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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 28, 2003
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 (I.R.S. Employer
incorporation 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. |_|
Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes |_| No |X|
The aggregate market value of Registrant's voting stock held by
non-affiliates of the Registrant as of December 28, 2002 (the last business day
of the Registrant's most recently completed second quarter) was $607,035, based
upon the closing sales price of a share of the Registrant's common stock as
reported by the Nasdaq SmallCap Market on that date.
As of September 18, 2003, 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 24, 2003 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 6 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. ("Speizman Industries" or "the Company") is a
distributor of specialized commercial industrial machinery, parts and equipment.
The Company operates primarily in two segments, textiles and laundry. In the
textile segment, the Company distributes sock-knitting machines, other knitting
equipment, automated boarding, finishing and packaging equipment, and related
parts used in the sock industry. In the laundry segment, the Company distributes
commercial and industrial laundry equipment and parts and provides 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 2001, 2002 AND 2003
CONTAINED 52 WEEKS AND ENDED ON JUNE 30, 2001, JUNE 29, 2002,AND JUNE 28, 2003,
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. The Company's ability to sell in Mexico is
limited to Mexican companies that are working with a U.S. or Canadian sock
manufacturer. 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.
1
The Lonati Agreement contains certain covenants and conditions relating
to Speizman Industries' sale of Lonati machines, including, among others,
requirements that Speizman Industries, at its own expense, promote the sale of
Lonati machines and assist Lonati in maintaining its competitive position,
maintain an efficient sales staff, provide for the proper installation and
servicing of the machines, maintain an adequate inventory of parts and pay for
all costs of advertising the machines. Speizman is prohibited during the term of
the Lonati Agreement from distributing any machines 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, is 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 mainly used 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. 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: 26.0% in fiscal 2003, 25.1% in fiscal 2002 and
26.2% in fiscal year 2001.
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
SRA, Srl Automated loading, positioning, and finishing devices United States and Canada
Florence, Italy
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.
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 an appraiser and
liquidator of textile mill equipment and as a broker in the purchase and sale of
such equipment.
2
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 18, 2003, Speizman Industries employed 7 salespersons and 11 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 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 has utilized
forward exchange contracts in connection with these purchases of parts and
expects that it will continue to do so in fiscal 2004 to hedge foreign currency
exchange risk. 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 2003, 2002 and 2001.
CUSTOMERS
Speizman Industries' customers consist primarily of the major sock
manufacturers in the United States and Canada. In fiscal 2003, one customer
(Sara Lee Sock Company) represented approximately 10% of the Company's revenues.
In 2002, no single customer represented over 10% of the Company's revenues. In
fiscal year 2001, one customer (Sara Lee Sock Company) represented 13.4% 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.
3
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, and
Charlotte, North Carolina, distributes commercial laundry equipment and parts
and provides related services, principally installation and repair 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, 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 most of its current
territories since 1972. In 2003, Pellerin Milnor presented its annual top
distributor award to Wink Davis and has done so for all but three years since
1980.
4
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 dryers Southeastern U.S. & Chicago, IL areas
Cincinnati, Ohio
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
- ------------------------------ --------------------------------------------- ----------------------------------------
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 18,
2003, Wink Davis employed approximately 9 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' subcontractors install the equipment and Wink
Davis provides 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 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 Wink Davis
location or shipped directly from the manufacturer.
5
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 comprehensively trained 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 workplace
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 18, 2003, the Company had 99 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 $3.2 million at September 18, 2003. The Company's firm backlog of unfilled
orders was $20.1 million and $13.8 million at June 29, 2002 and June 30, 2001,
respectively. The reduction in unfilled orders at June 2003 compared to June
2002 was primarily due to a trend in lower equipment sales which the Company
believes was due to delayed decisions for capital spending due to concerns about
imports from foreign manufacturers in the sock knitting division and to the
continued decline in the hospitality industry, which represents a large part of
the customer base in the laundry division. 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
As of September 18, 2003, Speizman had $9.4 million in borrowings under
its line of credit facility with a commercial bank. This facility matures
December 31, 2003. 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.
6
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:
o failure to pay any amounts owed when due, which failure
continues for 10 days after written notice;
o an event of default occurring under Speizman's existing credit
facility with SouthTrust;
o an event of default for any indebtedness in excess of $1.0
million; or
o failure to refinance its existing credit facility at maturity.
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. At September 18, 2003, the Company was in full compliance with
the terms of the Lonati agreement. The Lonati agreement allows Lonati to make
sales directly to customers located in the Company's distribution territories
and pays 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.
SPEIZMAN'S ABILITY TO RETURN TO PROFITABILITY
Speizman incurred a net loss of $296,000 in fiscal 2003. In addition,
Speizman incurred net losses of $5.3 million in fiscal 2002 and $5.9 million in
fiscal 2001. 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 the last three fiscal
years, 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:
o 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;
o impairing its ability to obtain additional financing for
working capital, capital expenditures, acquisitions or general
corporate purposes;
o increasing vulnerability to increases in interest rates;
o hindering its ability to adjust rapidly to changing market
conditions; and
o making it more vulnerable to a further downturn in general
economic conditions or in its business.
7
RELATIONSHIP WITH FOREIGN SUPPLIERS
The majority of Speizman Industries' suppliers for textile parts and
textile 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 30.1%, 31.9% and 30.4% of
the Company's net revenues in fiscal 2003, 2002 and 2001, 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, is 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 fiscal 2002 or 2003,
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.
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 significant 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 28, 2003 and 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 that 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 as such fluctuations have in the past. All of Speizman Industries'
export sales originating from the United States are made in U.S. dollars.
8
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 and imported goods. These factors may contribute to fluctuations in the
demand for the Company's sock knitting and packaging equipment and knitted
fabric equipment products.
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 September 29, 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.
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
rebuilding and warehousing Charlotte, NC December 1, 1999 180 $ 66,667 221,000 (a)
PROPERTIES USED PRIMARILY BY WINK DAVIS:
Administrative, general office and
warehouse Smyrna, GA May 1, 2001 61 $ 5,509 12,000
Sales and service office and warehouse Wood Dale, IL June 1, 2002 61 $ 5,677 6,800
Sales and service office and warehouse Charlotte, NC March 1, 2000 60 $ 8,172 10,800
- ------------
(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.
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.
As of September 18, 2003, no court date has been set in this matter.
9
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 lawsuit 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 2003.
EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information regarding the
executive officers of the Company as of September 18, 2003:
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Robert S. Speizman....... 63 Chairman of the Board, President and Director
Mark A. Speizman ........ 32 Senior Vice President, Hosiery
Paul R.M. Demmink........ 48 Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer
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.
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, Inc., a provider of information systems to the
financial services industry.
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 2002 HIGH LOW
---- ---
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
FISCAL 2003
First Quarter (ended September 28, 2002) .......... $0.94 $0.55
Second Quarter (ended December 28, 2002)........... 0.65 0.25
Third Quarter (ended March 29, 2003)............... 0.66 0.25
Fourth Quarter (ended June 28, 2003)............... 0.67 0.28
10
As of June 28, 2003, there were approximately 191 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.
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. See
"Risk Factors -- Nasdaq Listing" for discussion of the impact of our share
prices on continued listing.
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 28, 2003, 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." The consolidated operating
information set forth below for the periods in the three years ended June 28,
2003, June 29, 2002 and June 30, 2001 and the consolidated balance sheet data as
of June 28, 2003 and June 29, 2002, are derived from and qualified by reference
to our audited financial statements included in this annual report. The
consolidated operating information set forth below for the years ended July 1,
2000 and July 3, 1999, and the consolidated balance sheet data as of June 30,
2001, July 1, 2000 and July 3, 1999 are derived from and qualified by reference
to our audited financial statements that are not included in this annual report.
Fiscal Year Ended
------------------------------------------------------------
June 28, June 29, June 30, July 1, July 3,
2003 2002 (A) 2001 2000 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $ 62,536 $ 57,103 $ 82,233 $ 115,182 $ 101,412
Cost of sales ........................................... 52,451 49,344 70,511 96,443 85,564
--------- --------- --------- --------- ---------
Gross profit ............................................ 10,085 7,759 11,722 18,739 15,848
Selling, general and administrative expenses ............ 8,756 12,671 14,849 15,420 15,124
--------- --------- --------- --------- ---------
Operating income (loss) ................................. 1,329 (4,912) (3,127) 3,319 724
Interest expense, net ................................... 1,597 1,930 2,422 1,973 1,103
Loss on settlement of uncommitted foreign
currency derivative contracts ......................... -- -- 3,926 -- --
--------- --------- --------- --------- ---------
Income (loss) before taxes on income .................... (268) (6,842) (9,475) 1,346 (379)
Taxes (benefit) on income ............................... 28 (1,500) (3,612) 544 (126)
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (296) $ (5,342) $ (5,863) $ 802 $ (253)
========= ========= ========= ========= =========
PER SHARE DATA:
Basic earnings (loss) per share.......................... $ (0.09) $ (1.64) $ (1.80) $ 0.25 $ (0.08)
Diluted earnings (loss) per share ....................... (0.09) (1.64) (1.80) 0.24 (0.08)
Weighted average shares outstanding - basic ............. 3,255 3,255 3,253 3,243 3,274
Weighted average shares outstanding - diluted ........... 3,255 3,255 3,253 3,296 3,274
BALANCE SHEET DATA:
Working capital.......................................... $ 7,364 $ 8,952 $ 17,300 $ 28,182 $ 16,058
Total assets ............................................ 38,403 40,047 54,873 68,255 56,456
Short-term debt ......................................... 7,301 5,000 -- -- 4,900
Long-term debt, including current maturity .............. 8,978 10,610 16,404 19,725 7,196
Stockholders' equity .................................... 11,992 12,119 17,366 23,490 22,577
(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.
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.
11
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 increased to $62.5 million in 2003 from $57.1
million in 2002 and decreased from $82.2 million for fiscal 2001. In addition,
the Company incurred net losses of $296,000 in 2003, $5.3 million in 2002 and
$5.9 million in 2001. 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 experienced a slowdown in bookings of new equipment in both
divisions in the fourth quarter of 2003. The Company believes the slowdown is
due to delayed decisions for capital spending due to concerns about the effect
of imports from foreign manufacturers and their impact on demand for
domestically produced athletic socks in the sock knitting division and to the
continued decline in the hospitality industry, which represents a large part of
the customer base in the laundry division. This slowdown continued through the
first quarter of 2004 and the Company expects that it will continue at least
through the second quarter of 2004.
During 2002 and 2003, the Company 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 bank credit facility, which is scheduled to expire on
December 31, 2003.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 28, 2003 COMPARED TO YEAR ENDED JUNE 29, 2002
NET REVENUE. Net revenues increased to $62.5 million in fiscal 2003
from $57.1 million in fiscal 2002, an increase of 9.5%. Revenues in the textile
division increased to $35.4 million in fiscal 2003 from $31.5 million in fiscal
2002. The increase is due primarily to an increase in sales of new and used sock
knitting equipment of approximately $1.9 million. Revenues in the laundry
division increased to $27.1 million in fiscal 2003 from $25.6 million in fiscal
2002. The increase is due primarily to an increase in new equipment sales of
approximately $3.3 million and was partially offset by a reduction in
installation services and parts revenue of approximately $1.2 million.
COST OF SALES AND GROSS PROFIT. Cost of sales as a percentage of
revenues decreased to 83.9% in fiscal 2003 from 86.4% in fiscal 2002.
Gross profit in the textile division increased to $5.5 million in
fiscal 2003 from $3.9 million in fiscal 2002. As a percentage of revenues, gross
margin increased to 15.5% from 12.2%. The increase in gross margin dollars
primarily reflects the increased revenues noted above. The improvement in gross
margin percentage is due primarily to an increase in demand for the Company's
sock knitting equipment and increased sales of parts. In the prior year, because
of weakened demand, the Company was forced to absorb a price increase from its
manufacturer.
Gross profit in the laundry division increased to $4.5 million in
fiscal 2003 from $3.9 million in fiscal 2002. As a percentage of revenue, gross
margin increased to 16.6% from 15.3%. The increase in gross margin dollars
reflects the increase in revenues noted above. The increase in gross margin
percentage reflects a decrease in the number of large projects relative to total
revenues in 2003 as compared to 2002. Large projects are typically more
competitive than small white machine sales and are therefore more price
sensitive. The increase in gross margin percentage also reflects a reduction in
service related salaries included in cost of sales.
