)
September 30, 2000 December 30, 2000 March 31, 2001 June 30, 2001
------------------ ----------------- -------------- -------------
2001
Revenues ............................ $ 20,896,000 $ 17,811,000 $ 21,164,000 $ 22,362,000
Gross Profit ........................ 1,548,000 2,405,000 3,503,000 4,266,000
Operating Income (loss) ............. (2,344,000) (1,516,000) 25,000 708,000
Income (loss) before taxes .......... (2,856,000) (6,089,000)(b) (601,000) 71,000
Net Income (loss) ................... $ (1,783,000) $ (3,751,000) $ (371,000) $ 42,000
Basic earnings (loss) per share ..... $ $ (0.55) $ (1.15) $ (0.11) $ 0.01
Diluted earnings (loss) per share ... (0.55) (1.15) (0.11) 0.01
- ------------
(a) The textile segment includes a $1.0 million goodwill impairment charge in
2002.
(b) In 2001, the loss before interest and taxes for the textile segment included
a one-time loss on settlement of uncommitted cash flow foreign currency
derivative contracts of $3.9 million.
Earnings (loss) per share calculation for each quarter are based on the
weighted average shares outstanding for each period. The sum of the quarters may
not necessarily be equal to the full year earnings (loss) per share amount.
NOTE 16 -- OPERATIONS
As shown in the accompanying financial statements, the Company's sales
have decreased to $57.1 million in 2002 from $82.2 million in 2001 and $115.2
million for fiscal 2000. In addition, the Company incurred net losses of $5.3
million in 2002 and $5.8 million in 2001. The Company believes that the decrease
in sales over the previous two years are due, in large part, to the delay in the
sales of closed toe machines and the slowdown in the overall economy. However,
the Company believes that the trend in sales has stabilized. Factors
contributing to the losses in 2002, include the $1 million goodwill impairment
charge. Factors that have contributed to the losses for 2001 include losses from
the use of lira hedging contracts for anticipate sales that were postponed or
cancelled.
The Company has responded to the decrease in sales by reducing its
personnel in all departments, restructuring its commission arrangement with
sales personnel, and reducing general and administrative expenses, including a
reduction of the lease payments for its main facility. In addition, the Company
has reduced its bank financing, and interest expense through aggressive asset
management. To further improve its available cash, the Company has entered into
extended payment terms with Lonati and its subsidiaries. The Company is
currently in discussions with potential lenders regarding refinancing its credit
facility, which is scheduled to expire on December 31, 2002. There can be no
assurances the Company will be able to refinance this debt with another lender
on a timely basis, on commercially reasonable terms, or at all.
F-17
[BDO SEIDMAN LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
SPEIZMAN INDUSTRIES, INC.
The audits referred to in our report dated August 30, 2002, relating to the
consolidated financial statements of Speizman Industries, Inc. and subsidiaries,
which is contained in Item 8 of this Form 10-K included the audit of the
financial statement schedule listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
Charlotte, North Carolina BDO Seidman, LLP
August 30, 2002
S-1
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- --------
Balance at Charged to Charged to Deductions Balance
beginning costs and other from at end
Description of period expenses accounts reserves of period
- ----------- --------- -------- -------- -------- ---------
Fiscal year ended July 1, 2000:
Reserve for doubtful accounts ........ $ 646,000 $ 259,000 $ - $ 303,000 $ 602,000
---------- ---------- ------- --------- ----------
Reserve for inventory obsolescence ... $ 736,000 $ 807,000 $ - $ 230,000 $1,313,000
---------- ---------- ------- --------- ----------
Fiscal year ended June 30, 2001:
Reserve for doubtful accounts ........ $ 602,000 $ 413,000 $ - $ 268,000 $ 747,000
---------- ---------- ------- --------- ----------
Reserve for inventory obsolescence ... $1,313,000 $ 689,000 $ - $ 430,000 $1,572,000
---------- ---------- ------- --------- ----------
Fiscal year ended June 29, 2002:
Reserve for doubtful accounts ........ $ 747,000 $ 535,000 $ - $ 463,000 $ 819,000
---------- ---------- ------- --------- ----------
Reserve for inventory obsolescence ... $1,572,000 $1,432,000 $ - $ 443,000 $2,561,000
---------- ---------- ------- --------- ----------
S-2
SPEIZMAN INDUSTRIES, INC.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of Speizman Industries, Inc. (the
"Company"). (Incorporated by reference to Exhibit 3.1 contained in
the Company's Registration Statement on Form S-1 (the "1993 Form
S-1"), registration number 33-69748, filed with the Securities and
Exchange Commission (the "Commission") on September 30, 1993, and
amendments thereto.)