12
SELLING EXPENSES. Selling expenses decreased to $3.9 million (6.3% of
net revenue) in fiscal 2003 from $5.4 million (9.5% of net revenue) in fiscal
2002. The reduction of $1.5 million was primarily due to lower personnel costs
($549,000), lower travel and entertainment expense ($150,000), and reduced
vehicle expenses ($498,000). The reduction in selling expenses as a percentage
of net revenue is primarily attributable to a change in the sales compensation
plan for the textile division from a fixed salary and commission structured plan
to a straight commission plan.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $4.8 million (7.7% of net revenue) in fiscal 2003 from $6.2 million
(10.9% of net revenue) in fiscal 2002. The reduction of $1.4 million reflects a
reduction in personnel costs ($1.0 million), equipment rental ($202,000) and bad
debts ($401,000).
LOSS ON GOODWILL IMPAIRMENT. In fiscal 2002, the Company recognized an
impairment of goodwill of $1.0 million associated with the Company's 1998
acquisition of TMC. No such impairment was deemed necessary in fiscal 2003.
INTEREST EXPENSE. Interest expense decreased to $1.6 million in fiscal
2003 from $1.9 million in fiscal 2002. The decrease reflects reduced borrowing
rates and a lower level of average borrowings under the Company's line of
credit.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
was $28,000 (10.4% OF PRETAX LOSS) in fiscal 2003 as compared to a benefit of
$1.5 million (22% of pretax loss) in fiscal 2002. The increase in the tax rate
primarily reflects the impact of certain non-deductible expenses such as travel
and entertainment and the impact of taxable income allocated to various states.
NET LOSS. Net loss for fiscal 2003 was $296,000, or $0.09 per share
(basic and diluted), as compared to a net loss of $5.3 million, or $1.64 per
share (basic and diluted), for fiscal 2002.
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
($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.
13
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.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three fiscal periods, the Company satisfied its cash
requirements from operations, 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
March 31, 2003, expires on December 31, 2003 and provides a revolving line of
credit up to $10.0 million and an additional line of credit for issuance of
Documentary Letters of Credit up to $7.5 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 18, 2003, the Company's outstanding revolving line of credit balance
was $9.4 million and the usage for documentary letters of credit was $2.1
million. The unused amount available to the Company as determined by the Bank
was $.8 million. Beginning on June 3, 2003, all borrowings under the line
accrued interest at prime plus 1 1/4%. On July 1, 2003, the interest rate
increased to prime plus 3% until the expiration of the agreement. In connection
with the SouthTrust facility, the Company granted the bank a security interest
in all assets of the Company.
Working capital at June 28, 2003 was $7.4 million, a decrease of $1.5
million from $8.9 million at June 29, 2002. The working capital ratio at June
28, 2003 was 1.39 compared with 1.47 at June 29, 2002. Net cash used in
operating activities of $2.3 million for 2003 was primarily due to an increase
in accounts receivable of $1.9 million, offset by a decrease in inventories of
$2.2 million, decrease in accounts payable of $1.4 million and a decrease in
trade notes payable of $1.5 million.
The increase in accounts receivable of $1.9 million reflects the
increase in net revenue in 2003 with some large sales taking place late in the
last quarter of the fiscal year. The number of days sales in accounts receivable
declined from 93 days in fiscal 2002 to 64 days in fiscal 2003. The improvement
of 29 days resulted in a net reduction in accounts receivable of approximately
$5.0 million and reflects management's increased emphasis on cash collections.
The decrease in inventory of $2.2 million was primarily due to sales of
hosiery and seamless underwear equipment and reflects management's increased
efforts in reducing inventory levels.
14
The decrease in accounts payable of $1.4 million reflects reduced
purchases in the fourth quarter of fiscal 2003 as compared to the fourth quarter
of 2002 and is due to a reduction in net revenue in the fourth quarter of fiscal
2003 of $2.3 million versus the fourth quarter of 2002.
The reduction in customers' deposits of $600,000 results from the
timing of signed contracts and reflects the Company's reduced backlog at June
28, 2003.
The reduction in trade notes payable of $1.5 million reflects payments
made during the fiscal year toward the trade notes payable.
Net cash used in investing activities of $450,000 resulted primarily
from capital expenditures (enterprise-wide computer system) in fiscal 2003 and
compared to net cash provided from investing activities of $115,000 from the
disposition of assets in the prior year. Net cash provided by financing
activities of $2.0 million resulted primarily from net borrowings under the
Company's line of credit of $2.3 million in the current fiscal year.
The Company's credit facility with SouthTrust matures December 31,
2003. As of September 18, 2003, Speizman had $9.4 million in borrowings under
its line of credit facility with a commercial bank. This facility matures
December 31, 2003. 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
is currently in negotiations to refinance this facility with another lender.
However, there is no assurance that additional financing will be available when
needed or desired on terms favorable to the Company or at all.
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
----- -------- --------- --------- -------------
Notes payable and long-term
debt $11,899,000 $ 8,379,000 $3,520,000 $ -- $ --
Capital lease obligations 9,533,000 800,000 2,400,000 1,600,000 4,733,000
Irrevocable letters of credit 4,180,000 4,180,000 -- -- --
Operating leases 1,200,000 539,000 651,000 10,000 --
Deferred Compensation 1,207,000 104,000 311,000 208,000 584,000
----------- ----------- ---------- ---------- ----------
Total $28,019,000 $14,002,000 $6,882,000 $1,818,000 $5,317,000
=========== =========== ========== ========== ==========
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.
15
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
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 28, 2003.
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 Euro 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 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.
REVENUE RECOGNITION
We apply the provisions of Securities and Exchange Commission (SEC)
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION (SAB 101) to all our
revenue transactions. The major portion of the Company's revenues consists of
sales and commissions on sales of machinery and equipment. The revenue derived
from 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. Shipping and handling charges to customers
are included in revenues. Costs associated with shipping are included in cost of
sales.
16
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 amount 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.
The Company performs its annual impairment test of goodwill on the last
day of its fiscal year and more often if circumstances surrounding its business
dictate that it do so. For purposes of determining the fair value of its
goodwill, the Company computes the net present value of its future cash flows
using the five-year average return on investment earned by comparable companies
in its industry and compares that to the book value of the reporting segment.