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, dated December 4, 1978. (Incorporated by reference to
Exhibit 3.2 contained in the 1993 Form S-1.)
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, dated February 8, 1993. (Incorporated by reference to
Exhibit 3.3 contained in the 1993 Form S-1.)
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company, dated January 31, 1997. (Incorporated by reference to
Exhibit 10.4 contained in the Company's Annual Report on Form 10-K
for the fiscal year ended June 28, 1997, File No.0-8544, filed with
the Commission on September 26, 1997 (the "1997 Form 10-K").)
3.5 Certificate of Amendment of Certificate of Incorporation of the
Company, dated January 7, 2002. (Incorporated by reference to Exhibit
10(a) contained in the Company's Quarterly Report on Form 10-Q for
quarter ended December 29, 2001, File No. 0-8544, filed with the
Commission on February 12, 2002 (the "December 29, 2001 Form 10-Q").)
3.6 Bylaws of the Company, as amended November 7, 1978. (Incorporated by
reference to Exhibit 3.6 contained in the 1993 Form S-1.)
4.1 Certificate of Incorporation of the Company as currently in effect
(included as Exhibits 3.1 through 3.5). (Incorporated by reference to
Exhibit 4.1 contained in the 1993 Form S-1.)
4.2 Bylaws of the Company, as amended November 7, 1978. (Incorporated by
reference to Exhibit 4.2 contained in the 1993 Form S-1.)
4.3 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.3 contained in the 1993 Form S-1.)
10.1 Agency Agreement between the Company and Lonati, S.r.l., Brescia,
Italy ("Lonati"), dated January 2, 1992, relating to the Company's
distribution of machines in the United States. (Incorporated by
reference to Exhibit 10.1 contained in the 1993 Form S-1.)
10.2 Agency Agreement between the Company and Lonati, dated January 2,
1992, relating to the Company's distribution of machines in Canada.
(Incorporated by reference to Exhibit 10.2 contained in the 1993 Form
S-1.)
10.3 Distribution Agreement by and between Company and Lonati, dated
January 2, 1997, relating to the Company's distribution of circular
knitting machines, ladies and men in Mexico. (Incorporated by
reference to Exhibit 10.3 contained in the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 1998, File No. 0-8544,
filed with the Commission on September 25, 1998 (the "1998 Form
10-K").)
10.4 Distribution Agreement by and between the Company and Lonati, dated
December 3, 2001, relating to the Company's distribution of Lonati
machines in Mexico. (Incorporated by reference to Exhibit 10(a)
contained in the Company's Quarterly Report on Form 10-Q for quarter
ended March 30, 2002, File No. 0-8544, filed with the Commission on
May 14, 2002 (the "March 30, 2002 Form 10-Q").)
10.5 First Amendment to Agency Agreement between the Company and Lonati
effective May 3, 2001. Confidential Treatment requested pursuant to a
request for confidential treatment filed with the SEC on September
28, 2001. The portions of the exhibit for which confidential
treatment has been requested have been omitted from the exhibit. The
omitted information has been filed separately with the Commission as
part of the confidential treatment request. (Incorporated by
reference to Exhibit 10.4 contained in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001, File No. 0-8544,
filed with the Commission on September 28, 2001 (the "2001 Form
10-K").)
10.6 Second Amendment to Agency Agreement and Forbearance Agreement
between the Company and Lonati effective February 1, 2002.
(Incorporated by reference to Exhibit 10(f) contained in the March
30, 2002 Form 10-Q.)
10.7 Agency Agreement between the Company and Santoni, S.r.l., Brescia,
Italy ("Santoni"), dated January 2, 1992 ("Santoni Agreement").
(Incorporated by reference to Exhibit 10.3 contained in the 1993 Form
S-1.)
10.8 Letter from Santoni relating to the Santoni Agreement, dated June 8,
1992. (Incorporated by reference to Exhibit 10.4 contained in the
1993 Form S-1.)
10.9 Letter Agreement between the Company and Santoni relating to the
Santoni Agreement, dated July 21, 1993. (Incorporated by reference to
Exhibit 10.5 contained in the 1993 Form S-1.)