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 records an allowance for doubtful accounts
based on specifically identified amounts that management believes to be
uncollectible. Management also records an additional allowance based on certain
percentages of its aged receivables over 90 days old, which are determined based
on historical experience and management's assessment of the general financial
conditions affecting its customer base. If actual collections experience
changes, revisions to the allowance may be required. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance. 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 for a specific product.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. This interpretation establishes new guidelines
for consolidating entities in which a parent company may not have majority
voting control, but bears residual economic risks or is entitled to receive a
majority of the entity's residual returns, or both. As a result, certain
subsidiaries that were previously not consolidated under the provisions of
Accounting Research Bulletin No. 51 may now require consolidation with the
parent company. This interpretation applies in the first year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
We are currently evaluating this interpretation but do not expect that it will
have a material effect on our business, results of operations, financial
position, or liquidity.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement is effective for contracts entered into or modified after June 30,
2003. We are currently evaluating this statement but do not expect that it will
have a material effect on our business, results of operations, financial
position, or liquidity.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY (SFAS
150). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We are currently evaluating this statement but do not
expect that it will have a material effect on our business, results of
operations, financial position, or liquidity.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 2002 and 2003. All swaps had expired at June 28, 2003.
The Company's bank facility interest rate is subject to the bank's changes in
the prime rate.
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. No such exchange contracts were outstanding at June 28, 2003.
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.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company's disclosure controls and procedures (as defined in
Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) are designed to ensure that information required
to be disclosed in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. The Chief Executive Officer and the Chief Financial Officer, with
assistance from other members of management, have reviewed the effectiveness of
the Company's disclosure controls and procedures as of June 28, 2003 and, based
on their evaluation, have concluded that the disclosure controls and procedures
were effective as of such date.
There has been no change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act) that occurred during the fourth quarter of fiscal 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
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, Item 4 of this Annual Report
on Form 10-K and the remainder is set forth in the Company's 2003 Proxy
Statement for the 2003 Annual Meeting of Stockholders
ITEM 11. EXECUTIVE COMPENSATION.
The response to this Item 11 is set forth in the Company's 2003 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 2003 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 28, 2003 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 future
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans (excluding
of outstanding options, outstanding options, securities reflected in column
warrants and rights warrants and rights (a))
------------------- ------------------- ----
Plan category (a) (b) (c)
- ------------- --- --- ---
Equity compensation plans
approved by stockholders 390,250 4.88 229,750
Equity compensation plans not
approved by stockholders - - -
------- ---- -------
Total 390,250 4.88 229,750
======= ==== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this Item 13 is set forth in the Company's 2003 Proxy
Statement under the section captioned "Certain Transactions," which section is
incorporated herein by reference.
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 28, 2003 and June 29, 2002................. F-2
Consolidated Financial Statements for each of the three years
in the period ended June 28, 2003, June 29, 2002, and June 30, 2001:
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-9
19
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
We filed or furnished three reports on Form 8-K during our fourth
quarter ended July 28, 2003. Information regarding the items reported on is as
follows:
Date Filed
or Furnished Item No. Description
------------ -------- ---------------------------------------
April 3, 2003 Items 5 and 7 On April 3, 2003, Speizman announced the
extension of its credit facility.
May 12, 2003 Items 7 and 9* On May 12, 2003, Speizman announced its
results of operations for its fiscal
third quarter ended March 29, 2003.
May 20, 2003 Items 5 and 7 On May 20, 2003, Speizman announced that
it had appealed a delisting notification
from Nasdaq.
* Pursuant to SEC Release No. 33-8216, the information required to be
furnished under Item 12 was furnished under Item 9.
20
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 23, 2003
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 23, 2003
- ------------------------- and Director (Principal Executive
Robert S. Speizman Officer)
/S/ PAUL R. M. DEMMINK Vice President-Finance, CFO, September 23, 2003
- ------------------------- Secretary and Treasurer (Principal
Paul R. M. Demmink Financial Officer and Principal
Accounting Officer)
/S/ JON P. BRADY Director September 23, 2003
- -------------------------
/S/ SCOTT C. LEA Director September 23, 2003
- -------------------------
Scott C. Lea
/S/ JOSEF SKLUT Director September 23, 2003
- -------------------------
Josef Sklut
21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Speizman Industries, Inc.
We have audited the accompanying consolidated balance sheets of SPEIZMAN
INDUSTRIES, INC. AND SUBSIDIARIES as of June 28, 2003 and June 29, 2002, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 28, 2003. 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 28, 2003 and June 29, 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended June 28, 2003, in conformity with accounting principles generally accepted
in the United States of America.
Charlotte, North Carolina BDO Seidman, LLP
September 12, 2003
F-1
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 28, June 29,
2003 2002
------------ ------------
ASSETS
Current:
Cash and cash equivalents ....................................... $ 217,000 $ 970,000
Accounts receivable ............................................. 12,074,000 10,144,000
Inventories ..................................................... 11,329,000 13,542,000
Income tax refund ............................................... -- 523,000
Deferred tax asset, current...................................... 1,432,000 1,773,000
Prepaid expenses and other current assets ....................... 964,000 1,004,000
------------ ------------
TOTAL CURRENT ASSETS ......................................... 26,016,000 27,956,000
------------ ------------
Property and Equipment:
Building and leasehold improvements ............................. 6,890,000 6,887,000
Office equipment and computers................................... 1,380,000 939,000
Furniture, fixtures and transportation equipment ................ 1,550,000 1,575,000
------------ ------------
9,820,000 9,401,000
Less accumulated depreciation and amortization .................. (3,728,000) (3,089,000)
------------ ------------
NET PROPERTY AND EQUIPMENT ................................... 6,092,000 6,312,000
------------ ------------
Deferred tax asset, long-term ....................................... 1,832,000 1,561,000
Other long-term assets ............................................. 673,000 428,000
Goodwill ............................................................ 3,790,000 3,790,000
------------ ------------
$ 38,403,000 $ 40,047,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable ................................................ $ 8,601,000 $ 9,994,000
Customers' deposits ............................................. 1,175,000 1,779,000
Accrued expenses ................................................ 356,000 545,000
Revolving Line of Credit ........................................ 7,301,000 5,000,000
Current maturities of long-term debt ............................ 1,078,000 1,565,000
Current maturity of obligation under capital lease .............. 141,000 121,000
------------ ------------
TOTAL CURRENT LIABILITIES .................................... 18,652,000 19,004,000
Long-term debt ...................................................... 3,520,000 4,544,000
Obligation under capital lease ...................................... 4,239,000 4,380,000
------------ ------------
TOTAL LIABILITIES ............................................ 26,411,000 27,928,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock - par value $.10; authorized 12,000,000 shares at
June 28, 2003 and June 29, 2002, 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)
Accumulated deficit ............................................. (808,000) (512,000)
------------ ------------
Total ........................................................ 12,579,000 12,706,000
Treasury stock, at cost, 140,800 shares ......................... (587,000) (587,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................... 11,992,000 12,119,000
------------ ------------
$ 38,403,000 $ 40,047,000
============ ============
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 28, June 29, June 30,
2003 2002 2001
------------ ------------ ------------
(52 weeks) (52 weeks) (52 weeks)
------------ ------------ ------------
REVENUES .............................. $ 62,536,000 $ 57,103,000 $ 82,233,000
COST OF SALES ......................... 52,451,000 49,344,000 70,511,000
------------ ------------ ------------
GROSS PROFIT .......................... 10,085,000 7,759,000 11,722,000
SELLING EXPENSES ...................... 3,911,000 5,443,000 7,770,000
GENERAL AND ADMINISTRATIVE
EXPENSES ............................. 4,845,000 6,228,000 7,079,000
GOODWILL IMPAIRMENT CHARGES ........... -- 1,000,000 --
------------ ------------ ------------
OPERATING INCOME (LOSS) ............... 1,329,000 (4,912,000) (3,127,000)
Net Interest Expense .............. 1,597,000 1,930,000 2,422,000
Loss on settlement of uncommitted
foreign currency derivative contracts -- -- 3,926,000
------------ ------------ ------------
LOSS BEFORE PROVISION (BENEFIT)
FOR INCOME TAX ..................... (268,000) (6,842,000) (9,475,000)
PROVISION (BENEFIT) FOR
INCOME TAX ........................ 28,000 (1,500,000) (3,612,000)
------------ ------------ ------------
NET LOSS .............................. $ (296,000) $ (5,342,000) $ (5,863,000)
============ ============ ============
Basic loss per share .................. $ (0.09) $ (1.64) $ (1.80)
Diluted loss per share ................ $ (0.09) $ (1.64) $ (1.80)
Weighted average shares
Outstanding:
Basic ............................. 3,255,428 3,255,428 3,252,577
Diluted ........................... 3,255,428 3,255,428 3,252,577
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 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
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
------------
Comprehensive Loss ........ -- -- -- -- -- -- $ (5,247,000)
--------- ------------ ------------ ---------- ------------ ------------- ============
BALANCE, JUNE 29, 2002 ....... 3,396,228 $ 340,000 $ 13,047,000 $ (512,000) $ (169,000) $ (587,000)
Net loss ..................... -- -- -- (296,000) -- -- $ (296,000)
Accumulated Comprehensive loss
- Interest rate swap, net
of tax ................. -- -- -- -- 169,000 -- 169,000
------------
Comprehensive Loss ........ -- -- -- -- -- -- $ (127,000)
--------- ------------ ------------ ---------- ------------ ------------- ============
BALANCE, JUNE 28, 2003 ....... 3,396,228 $ 340,000 $ 13,047,000 $ (808,000) $ -- $ (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 28, June 29, June 30,
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (296,000) $ (5,342,000) $ (5,863,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
(Gain) loss on disposal of fixed assets ............... (2,000) 38,000 6,000
Depreciation .......................................... 672,000 747,000 922,000
Amortization .......................................... -- 246,000 532,000
Writedown for goodwill impairment ..................... -- 1,000,000 --
Provision for losses on accounts receivable ........... 134,000 535,000 413,000
Provision for inventory obsolescence .................. 133,000 1,432,000 689,000
Deferred income taxes ................................ (43,000) 1,213,000 (3,028,000)
(Increase) decrease in:
Accounts receivable ............................... (2,064,000) 8,761,000 10,869,000
Inventories ....................................... 2,080,000 1,748,000 (922,000)
Prepaid expenses and other assets ................. (55,000) (106,000) 3,599,000
Income tax refund receivable ...................... 523,000 -- --
Increase (decrease) in:
Accounts payable .................................. (1,393,000) (186,000) (4,753,000)
Trade notes payable ............................... (1,511,000) -- --
Accrued expenses and customers' deposits .......... (511,000) (3,122,000) 322,000
------------ ------------ ------------
Net cash provided by (used in) operating activities ... (2,333,000) 6,964,000 2,786,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (501,000) (10,000) (219,000)
Proceeds from property and equipment disposals ........ 51,000 125,000 87,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (450,000) 115,000 (132,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit .......................... 69,391,000 50,461,000 40,386,000
Payments on line of credit ............................ (67,090,000) (56,439,000) (43,208,000)
Principal payments on long-term debt .................. -- (81,000) (499,000)
Principal payments on Capital lease obligation ........ (121,000) -- --
Debt issue costs ...................................... (150,000) (50,000) (50,000)
Issuance of common stock upon exercise of stock options -- -- 3,000
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,030,000 (6,109,000) (3,368,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ..................................... (753,000) 970,000 (714,000)
CASH AND CASH EQUIVALENTS, at beginning of year ......... 970,000 -- 714,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, at end of year ............... $ 217,000 $ 970,000 $ --
============ ============ ============
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 28, 2003 and June 29, 2002 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
Management also records an additional allowance based on certain percentages of
its aged receivables over 90 days old, which are determined based on historical
experience and management's assessment of the general financial conditions
affecting its customer base. If actual collections experience changes, revisions
to the allowance may be required. After all attempts to collect a receivable
have failed, the receivable is written off against the allowance.
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 office equipment, 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. 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.
F-6
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. In addition, the Company has adopted the disclosure provisions of
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION, which amends the
disclosure requirements of SFAS No. 123. SFAS No. 148 had no impact on net
(loss) or stockholders' equity. The Company uses the intrinsic value method of
accounting for their plan in accordance with Accounting Principle Board Opinion
No. 25, and, therefore, recognize no compensation expense for stock options. The
Company did not issue any stock options in fiscal 2003. Pro forma net income and
earnings per share, as if the fair value method in SFAS No. 123 had been used to
account for stock-based compensation, and the assumptions used for year ended
June 28, 2003, June 29, 2002 and June 30, 2001 are as follows:
Year Ended Year Ended Year Ended
June 28, 2003 June 29, 2002 June 30, 2001
------------- ------------- -------------
Net Loss
As reported ......................... $ (296,000) $ (5,342,000) $ (5,863,000)
Compensation expense ................ $ (8,000) $ (60,000) $ (51,000)
Pro forma ........................... $ (304,000) $ (5,402,000) $ (5,914,000)
Basic loss per share
As reported ......................... $ (0.09) $ (1.64) $ (1.80)
Compensation expense ................ $ -- $ (0.02) $ (0.02)
Pro forma ........................... $ (0.09) $ (1.66) $ (1.82)
Diluted loss per share
As reported ......................... $ (0.09) $ (1.64) $ (1.80)
Pro forma ........................... $ (0.09) $ (1.66) $ (1.82)
Black-Scholes assumptions
Fair market value of options granted* $ -- $ .63 $ 1.00
Risk-free interest rate ............. -- 4.9% 5.4%
Dividend Yield ...................... -- -- $ --
Stock volatility .................... -- 73.9% 70.4%
Expected option life ................ -- 10 years 10 years
-------------
* weighted average
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 June 28, 2003, June 29, 2002 and June 30,
2001 is as follows:
F-7
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The basic shares outstanding for the fiscal year 2003, 2002 and 2001 is
3,255,428, 3,255,428 and 3,252,577, respectively. The effect of the assumed
conversion of employee stock options was $0 for fiscal years 2003, 2002 and
2001, respectively. Options to purchase approximately 390,000, 463,000 and
389,000 shares of common stock at prices from $0.60 to $6.31, $0.56 to $6.31 and
$1.00 to $6.31 per share were outstanding during portions of fiscal years 2003,
2002 and 2001, 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 28, 2003, June 29, 2002 and June 30, 2001 included 52 weeks.