10.10 Agreement between the Company and Santoni effective February 1, 2002.
10.11 Distributorship Agreement between the Company and Conti Complett,
S.p.A., Milan, Italy, dated October 2, 1989.
10.12 Letter Agreement between Speizman Yarn Equipment, Inc. and Margasa,
dated June 15, 1999. (Incorporated by reference to Exhibit 10.10
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended July 3, 1999, File No. 0-8544, filed with the Commission
on October 1, 1999 (the "1999 Form 10-K".)
10.13 Letter Agreement between Speizman Yarn Equipment, Inc. and Margasa,
dated January 23, 2001. (Incorporated by reference to Exhibit 10.10
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2001, File No. 0-8544, filed with the Commission
on September 29, 2001 (the "2001 Form 10-K".)
10.14 Split Dollar Insurance Agreement, dated January 15, 1992, between the
Company and Richard A. Bigger, Jr., Successor Trustee of the Robert
S. Speizman Irrevocable Insurance Trust. (Incorporated by reference
to Exhibit 10.13 contained in the 1993 Form S-1.)
10.15 First Amendment to Split Dollar Insurance Agreement, dated September
4, 1996, between the Company and Richard A. Bigger, Jr., Successor
Trustee of the Robert S. Speizman Irrevocable Insurance Trust.
10.16 Lease Agreement by and between The Speizman LLC and the Company
regarding corporate headquarters and warehouse, dated as of December
1, 1999. Incorporated by reference to Exhibit 10.15 contained in the
Company's Annual Report on Form 10-K for the fiscal year ended July
1, 2000, File No. 0-8544, filed with the Commission on September 30,
2000 (the "2000 Form 10-K".)
10.17 First Amendment to Lease Agreement, dated December 1, 1999 by and
between The Speizman LLC and the Company, dated as of June 2000.
(Incorporated by reference to Exhibit 10.18 contained in the 2000
Form 10-K.)
10.18 Second Amendment to Lease Agreement by and between The Speizman LLC
and the Company effective January 1, 2002. (Incorporated by reference
to Exhibit 10(f) contained in the March 30, 2002 Form 10-Q.)
10.19* 1991 Incentive Stock Option Plan, as Amended and Restated Effective
September 20, 1993, of the Company. (Incorporated by reference to
Exhibit 10.21 contained in the 1993 Form S-1.)
10.20* Speizman Industries, Inc. 1995 Stock Option Plan. (Incorporated by
reference to Exhibit 4 to the Company's Registration Statement on
Form S-8, registration number 333-06287, filed with the Commission on
June 19, 1996.)
10.21* Speizman Industries, Inc. Nonqualified Stock Option Plan as amended
on October 4, 1996. (Incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8, registration no.
333-23503, filed with the Commission on March 18, 1997.)
10.22* Speizman Industries, Inc. Nonqualified Stock Option Plan as amended
on September 29, 1997. (Incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8, registration no.
333-46769, filed with the Commission on February 24, 1998.)
10.23* Speizman Industries, Inc. 2000 Equity Compensation Plan of the
Company. (Incorporated by reference to Exhibit 99 to the Company's
Registration Statement on Form S-8, registration no. 333-74292, filed
with the Commission on November 30, 2001.)
10.24* Restated Deferred Compensation Agreement, dated May 22, 1989, between
the Company and Josef Sklut, as amended by Amendment to Deferred
Compensation Agreement, dated December 30, 1992 (the "Deferred
Compensation Agreement"). (Incorporated by reference to Exhibit 10.27
contained in the 1993 Form S-1.)
10.25* Restated Trust Agreement, dated May 22, 1989, between the Company and
First Citizens Bank and Trust Company, as amended by First Amendment
to Trust Agreement dated December 30, 1992, relating to the Deferred
Compensation Agreement. (Incorporated by reference to Exhibit 10.28
contained in the 1993 Form S-1.)
10.26* Executive Bonus Plan of the Company, adopted July 20, 1993.
(Incorporated by reference to Exhibit 10.30 contained in the 1993
Form S-1.)
10.27* Resolutions of the Company's Board of Directors dated November 15,
1995, extending Executive Bonus Plan adopted July 20, 1993.