ADVERTISING
The Company expenses advertising costs as incurred. Total advertising
expense approximated $100,000, $17,000 and $103,000 for fiscal years 2003, 2002
and 2001, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. This interpretation establishes new guidelines
for consolidating entities in which a parent company may not have majority
voting control, but bears residual economic risks or is entitled to receive a
majority of the entity's residual returns, or both. As a result, certain
subsidiaries that were previously not consolidated under the provisions of
Accounting Research Bulletin No. 51 may now require consolidation with the
parent company. This interpretation applies in the first year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
We are currently evaluating this interpretation but do not expect that it will
have a material effect on our business, results of operations, financial
position, or liquidity.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement is effective for contracts entered into or modified after June 30,
2003. We are currently evaluating this statement but do not expect that it will
have a material effect on our business, results of operations, financial
position, or liquidity.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY (SFAS
150). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We are currently evaluating this statement but do not
expect that it will have a material effect on our business, results of
operations, financial position, or liquidity.
F-8
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 $803,000, $832,000 and
$4,310,000 during fiscal 2003, 2002 and 2001, 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 new machines manufactured by Lonati, S.p.A.,
generated the following percentages of the Company's net revenues: 26.0% in
2003, 25.1% in 2002 and 26.2% in 2001. In 2003 and 2001, sales to one customer
approximated 10% and 13.4%, respectively of revenues from the textile division.
In 2002, 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 28, 2003, 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 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 28, 2003.
F-9
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company had one interest rate swap derivative designated as a cash
flow hedge at June 29, 2002 which expired on June 2, 2003. The change in the
fair market value was a gain of $169,000 and $95,000 net of tax expense, and was
recognized in Other Comprehensive Income (equity) at June 28, 2003 and June 29,
2002, respectively. The liability of approximately $280,000 was included in
accrued expenses on the Company's balance sheet at June 29, 2002.
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
June 28, 2003 June 29, 2002
------------- -------------
Trade receivables............................... $ 13,016,000 $ 10,963,000
Less allowance for doubtful accounts............ (942,000) (819,000)
------------- -------------
Net accounts receivable......................... $ 12,074,000 $ 10,144,000
============= =============
NOTE 4 -- INVENTORIES
Inventories net of reserves are summarized as follows:
June 28, 2003 June 29, 2002
------------- -------------
Machines
New..................................... $ 4,505,000 $ 6,539,000
Used.................................... 1,965,000 2,166,000
Parts and supplies........................... 4,859,000 4,837,000
------------ ------------
Total ...................................... $ 11,329,000 $ 13,542,000
============ ============
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 2002, the
Company recognized a loss on impairment of $1,000,000 associated with its
finishing division. The impairment in the carrying value of goodwill was 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.
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:
2001
--------------
NET EARNINGS (LOSS)
As reported.................................. $ (5,863,000)
Add back Goodwill amortization, net
of tax effect.............................. 226,000
--------------
Adjusted..................................... $ (5,637,000)
==============
Basic earnings (loss) per share
As reported.................................. $ (1.80)
Add back Goodwill amortization, net
of tax effect.............................. 0.07
--------------
Adjusted..................................... $ (1.73)
==============
Diluted earnings (loss) per share
As reported.................................. $ (1.80)
Add back Goodwill amortization, net
of tax effect.............................. 0.07
--------------
Adjusted..................................... $ (1.73)
==============
F-10
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company performs its annual impairment test of goodwill on the last
day of its fiscal year and more often if circumstances surrounding its business
dictate that it do so. For purposes of determining the fair value of its
goodwill, the Company computes the net present value of its future cash flows
using the five-year average return on investment earned by comparable companies
in its industry and compares that to the book value of the reporting segment.
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.
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. In May 2003, the lease was
amended to reflect payments fixed until January 1, 2007. As of January 1, 2007,
an option exists to increase the monthly lease payment. 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 Speizman LLC approximated $800,000, $928,000 and
$1,055,000 in fiscal years 2003, 2002 and 2001, 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 in fiscal year 2001.