(Incorporated by reference to Exhibit 10.34 contained in the
Company's Annual Report on Form 10-K for the fiscal year ended July
1, 1995, File No. 0-8544, filed with the Commission on September 29,
1995 (the "1995 Form 10-K").)
10.28 Redemption Agreement between the Company and Robert S. Speizman,
dated May 31, 1974, as amended by Modified Redemption Agreement,
dated April 14, 1987, Second Modified Redemption Agreement, dated
September 30, 1991, and Third Modified Redemption Agreement, dated as
of July 14, 1993. (Incorporated by reference to Exhibit 10.34
contained in the 1993 Form S-1.)
10.29 Fourth Modified Redemption Agreement between the Company and Robert
S. Speizman, dated September 14, 1994 as amended by Fifth Modified
Redemption Agreement, dated September 26, 1995.
10.30 Credit Facility Agreement by and between the Company and its
subsidiaries and SouthTrust Bank, N.A., dated as of May 31, 2000.
(Incorporated by reference to Exhibit 10.53 contained in the 2000
Form 10-K.)
10.31 Amendment and Forbearance Agreement by and between the Company and
its subsidiaries and SouthTrust, dated as of November 13, 2000.
(Incorporated by reference to Exhibit 10(a) contained in the
Company's Quarterly Report on Form 10-Q for quarter ended December
30, 2000, File No. 0-8544, filed with the Commission on February 13,
2001 (the "December 30, 2000 Form 10-Q".)
10.32 Second Amendment and Forbearance Agreement by and between the Company
and its subsidiaries and SouthTrust dated as of February 19, 2002.
(Incorporated by reference to Exhibit 10.34 contained in the 2001
Form 10-K.)
10.33 Third Amendment and Forbearance Agreement by and between the Company
and its subsidiaries and SouthTrust dated as of February 19, 2002.
(Incorporated by reference to Exhibit 10(c) contained in the March
30, 2002 Form 10-Q.)
10.34 Fourth Amendment and Forbearance Agreement by and between the Company
and its subsidiaries and SouthTrust dated as of July 31, 2002.
10.35 Dealer Agreement by and between Pellerin Milnor Corporation and Wink
Davis Equipment Company, Inc. ("Wink Davis"), dated July 1, 1989,
relating to the Company's distribution of machines primarily in the
southeastern United States and the Chicago, Illinois area.
(Incorporated by reference to Exhibit 10.50 contained in the
Company's Annual Report on Form 10-K for fiscal year ended June 27,
1997, File No. 0-8544, filed with the Commission on September 26,
1997 (the "1997 Form 10-K").)
10.36 Dealer Agreement between Pellerin Milnor Corporation and Wink Davis
dated as of February 1, 2002. (Incorporated by reference to Exhibit
10(d) contained in the March 30, 2002 Form 10-Q.)
10.37 Distributor Agreement by and between Chicago Dryer Corporation
("CDC") and Wink Davis, dated January 1, 1994, relating to the
distribution of certain items of CDC's commercial laundry equipment.
(Incorporated by reference to Exhibit 10.51 contained in the
Company's 1997 Form 10-K.)
10.38 Lease Agreement by and between The Speizman LLC, II and Wink Davis,
dated as of March 1, 2000 relating to the Wink Davis Charlotte, North
Carolina office. (Incorporated by reference to Exhibit 10.61
contained in the 2000 Form 10-K.)
10.39 Commercial Lease between Master Distributors, Inc. t/a Atlantic
Beverage Co., Inc. and Wink Davis, dated as of September 6, 2001,
relating to the Maryland office. (Incorporated by reference to
Exhibit 10(e) contained in the March 30, 2002 Form 10-Q.)
10.40 Industrial Building Lease between Kensington Partners, Ltd. and Wink
Davis, dated as of April 25, 2002, relating to the Wood Dale,
Illinois office.
10.41 License Agreement by and between Todd Motion Controls, Inc and SRA
srl ("SRA"), dated October 4, 2000. (Incorporated by reference to
Exhibit 10(b) contained in the Company's December 30, 2000 Form
10-Q.)
10.42 First Amendment to License Agreement and Grant of Distributorship
between SRA and the Company and its subsidiaries dated July 16, 2002.
10.43 Agreement between Tecnopea SrL and the Company, effective as of
February 1, 2002.
21 List of Subsidiaries
23 Consent of BDO Seidman, LLP
99.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- -----------------
* Represents a management contract or compensatory plan or arrangement of the
Registrant.