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 and $80,000 in 2002 and 2001,
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 28, 2003, 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
------------ ---------
2004 $ 800,000 $ 539,000
2006 800,000 188,000
2007 ........................................................... 800,000 97,000
2008 ........................................................... 800,000 10,000
Beyond 5,533,000 -
-------------- -----------
Total minimum lease payments ................................ $ 9,533,000 $ 1,200,000
===========
Less amount representing interest at 15%..................... (5,153,000)
--------------
Present value of net minimum lease payments ................. 4,380,000
Current portion ............................................. (141,000)
--------------
$ 4,239,000
==============
The following summarizes property held under capital leases:
2003 2002
-------------- --------------
Land and Building ................................................ $ 5,127,000 $ 5,127,000
Less accumulated depreciation ................................... (1,284,000) (962,000)
-------------- -----------
3,843,000 4,165,000
=============== ===========
F-11
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total rent expense for all operating leases approximated $850,000,
$915,000 and $1,125,000 in fiscal years 2003, 2002 and 2001, 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:
2003 2002 2001
----------- ----------- -----------
Current:
Federal ................... $ - $ (2,731,000) $ (629,000)
State .................... 71,000 18,000 45,000
----------- ----------- -----------
71,000 (2,713,000) (584,000)
----------- ----------- -----------
Deferred:
Federal ................... (57,000) 1,328,000 (2,194,000)
State ..................... 14,000 (115,000) (834,000)
----------- ----------- -----------
(43,000) 1,213,000 (3,028,000)
----------- ----------- -----------
Total taxes (benefit) on income $ 28,000 $ (1,500,000) $ (3,612,000)
=========== =========== ===========
Deferred tax benefits and liabilities are provided for the temporary
differences between the book and tax bases of assets and liabilities. Deferred
tax assets are reflected in the consolidated balance sheets as follows:
June 28, 2003 June 29, 2002
-------------- --------------
Net current assets....................... $ 1,432,000 $ 1,773,000
Net noncurrent assets.................... 1,832,000 1,561,000
-------------- --------------
$ 3,264,000 $ 3,334,000
============== ==============
Principal items making up the deferred income tax assets (liabilities) are as
follows:
Year Ended
----------------------------------
June 28, 2003 June 29, 2002
------------- -------------
Inventory valuation reserves..................................... $ 782,000 $ 955,000
Depreciation..................................................... 220,000 116,000
Deferred compensation............................................ 276,000 263,000
Deferred charges and other....................................... (122,000) (21,000)
Inventory capitalization ........................................ 242,000 420,000
Accounts receivable reserves..................................... 332,000 307,000
Net operating loss carryforwards................................. 1,734,000 1,381,000
Interest rate swap............................................... - 113,000
Deferred tax valuation reserve................................... (200,000) (200,000)
------------- -------------
Net deferred tax asset....................................... $ 3,264,000 $ 3,334,000
============= =============
Deferred taxes include federal and state net operating loss
carryforwards of approximately $2,400,000 and $9,770,000, 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:
2003 2002 2001
----------- ---------- ----------
U.S. Federal statutory tax rate................................... (34.0)% (34.0)% (34.0)%
State income taxes, net of federal income tax benefit............. 20.9 (1.0) (5.5)
Non-deductible goodwill impairment................................ - 5.5 -
Non-deductible expenses - travel and entertainment ............... 23.6 1.7 -
Deferred tax valuation reserve.................................... - 2.9 1.6
Other............................................................. - 3.0 (0.2)
---- ----- -----
Effective tax rate................................................ 10.5 % (21.9)% (38.1)%
==== ===== =====
F-12
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 - NOTES PAYABLE AND 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
March 31, 2003, the Company entered into a Sixth Amendment and Forbearance
Agreement ("Sixth Amendment") relating to its original Credit Facility Agreement
with SouthTrust. The Sixth Amendment provides a revolving credit facility up to
$10.0 million and an additional line of credit for issuance of Documentary
Letters of Credit up to $7.5 million. The availability under the combined
facility is limited to a borrowing base as defined in the Sixth Amendment and
the original Credit Facility Agreement. Total amount outstanding under this
credit facility is $7,301,000 and $5,000,000 at June 28, 2003 and June 29, 2002,
respectively.
Beginning on June 3, 2003, all borrowings under the line will accrue
interest at prime plus 1 1/4%. On July 1, 2003, the interest rate will increase
to prime plus 3% until the expiration of the agreement.
Other long-term obligations primarily include trade debt with several
vendors 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 amended 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 28, 2003 June 29, 2002
------------- -------------
Trade notes payable.............. $ 4,598,000 $ 6,109,000
Current maturities............... (1,078,000) (1,565,000)
----------- -------------
$ 3,520,000 $ 4,544,000
=========== =============
Annual maturities of long-term debt excluding capital lease obligations
are:
2004 ........................... $ 1,078,000
2005 ........................... 2,112,000
2006 ........................... 1,408,000
-----------
$ 4,598,000
============
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
28, 2003, options to purchase 378,000 and 0 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
F-13
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1995. As of June 28, 2003, 12,250 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 2003, 2002 and 2001 follows:
Year Ended
---------------------------------------------------------------------
Weighted Weighted Weighted
June 28, Average June 29, Average June 30, Average
2003 PRICE/SH 2002 PRICE/SH 2001 PRICE/SH
------- -------- ------- -------- -------- --------
Shares under option, beginning of year........ 463,750 $4.29 442,000 $4.56 478,163 $4.81
Options granted............................... - - 34,000 0.63 45,000 1.00
Options exercised............................. - - - - (3,000) 0.75
Options cancelled/forfeited................... (73,500) 1.29 (12,250) 3.87 (78,163) 4.08
-------- ----- ------- ----- ------- -----
Shares under option, end of year.............. 390,250 $4.88 463,750 $4.29 442,000 $4.56
======== ===== ======= ===== ======= =====
Options exercisable........................... 388,250 455,000 384,500
======== ======= =======
Prices of options exercised................... - - $0.75
Prices of options outstanding, end of $0.60 to $0.56 to $1.00 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 and 2001: expected lives of
10.0 years, expected volatility of 73.9% for fiscal year 2002 and 70.4% for
fiscal year 2001, risk-free interest rate of 4.9% for 2002 and 5.4% for 2001,
and dividend yield of 0.0% for both 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 and 2001 was $0.63 and $1.00 per
share, respectively. No options were issued in 2003.
The following table summarizes information about stock options
outstanding at June 28, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------------- ------------------------------------
Number of Weighted-Average Number Weighted-Average
Range of Outstanding Remaining Weighted-Average Exercisable Exercise Price
Exercise price at 6/28/03 Contractual Life Exercise Price at 6/28/03
----------------- ---------------- ------------------- -------------------- ---------------- -------------------
$ 0 to 2 16,500 8.0 0.67 14,500 0.68
2 to 4 113,000 2.0 3.00 113,000 3.00
4 to 6 188,750 4.5 5.83 188,750 5.83
6 to 6.31 72,000 4.0 6.31 72,000 6.31
------- -------
390,250 388,250
======= =======
NOTE 10 -- DEFERRED COMPENSATION PLANS
The Company has deferred compensation agreements with one active and
one retired employee providing for remaining payments amounting to $1,207,000.
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 $67,000,
$94,000 and $20,000 for the fiscal years 2003, 2002 and 2001, respectively.
F-14
SPEIZMAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 $0, $33,000 and $173,000 in fiscal years
2003, 2002 and 2001, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company had outstanding commitments backed by letters of credit of
approximately $4,180,000 and $5,012,000 at June 28, 2003 and June 29, 2002,
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 ..............................2003 $ 35,422,000 $ 27,114,000 $ - $ 62,536,000
2002 31,548,000 25,555,000 - 57,103,000
2001 47,337,000 34,896,000 - 82,233,000
Earnings (Loss) before Interest & Taxes ...2003 1,058,000 982,000 (711,000) 1,329,000
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)
Total Assets ..............................2003 28,788,000 9,615,000 - 38,403,000
2002 30,258,000 9,789,000 - 40,047,000
2001 43,339,000 14,570,000 (3,036,000) 54,873,000
Capital Expenditures ......................2003 481,000 20,000 - 501,000
2002 10,000 - - 10,000
2001 182,000 37,000 - 219,000
Depreciation and Amortization .............2003 313,000 109,000 250,000 672,000
2002 684,000 63,000 246,000 993,000(1)
2001 914,000 447,000 92,000 1,453,000
Interest Expense (Income) .................2003 845,000 327,000 425,000 1,597,000
2002 845,000 8,000 1,077,000 1,930,000
2001 963,000 28,000 1,431,000 2,422,000
Goodwill ..................................2003 622,000 3,168,000 - 3,790,000
2002 622,000 3,168,000 - 3,790,000
2001 1,622,000 3,168,000 - 4,790,000
- ------------
(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 28, 2003 June 29, 2002 June 30, 2001
------------- ------------- -------------
Cash paid (received) during year for:
Interest expense .......................................... $ 1,657,000 $ 1,951,000 $ 2,389,000
Income taxes (benefit)..................................... (523,000) (2,775,000) (304,000)
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 28, 2003 and June 29, 2002:
QUARTER ENDED
----------------------------------------------------------------------------------
September 28, 2002 December 28, 2002 March 29, 2003 June 28, 2003
------------------ ----------------- -------------- -------------
2003
Revenues ..............................$ 16,828,000 $ 16,149,000 $ 15,007,000 $ 14,552,000
Gross Profit ......................... 2,610,000 2,656,000 2,502,000 2,317,000
Operating Income (loss) ............... 226,000 631,000 484,000 (12,000)
Income (loss) before taxes ............ (174,000) 232,000 84,000 (410,000)
Net Income (loss) ..................... (127,000) 163,000 51,000 (383,000)
Basic earnings (loss) per share ....... $ (0.04) $ 0.05 $ 0.02 $ (0.12)
Diluted earnings (loss) per share ..... (0.04) 0.05 0.02 (0.12)
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)
- ------------
(a) The textile segment includes a $1.0 million goodwill impairment charge
in 2002.
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 increased to $62.5 million in 2003 from $57.1 million in 2002 and decreased
from $82.2 million for fiscal 2001. In addition, the Company incurred net losses
of $296,000 in 2003, $5.3 million in 2002 and $5.9 million in 2001. 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. 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, 2003. 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-18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Speizman Industries, Inc.
The audits referred to in our report dated September 12, 2003, 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
September 12, 2003
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 June 28, 2003:
Reserve for doubtful accounts.......... $ 819,000 $ 134,000 $ - $ 11,000 $ 942,000
----------- ------------ ----------- ----------- ------------
Reserve for inventory obsolescence..... $ 2,561,000 $ 133,000 $ - $ 652,000 $ 2,042,000
----------- ------------ ----------- ----------- ------------
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
----------- ------------ ----------- ----------- ------------
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
----------- ------------ ----------- ----------- ------------
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. (Incorporated by reference to Exhibit 10.10 contained in
the Company's Annual Report on Form 10-K for the fiscal year
ended June 29, 2002, File No. 0-8544, filed with the Commission
on September 27, 2002 (the "2002 Form 10-K").)
10.11 Distributorship Agreement between the Company and Conti Complett,
S.p.A., Milan, Italy, dated October 2, 1989. (Incorporated by
reference to Exhibit 10.11 contained in the 2002 Form 10-K.)
10.12 Termination Letter of Distributorship Agreement of October 2,
1989 between the Company and Conti Complett, dated October 1,
2002.
10.13 Distributorship Agreement between the Company and Conti Complett,
dated October 2, 2002.
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. (Incorporated by reference to Exhibit 10.15
contained in the 2002 Form 10-K.)
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 Third Amendment to Lease Agreement by and between The Speizman
LLC and the Company dated May 9, 2003, effective as of January 1,
2002.
10.20* 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.)
10.21* 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.)
10.22* 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.)
10.23* 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.)
10.24* 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.)
10.25* 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.)
10.26* 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.)
10.27* Executive Bonus Plan of the Company, adopted July 20, 1993.
(Incorporated by reference to Exhibit 10.30 contained in the 1993
Form S-1.)
10.28* 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").)
10.29 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.)
10.30 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.
(Incorporated by reference to Exhibit 10.29 contained in the 2002
Form 10-K.)
10.31 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.)
10.32 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".)
10.33 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.)
10.34 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.)
10.35 Fourth Amendment and Forbearance Agreement by and between the
Company and its subsidiaries and SouthTrust dated as of July 31,
2002. (Incorporated by reference to Exhibit 10.34 contained in
the 2002 Form 10-K.)
10.36 Fifth Amendment and Forbearance Agreement by and between the
Company and its subsidiaries and SouthTrust effective December
31, 2002. (Incorporated by reference to Exhibit 10(a) contained
in the December, 2002 Form 10-Q.)
10.37 Sixth Amendment and Forbearance Agreement by and between the
Company and its subsidiaries and SouthTrust effective March 31,
2003. (Incorporated by reference to Exhibit 10(a) contained in
the March 29, 2003 Form 10-Q.)
10.38 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 1997 Form 10-K.)
10.39 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.)
10.40 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 1997 Form 10-K.)
10.41 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.)
10.42 Commercial Lease Agreement by and between William J. Wesley
Properties and Wink Davis relating to the Smyrna, Georgia office
dated March 26, 2001.
10.43 Industrial Building Lease between Kensington Partners, Ltd. and
Wink Davis, dated as of April 25, 2002, relating to the Wood
Dale, Illinois office. (Incorporated by reference to Exhibit
10.40 contained in the 2002 Form 10-K.)
10.44 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 December 30, 2000
Form 10-Q.)
10.45 First Amendment to License Agreement and Grant of Distributorship
between SRA and the Company and its subsidiaries dated July 16,
2002. (Incorporated by reference to Exhibit 10.42 contained in
the 2002 Form 10-K.)
10.46 Agreement between Tecnopea SrL and the Company, effective as of
February 1, 2002. (Incorporated by reference to Exhibit 10.43
contained in the 2002 Form 10-K.)
21 List of Subsidiaries
23 Consent of BDO Seidman, LLP
31.1 Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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* Represents a management contract or compensatory plan or
arrangement of the Registrant.